Daniel St-Jean, Cory Prince, Meaghan Lazenby & Milena Cardinal
Daniel: It says part two there, which is Q and A part two. However, a lot of information has come to our attention since we did part one. In addition to answering some of your questions, we're going to also be sharing some really important information for all the people out there who want to get involved in the RWA strategy and do well. Getting involved in the RWA strategy is very easy. Doing well will depend on how well you do with the criteria and how well you pay attention to some of the recommendations we're going to be making today.
This is being recorded. This is being filmed. If you want to take a minute there to take a look at that text on the screen, but yes, we're going to be recording this. We are recording this actually, as I am speaking. We will be talking with the lawyer. We'll be talking with the realtor who has a lot of experience with pre-construction where you're going to be talking with Cory, an absolute expert in HST and accounting matters. Of course I'm going to be sharing some of the formation. I have discovered over the last few weeks that is changing quite a bit, that we're working just RWA business.
Katherine: Before we do that, we need to get some housekeeping done. Let me just step in to say that, although we are recording this, please note that there is no personal recording allowed. Let me get onto the legal disclaimer.
The REITE Club does not endorse any particular attendee, participant, speaker, investment, sponsor, advertisement or anything else presented during meetings, events or on our website or social media platforms.
The REITE Club also does not guarantee the accuracy of any information presented during our events on or on The REITE Club website and social media platforms.
Before taking actions, always do your own research, including but not limited to checking with any of your own power team, your accountants, your lawyers, speaking to other people and your own networking before doing your own due diligence.
Daniel: Here are the list of our sponsors. Those of you who've been around The REITE Club for a while, know that our membership is free. The reason why our membership is free is because all of these people they're our sponsors. These people right there on the screen are the ones who are making it possible for us to give you all of the events that we give you, that we present, that we invite you for no charge, because the cost of running this business is covered by these sponsors.
When you need a lawyer, there's Derek. When you need a mortgage broker, there's some there. When you need an accountant, whatever they're there. Please work with our sponsors. The happier we made them because they get business from us. The more they're going to be sponsoring and the more they sponsor, the more we can keep bringing you all this information at no charge.
I'm the one on the top left. Then we have Meaghan Lazenby. No relation to the famous actor who played James Bond 50 years ago. Cory Prince, no relation to the Prince that we know sent purple rain. Just a really good guy with a lot of knowledge in accounting. Of course, Milena Cardinal, talking to us today from Mexico. The lawyer that we know who has the most experience with assignment, contracts and documentation.
Are we ready to go folks? Let's start with Cory, how are you doing Cory?
Cory: I'm well, how's everyone doing today? Thanks for having me.
Daniel: We're doing fine. Let's start with this big discovery. I made this discovery, thanks to your input a couple of weeks ago. The first key point we want to share with the folks today is this, "do not do this RWA strategy personally". I've noticed we were just in the middle of a project in New Castle where people are signing up for units. A lot of them I see are doing that in their personal name and that causes a nightmare to me. Cory and I will explain to you in two minutes why this is a really bad idea.
Cory, let me ask you a question. We're talking in generalities here, so just assume for one minute that I am not a real estate investor. I am the parts manager at an auto dealership and I earn out a thousand dollars a year. That's the amount I declare. I have a wife who stays at home. I have two kids, nothing special. I'm not in business. I'm just an employee. I make a hundred thousand bucks a year. That's what I put on my income tax return. Roughly what kind of income tax that you think I might end up paying at the end of the year and percentages?
Cory: Even at a hundred thousand dollars of income, you're still looking somewhere between 25%, 30% income tax on the personal level. Now, as you get higher and earn more and more income, the percentage gets larger very quickly and you'll realize that at $220,000, you're taxed at 53%.
Daniel: Right now, when I'm just an employee, I could say pay $27,000. That's a separate $27,000 in personal taxes. I get involved with Daniel and he gets me all excited about this RWA strategy. I reserved a unit. I put it in my name and then by the end of the year, I will assign it to somebody and the guy will send me a check for $200,000. Now, I declare next year not $100,000 but $300,000 cause that's all personally come. What kind of tax am I going to pay on that?
