By Fabio Campanella CPA, CA, CFP, CIM
Way back in 2011 I wrote a column for the Toronto Star print edition (CLICK HERE for the full article). In it, I gave my top 5 financial recommendations for novice real estate investors. Even now, these are the same top recommendations I continue to give to new clients wishing to take the plunge into real estate investment. Here they are:
1: Project and manage your cash flows:
Like any investment other than a GIC or bond, cash-flows can be unpredictable with real estate and you must learn how to manage them properly. For example, it is very possible to have a negative monthly cash flow from your real estate investment only to be surprised that your accountant will calculate a taxable profit at the end of the year. If you haven’t projected your cash flows you won’t be ready for this financial hit. Cash flow management is the single biggest financial factor that real estate investors must get a grasp on because cash is king and you don’t want to get stuck in a sticky situation.
2: Keep an emergency reserve:
Further to my recommendations with respect to cash flow it is absolutely imperative that you keep an emergency reserve. As a general rule of thumb I advise all my clients to keep a cash reserve, or untapped access to a line of credit, that will carry you for a minimum of three months. If you have real estate investments I would include three months of carrying costs on those investments into your calculation.
3: Keep adequate records:
The policy at the Canada Revenue Agency is pretty clear: if it isn’t properly documented it isn’t true. If audited, and trust me it happens more often than you think, you MUST keep adequate records of all rents collected and expenditures made. Contrary to popular belief, your bank and credit card statements are NOT an adequate form of documentation or audit evidence. You must keep original receipts, invoices, and contracts. These can be stored in paper format or electronic format. For more information on keeping records see my blog post on the topic: CLICK HERE
4: File your taxes early, properly, and use a professional:
When you invest in real estate your taxes are more complex and require more attention to detail. Walking into your accountant’s office on April 29th isn’t the best idea. Your best bet is to first, properly organize all of your real estate revenue and expenses, second, visit your accountant early (preferably late March), third, ensure you are using a Chartered Professional Accountant (CPA) with deep experience in the real estate investment field.
5: Plan your estate:
Estate planning for real estate investors is not as simple as buying a life insurance policy and preparing a basic will. How will your estate handle your rental properties? Do you want your children to continue running your portfolio or will this cause unnecessary stress for them. What if the real estate portfolio is run by yourself, will your spouse be able to take over if you were to suddenly pass away? These are all serious considerations that must be dealt with while you are alive and well. Estate planning is a complex process that may involve multiple professionals along with input from your loved ones, it should not be ignored.
At Campanella McDonald LLP we help small business owners, self-employed professionals, and real estate investors maximize their bottom lines by providing value-added tax, accounting and financial advice. Our partners and staff have been advising clients on real estate investment matters since 2002. In addition to tax advice the firm has a dedicated team including investment focused realtors, mortgage brokers and financial planners that help clients design, implement and monitor their real estate investment portfolios from novice to seasoned experience levels. For more information you can visit our website at www.cmllp.com, email us at firstname.lastname@example.org, or call 647-557-2935 ext: 101.