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How to Use Buy Renovate Refinance Rent (BRRR) Strategy to Make 1.5 Million in 2 Years

We’re up north with the kids this week.

My best friend, Monica, shared with me how great her experience with the YMCA Pine Crest family camp was, Erwin & I decided to sign up.

We barely made the cut, as there’re only limited spots available.

Kids get to do their own camp every day, but daddy and mommy can have our own fun as well!

I fear of height, I fear of water and I fear of bugs– a typical city girl.

This YMCA camp pushed me to face all my fears.  

When the kids said, “Mommy, why aren’t you coming into the water with us?”  I can’t possibly say no.

I had to happily jump into the water with a life jacket with them, dragged them from the shallow end to the deep end. I had to appear to be brave.  😉

When we signed up for the static course so Erwin & I could do something out of the ordinary, I didn’t quite understand what static course was until these camp counsellors led us to a high up course.

You climb up to the platform many feet off the ground. 

You cross from one side of the platform on either the wire/tires/swings, etc. to the other side of the platform. 

When I was on my first platform staring down, my heart was pounding, my hands were sweating and my head even hurt a bit.

What did I sign up myself up for again?  This is not the nice romantic activity that I was hoping to do with him?!

The entire YMCA Pine Crest camp is run by young adults and high school kids.

They go up on stage, sing and perform.  They run the kitchen, make us dinner and wash the dishes.  

Some of them join us for dinner every night, sharing their experiences and their future education plans. 

All of them are well-spoken and polite.  None of them give me the sense of entitlement that many millennials carry around these days.

They also live here for the entire summer.  They work long hours, but none of them show any bit of tiredness when they interact with us and our kids.

Being a mom myself, I am very impressed by how these kids are.

Of course, these camp counsellors have all come to these camps since they were little.   

Maybe, just maybe, we will start our kids young too! 😉 

On another note, Erwin and I got to take a tour at Monica’s commercial plaza nearby at Bracebridge. 

She’s bought this property for over 2 years now.  The property was a power of sale and she got it at a really good price.

A great price also came with a lot of work – a collapsed roof, mold issues, asbestos, vacant commercial units, etc.

Needless to say, no bank is interested in financing this property. 

If you are familiar with the real estate investment strategy BRRR (buy, renovate, refinance and rent), that is what she and her husband are doing in this property.

Except that the numbers aren’t quite what we handle on a daily basis.

Renovation is over $1million and it is still going. 

So, what are the tax consideration they need to consider when they use BRRR in a commercial property?

HST impact on substantial renovations

If you are renovating a residential property (even if the residential property is a part of commercial property), you may have an HST impact on the renovation.

If you do the substantial renovation on a residential property (or on the residential unit of the commercial property), you are required to do a self-assessment and pay HST to CRA.

If you simply renovate (not substantial renovation) a residential unit in a commercial unit, make sure you separate the HST related to the residential unit renovation.  You cannot claim the HST you pay on the residential renovation as a credit on your HST return.

HST exposure, if converting the commercial unit to residential units

If you are converting a vacant commercial unit to residential units, you are required to do a self-assessment on the fair market value of these residential units.

You have to pay CRA the HST on the fair market value of these residential units.  ☹

Make sure you account for these extra costs before doing the conversion.

HST audit

When you are doing a substantial renovation on the property, you can claim the HST you paid to purchase materials and your contractors on your HST returns as Input Tax Credits.

If the HST you paid is greater than the HST you collect, you are claiming a refund.

Sometimes, this amount can help with cash flow.

But more often than not, this also means that you likely will get an audit. 

If you’re asking for a refund on your HST return, be prepared for an audit.

Soft costs incurred during renovation period is not an immediate expense

Major renovation costs are usually not a one-time write-off expense. 

Soft costs, including carrying costs, interest expense incurred prior to the property being rented.  If you have only a portion of the units ready to rent, then only that portion of the expenses can be deductible.

Cash flow consideration

My friends aren’t extremely wealthy. They made good money with a lot of hard work. 

But the amount of money involved in bringing this property from distress to the current stage can break many people’s banks. That was how the previous owner got this property foreclosed as well.

Although this is not a tax consideration, it is worthwhile mentioning that you do need to have the financing ready for the renovation, including the carrying costs of the property.

Doing a month by month budget would help you prepare for the worst case, and plan to get more credit.

Here’s the small video I did at her property. 

By the way, you don’t need to go through this amount of work and capital investments to make good money. There’re other opportunities available, which we will share with all of you on Nov 9 at Wealth Hacker Conference.

Get your tickets at Wealthhacker.ca.  

Until next time, happy Canadian Real Estate Investing.

Cherry Chan, CPA, CA

Real Estate Accountant, Wealth Hacker

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