Cory: Now, you're paying at least 80% of $80,000 of that at 53%. The government is getting more money than you are on because that's above 220,000, between $100,000 and $300,000. You're roughly in about 40% tax range total. That's how much you're losing off the top to the government.
Daniel: Let's say that I'm still an employee and I did the strategy, but because I was paying attention to the people on the lunch and learn one day who told me, don't do this personally, I spent 2,000 bucks to incorporate, and now I have a business and all I do this under a business, of course, at the end of the year, the $200,000 that I declare will be profit, but it's going to be gross profit because now I can deduct some expenses, right? Like the car that I drive all the way to see the units and deal with when it's time to assign my lawyer fee, my accounting fee, all of that. Let's say at the end of the year, I'm going to have $190,000 in my business. What kind of a tax would I pay on that?
Cory: You're paying 12.2% tax on that. There are some rules that we discussed. We have to share that limit and then you hear $500,000 at 12.2% in the corporation.
Daniel: I don't think we need to tap people on the head here. Anybody with 2 cents of brain was listening to this and I'm sure all of them are in that category would figure out very quickly the dangers of doing this personally, because what people don't realize with this RWA strategy is that you could make a lot of money real quickly.
I got a check last Friday for $200,000 for assigning a unit that we reserved 12 months ago. If I do another one in three months for another two, I'm already at $400,000, we're only off weight for a year. Imagine putting that on my personal taxes. Oh my God. First key point for today, folks don't do this personally. If you figure out what the money you'd be saving in taxes.
I think you'd come up very quickly to the conclusion that spending 2,000 bucks to incorporate a company and a little bit more. It's going to cost at the end of the year to have your accountant file rather than go to the tax people in the corner and pay 200 bucks. All of that is going to be really peanuts compared to what you're going to be saving in tax to CRA, correct?
Cory: Yes, that's correct. I saw some comments coming. It might be timely to address some of these questions. Cause I see that there are some eligible individuals on this call that know the passive rates of tax are a lot higher. Can I spend two minutes addressing that comment then?
Daniel: Absolutely.
Cory: These are fees that are earned. This isn't really a passive income that's earned because you're not recognizing a capital gain. My understanding of the structure is you're paid a fee to do this. Fees are typically business income, active income. Whoever left those comments there that is active income taxed 12.2%. That's correct. Now, you're not recognizing any capital gains here at the passive rates.
Daniel: When you say you're a feast, so I reserved the unit at 550, and I assigned it to somebody last week for 750. He wrote me a check for $200,000. Now, he's taking over my APS Agreement of Purchase and Sale. But really now I have to declare to the government $200,000.
Cory: Yes, when you're going into this transaction with the intent to resell. When you earn this assignment fee, it's very hard to take a position. It's a capital gain and passive income because the entire time, your intent is to earn this $200,000 for example.
Daniel: A lot of people don't understand about the intent, for example, even a rent to own. We've done 51 of those deals. The minute that I start a rental deal, there's already a contract that says it's going to end three years from today. The intent of the rent to own is, I'm going to start this deal today with the intent of selling it to you in three years. That's why when we closed those 51 deals, we'd never heard the word capital gain because it just does not apply.
Let's talk about the horror, stupor and terrier also known as HST positions. What we learned in the last few weeks, which has changed our life considerably. I don't know if it's for the better or worse, but it's that margin, but what you reserve a unit at and what you will assign it at which I call a profit CRA doesn't see it that way while they will see it that way, because at the end of the year, I'll have to declare it and they're going to charge me tax on that. But initially they're calling it an assignment fee and as such, they want me to pay HST on that, correct?
Cory: That's correct. This is a very hot area for CRA right now. CRA does have some publications online and they are challenging taxpayers on this. They are considering it an assignment fee. That's correct and because it's a fee, it's got HST on it. Under the excise tax act, HST is applicable on all services and fees. So, that's correct.
Daniel: The first recommendation was, don't do this personally. The second recommendation is only do this using a company and make sure that your company is registered with HST. If you assign, you do an assignment and you have HST involved, you can just find a check with HST and send it.
