It takes some courage to say no. Sometimes, it may mean saying no to potentially some good money and a lot of fun.
One of my best friends is an accountant (surprise, surprise! LOL).
For years, I would share with her what I do with my investment portfolio. I would lay out the entire plan for her, such as work with a particular mortgage broker, buy in these particular areas, she could then get this much cash flow. ?
I didn’t want her to miss out on any action.
The truth was, she wasn’t really in the position financially to do much investing, until recently.
She’s my best friend and she’s buying an investment property! Hanging out with my friend while scouting for a good deal? That’s like a dream come true.
But…this is TAX SEASON!
Looking at my schedule, it’s almost impossible to squeeze a few showings in, especially the target area is about an hour away from my home.
And truth to be told, I am not an active Real Estate Agent at all. If you see headlines about how 1/3 of the real estate agents did zero deals, I am one of those!
If I worked a bit harder and made use of the resources available to me, perhaps I’d be better. It seems I’m just not as savvy as other agents, who use things like expired listing software to hustle for listings and get selling. Being an agent is a difficult job, and the only way to succeed in this industry is to be active…of which I am not.
Regrettably, I chose to place her in more capable hands. Sometimes, you just have to say no in life, as much as I would love to say yes.
We all face difficult choices in life, especially for the entrepreneurs with two young kids during tax season! ? Having a clear goal and why helps making these decisions easier.
Speaking about friends, this week, my blog post is inspired by a close friend of mine, Charles Wah’s land development stories.
Buying commercial properties isn’t easy. I’ve covered some tips in my previous blog post (please insert the blog post here).
But buying vacant land takes the risk factor to a different level.
Here are some of the tips I got from the conversation we had.
1. Zoning, municipality’s official plan, city’s vision and environmental concern
If you are planning to build residential houses and zoning of the land is commercial or industrial, you may need to jump through several hoops to get it rezoned. Or worse yet, you may not even be able to get that done.
Be sure to check out the zoning before moving along.
Sometimes, if your plans for the land complies with the municipality’s official plan and vision, it can help you significantly along the way.
A good opportunity is to start with researching the municipality’s plan, look for land around the future development.
After all, Canada is expected to have 1 million immigrants coming in the next three years. Every city is trying its best to accommodate more people.
Environmental risk can always be a concern. After all, costs to clean up the mess can be significant. Make sure you do the due diligence ahead of time.
2. Deep pockets may not be necessary if you know how to negotiate
Vacant land = no income.
No income = the bank is unlikely to finance the purchase for you.
It is, however, not unusual for owners of vacant land to finance the deal themselves.
Depending on how the negotiations go, you may be able to put very little money down, but secure financing with the sellers with very low interest rate.
3. Keep this tool in your tool box for your negotiation
If the sellers are willing to take on vendor take back mortgage, the capital gain can be potentially deferred over five years, instead of one single year.
Check out this previous blog post on how this rule can be applied.
Your sellers would get tax benefits if they finance your purchase for you. In addition to that, they can get some interest income along the way. Win win win!
4. Terms of vendor take back mortgage vary
After educating the sellers the tax benefit of financing the deal for you, it’s time to negotiate what the actual terms would be.
According to Charles, terms and rates are dependent on the sales price as well.
Most veteran real estate agents would know the “typical” rates in the market. But typical rates are just guidelines.
The longer the term, the more risk the seller would have to bear and thus the higher the interest rate.
The more the down payment, the more security the seller has and the lower the interest rate.
The higher the purchase price, the more favourable the term can be negotiated.
No one rate fits all answer. It’s all about negotiation!
5. Be prepared for a long negotiation period
Negotiations can be long and tough. Sometimes it can range from a couple of weeks to 6 months.
Many sellers aren’t aware of the tax benefits of doing vendor take back mortgage, educating them the benefits can be time consuming.
In addition to that, vendor take back mortgage terms can vary from deal to deal. Changes to the interest rate or terms of the deal can affect the ultimate profit substantially.
All these take time to sort through.
Be prepared to have a long negotiation period when you are getting yourself into land development.
6. Return on investment can be lucrative
Because of the possibility of vendor take back mortgage, it may mean that a land developer can put in very little money at the beginning.
When the land is developed, you can work with a builder to build all the houses/condos, or whatever you intend to have built for you.
You can choose to sell, like Charles did. Building is a completely different type of animal that I will get into in another blog post.
7. Know your numbers and structure your deal properly
I am accountant. I must throw this in at the end.
Make sure you have a budget ahead of time. Be sure to do sensitivity analysis to the best case scenario and the worst case scenario.
Land development is considered a business. If you own the land in your personal name at the beginning, it may cost you some significant tax costs when you decide to transfer it to a corporation.
Land development may take years to progress. Be sure to have a projection and do the math properly!
Lastly, I am going to leave all of you a quote from Charles.
“Through my two different presentations (one about development in general and showing my larger developments vs the one I do with Andy about smaller infill developments), people are actually learning that any investor can do development, not just the rich or established. To date, this has been one of my main goals. To educate and inspire others that development is possible. I started with no experience or knowledge of development!”
“I am blessed with many of the skills necessary to succeed but I’m also an extremely hard worker. Lot of people have no idea what was involved in the beginning years to build up to the sale of both of my projects!! Brutal long hours especially at the beginning when no one knows you, no one takes you seriously, and you have to do whatever it takes to learn and make money!”
All success requires hard work and risk taking. Charles was a trained engineer in school. Now he’s a land developer. It takes some courage to say no to cushy jobs and jump into a sea of unknown.
For those of you who need some encouragement to say no, this blog post is for you.
Until next time, happy Canadian Real Estate Investing.
Cherry Chan, CPA, CA
Your Real Estate Accountant