The government said, hey, I just did this thing here. Here's $26,000 no, because the first question will be what's the HST number? And he said I'm not registered. Guess what? You're in trouble. What that has caused us for example is that until two weeks ago, we had eight units registered with two companies that are not HST registered, that we cannot register with HST.
Laurel has now just started a brand new company. I started a brand new company that we are going to register with HST because we want to have the ability to go into a development and reserve four or five units without being blocked. All that to say that, don't do it personally, do it with a company and make sure your company is HST registered.
Cory: That's correct, and when you're HST registered the benefit of that, as well as you can recover any HST you pay. For example, you have to pay lawyers, you're going to pay accounts. They're going to charge HST on the services. You can recover that.
Daniel: Having discovered that, this is just a quick comment I'm going to make here. Because see, I negotiated with this gentleman back in December that I was going to assign the unit for 750. We had already agreed on the $200,000 margin, and then we discovered HST. At this point, I have two choices, number one, for him he's agreeing to 200, not more, not less. He's agreeing to 200. Okay, fine.
I have two choices. First choice, I charged him 200 assignment fees, and then I have to send a check to HST people for $26,000. I didn't like that. What I did with him is the contract. We'll talk about that later. She wrote the contract so that the assignment fee was 177 plus 23,000 hours of HST. From the point of view of the buyer, the assignee, it makes no difference to him because he just wrote me a check for 200 is happy. Everything's fine. Where the money goes is none of his concern. But for me, I only paid now for $23,000 of HST in 726 on 200. When I declare my income, it's going to be 177, not 200.
The end result is it's almost the same, but I'm benefiting from that. What I'm saying is when you're negotiating a price with an assignee, make sure that you're coding in the price that will include the HST, don't surprise and if somebody comes to you and said, I agreed to pay 100, then don't write a contract later on while it's a hundred and then you're charging them 13,000 for HST is not going to like that.
If you're going to do it for a hundred more than what you paid for, then that will be like 87 or 88 plus 12,000 HST, whatever that, and this is not Cory, when I talked to him on the phone that day I said, oh, can I say that publicly? Because it's cheating or something like that, then I think, I can't remember what you said. There we go. He said, no, it's totally legitimate to do that.
Cory: As long as documentation shows, the fees 177,000 plus HST, there's no funny games there.
Daniel: There was this other little thing, and I'm going to just pass it on to you. Because I just wanted to lay an egg when I heard that. I sent you an email and all in caps and I said, okay, this has gotta be a mistake. CRA is not fun to deal with, but there's no way that they would do that to people. Can you please talk about the deposit and what happens and what should people do about that?
Cory: This is a tough topic to deal with. The CRA has taken the position that deposits can form part of the compensation. As part of the compensation, there could be HST owing on the deposits and practically this makes no sense. First, the tax courts of Canada have challenged us multiple times and one in court against CRA and taxpayers in the community don't agree with it. The problem is the CRA hasn't changed their opinion yet.
If a serious thing is correct, if the deposit has HST on it, that's going to further your proceeds. This is a very tough topic. For a 30 minute Q and A, it's hard to go into detail about every single person's situation. What I would recommend is be aware of this risk, be aware of this issue. Most taxpayers we know are not paying HST on deposits. They're not following this because the courts have challenged in one, waiting for CRA to change their mind and change their position. Please be aware that they can actually consider deposits as consideration and part of your fee.
Daniel: In other words no recommendation from the accountant here, but just be aware of the situation and what you decide to do with it, whether you want to report, whatever you decide to do above, this situation is all up to you. But at least now you know about the situation, but you're right. The court, this is unbelievable. The court has won every single case and CRA, like a stubborn head, has decided that they still bug people about that even though they lose every time somebody takes them to court.
Cory: Yes, it's actually amazing that they haven't changed their position yet. We expect them to change it because you only lose so many times in court. Before you came to court to challenge you anymore.
Daniel: Thank you very much Cory. We might be coming back to you later on. There will be Q and A at the end. Anyway, thank you very much, Cory. Let's move on to Meaghan. How are you doing Meaghan?
Meaghan: I am great. Thanks for having me.
Daniel: You as a realtor have a lot of experience with clients buying pre-construction in Florida, in different parts of Ontario. My question to you, and I'm going to give you the floor. What recommendations would you make to the people in this call or on this recording from the viewpoint of a realtor who has done a lot of these pre-construction? What could you share with us that will enable people to do well with their strategy?
Meaghan: Perfect, no problem, my pleasure. One of the reasons why I love this strategy, I guess first off, let me just say, I'm an investor focused realtor. While I do help, some people buy and sell like their everyday primary residence. I am really an investor focused realtor. I'm helping novice and experienced investors make money and build wealth with real estate.
One of the reasons why I really like this strategy is because it is very passive. For those of you who are really busy professionals who don't want to be fixing leaky taps to be dealing with tenants or even managing kind of properties, long-term. This is a fantastic strategy, and a lot of my clients who want that are going ahead with this strategy. One of the reasons why it's actually been very popular and we're seeing even some of my investors who are long term. We'll call it buy and hold investors.
They're switching to this because there is really a lack of inventory and it's really hard to buy properties right now because there's so much competition. That's who's loving it, I guess I'd say when I look at what you want to look for when you're buying pre-construction. It really comes down to a lot of the same things about regular real estate, right? It's like a location, like buying in a good location, a good building or a good area.
Transportation is one thing that I always look for when I'm looking at a location. If there's been a subway or a train extension or a planned one anyways to that area that always drives real estate values. When I'm thinking about the builder or the developer, looking at them is that they have a track record of delivering on time. We know that this building or this complex is going to be completed on time and that your money, your deposit isn't be held there longer than needed.
Of course we want to have an assignment clause in there, that sometimes they're offered free, but sometimes you have to pay for them and that's okay because if you have to pay $5,000 to Daniel's point to make $200,000, it's a great investment. It doesn't always have to be free. What I'm noticing is that they're not always free anymore because the builders want to take their portion of the upside that the buyers or purchasers are making.
The other one is that you want to make sure that the building will be built within the next few years. You want to have all the zoning in place and that it'll be built within the next three years. Your money isn't going to be tied up long term. The other thing too is once you sign up and get the agreement of purchase and sale, you really want to have it reviewed by our lawyer. I see this so many times where people haven't what the builder has said. This is what I'm offering on their nice sales sheet, but then they don't actually have the agreement reviewed by their lawyer.
It can be different like not all. I think builders and developers play by the same rules. It's really important to have that agreement of purchase and sale reviewed by a lawyer. What I want to say is I have this example, I won't share the developer, but it's a very prominent one that I know all of their names. If I were to say it, I had a client who's doing this strategy, got an APS for this, and took it to my lawyer. I have a lawyer that I use for these. She went with him and there was something in there that we just weren't happy with.
Even though we didn't think we'd get it, we still went back to the builder and said, hey, will you change this? They didn't but what they did, they gave us two other things that we weren't expecting for free. I guess I'd say it never hurts to go back to the builder and see if they will make some modifications to your APS to give you additional things that you may want. Some of the things like that are like maybe cap to development fees. Sometimes builders are offering that as part of their purchase package, but sometimes they don't and they're including all these extra fees.
If you can get those capped, that's great. I got with this client and within this, there was going to be a fee. If you were going to tenant this property during the occupancy period, you had to put an additional $25,000 down as a deposit. That's a lot of money. For anyone wanting to buy this as an assignment, that's going to be very limiting for them. We got that removed. I'd really say you need to have your power team like your accountant and your lawyer to really support you and help you in this purchase.
Daniel: Two things, your number one, just about everything you said there, except for the extra deposit for a rental at the end, which I just made a note of, which is not going to be part of any of the criteria all the rest. We have a document called criteria. We're at number 15. That's going to make number 16. Actually, I just got another one, number 17. I'm going to bring this up to about 20 by the weekend and then we'll PDF it and we'll send it to everybody who's on this call today, or anybody who actually at some point watches or listened to this recording.
When this is evergreen, you'll be able to go on our website and find that document because yeah you have these criteria is what will keep you from getting in trouble with. For example, as you said the assignment fee, all of a sudden the charge they say, yeah we'll give you a chance to assign, oh, by the way, it's 2% of the purchase price. One of the units we'll reserve recently is $1,049,000, that's a $20,000 assignment fee. I don't think so guys.
We want a cap on that and we want it in writing the contract. Last thing I'm going to ask you, do you have a horror story, maybe a horror story of one deal that you did or that you heard of where people we're not careful, whatever and what happened to them?
Meaghan: Honestly, I don't have a horror story related to pre-construction to share. All of mine have gone very well, but I do want to say what you brought up at the very beginning is very real around buying it in a corporation versus buying it personally. I want to say, I do see a lot of people not understanding the full impacts when they go into it and buying it personally and not doing it in a corporation. It's a big mistake like they think they're going to make all this money, but then it's going to be half of what they thought because they bought it personally.
I can see like some of the people that I know that have bought pre-construction, one of their cars, like one of the challenges, they didn't know that going in so they ended up paying more in tax and they really want it.
Daniel: In addition to that, if you are an individual and you do it privately, guess what you celebrate and have to register as an individual with HST, with all of the complications that comes with that. Thank you very much. We're going to stick around because there's probably going to be some more Q & A that will be addressed to you. We deal with a few lawyers in our daily business, including two of our sponsors, Milena and DeAnn Oldman who are working on my assignment right now in Niagara falls.
We've done the exchange of money, but we're still just finishing the paperwork. They are experts on both assignments and they are prepared to help everybody here. When we publish a guide in a few weeks, there's going to be a RWA strategy guide. Their information will be in there. Of course he can deal with any lawyer that you want to deal with. All we're saying is that these two ladies are not in particular, we'll be able to help you out really well with this strategy. Speaking of Milena, good afternoon, Milena.
Milena: Hi, Daniel. I could talk about the boring stuff and all seriousness though. Thank you for having me as part of this panel. I came fully prepared to offer a little bit of my expertise and ended up learning so much already. Thank you very much for bringing me on. Did you want me to just get started on a few key items that I see?
Daniel: Things we talked about on the phone 20 minutes ago.
Milena: A few items to consider. Actually, I just saw a question on the chat that is super relevant to this. If you're about to put in an offer with a builder, you need to make sure that you have the unrestricted assignment clause that we talked about or that Daniel talked about earlier. Unrestricted assignment clause with a reasonable assignment fee. Yes, super important. You may want to consider also asking the builder to add an exception when you're doing your own restructuring.
Basically, having an exception to assign the agreement to your own personal corporation, without any fees, because really that doesn't change anything to the builder and it doesn't really require the builder to do any kind of verification of solvency or anything like that with a new buyer. That is something that you should consider.
Daniel: Let me interrupt you Milena. I just want to make sure people get that. What you're saying is that, and this is what's going to happen to about 10 people who last week reserved a unit in that New Castle project. I saw that they did it personally. Hopefully, they're on the call today and they'll get the message, but if they're not, I'm calling them the next couple of days to say, this is not a good idea. Now, they're going to say, oh yeah, but I've already affirmed up. It's under my name. All we need to do here is an amendment that was basically said, hey, which removes this person from whatever and insert whatever in that set and that's all it is.
Milena: There may also be a work around doing an assignment involving the builder, but Cory and I need to chat a little bit before that to make sure that it works. But if it does, there may be a workaround. Stay tuned because we might encourage The REITE club to do another little lunch and learn on this topic.
Meaghan: Sometimes the builders don't allow you to actually buy it. Like when you go to reserve it, they don't allow you to reserve it in a corporation. Okay, because they don't want a whole series of corporations buying these properties. They make it so, what we do is you put it in your personal name, but then before you're going to do your assignment, then you do with the amendment, like you're saying this is what I see.
Milena: There's a work around doing that amendment, I believe. I just need to have Cory stamp of approval on it before you make that suggestion. I do believe that if you're working with The REITE Club on projects, the assignment will be permitted. However, It is always a good idea to do your own verifications and make sure that you check on your end and are fully satisfied that the project is assignable and not just relying on that.
Things to also think about when you're drafting the agreement for the assignment. Always add a condition in your assignment contract that the builder is consenting to the assignment, and most importantly, fully releasing you from all obligations under the contract. A standard assignment contract will usually have the assigned work you are fully responsible for the closing of the transaction. Even if you've assigned the contract, we don't want that. You want the builder to release you from all liability.
Daniel and I have worked hard together to prepare a form for the builder to agree to. We are hoping to have this form approved by the builders for The REITE Club projects at the onset so that the builder won't say when you're ready to assign the builder, won't say I need three weeks because I need to run it by my lawyer. Hopefully, they'll have plenty of time to review it ahead of time. If we always use the same form, it will allow the builder to quickly sign off on releasing you from a liability and just having the new buyer respond.
You do want to include that also as a condition and give yourself a little bit of time to obtain that release from the builder. If you want the assignment fee paid to you at the time of the assignment and not at the time of the closing of the agreement of purchase and sale, you need to make changes to the standard or your form, because you will have to consider the assignment fee. Deposit on the form, even though it's not technically a deposit, but you'll have to remove the clause that states, that deposit is to be held in trust until closing, because normally what happens is that the assignment fee is considered a deposit paid to the lawyers, hold on to that fee until the closing of the agreement.
Once the sale goes through, which might be a long time in the future talking about prebuilt. Then in that case, you have to wait to get that money until the end, which is also what ties you to the contract until the end. We don't want that. There is a work around, but there are specific sections in the contract that need to be tweaked when using the standard or your form, which is totally okay. You just need to make sure to tweak those. Daniel and I also work together to systematize these changes in these documents so that we can turn them around fairly.
Daniel: What you mean is that we'll get to the point where this document is almost finished now, where basically anybody on this call or anybody, anywhere who contacts you, when they're ready to do an assignment, it will be seconds before you produce the template for the agreement. We will design something that we know is easily digestible by the builders.
Milena: Ultimately, to me, the name of the game is speed and simplicity. That's why working with lawyers and accountants who really know what it is and realtors as well, but really understand these assignments is key because it allows us to turn things around really fast, because once you seal the deal with that new buyer, it's best to move as fast as possible to get the documents signed and get you that money.
A lot of the time I get asked, what happens to the deposit that you've paid to the builder at the onset. I see two ways and there are accounting considerations as well and that's a recorded answer, but there are two ways around basically making sure that you get that money back. Either the new buyer can pay it to the builder who then returns it to you, or you can basically have the new buyer pay it to you at the same time as the assignment fee and then basically assign the deposit that the builder is holding to the new buyer.
Two procedures for the same result either one or the other is fine. I suggest choosing whichever option is most comfortable to the new buyer because it doesn't really make a difference to you and it makes the new buyer more comfortable.
Daniel: The same question I asked to Meaghan because you've done quite a few of those. Have you seen any stories or cautionary tales? In addition to what you talked about already to educate even further, the people who are on this on this recording.
Milena: I think really the key items are the things that we already talked about, making sure of that deposit, because it has to be factored in as a deposit. The assignment fee is not kept in trust so that it delays my sometimes a couple years before you get your money making sure that you can be completely released from all liability under the contract so that if the new buyer fails to close, you're not then on the hook and get sued by the seller for not closing the deal. Making sure that it's assignable of course, and what you've talked about, the assignment fee being reasons.
Daniel: As I mentioned earlier folks, I am preparing RWA strategy guide probably a couple of weeks, and there will be a section there about legal and we will have some content in there from Milena, and also we will have Milena's contact information in that guide because with all the preparation she doing with those various documents. Again please understand you can go to any lawyer. It's a free country. You go wherever you want.
I always say, if you add a BMW, it's better to get it fixed by a BMW dealer than by the garage on the corner of the street. If you are dealing and you're looking for somebody to help you with an assignment, why not go to somebody who does the assignment like by the bundle? We will have all that information, how you can contact Milena, so that when you're ready to assign one phone call and you're in business. Thank you Milena.
Milena: You're welcome.
Daniel: As I mentioned also earlier, we have a document that is growing by the minute here about criteria. We've added some more, we will send that to you and to the folks and also will be available on our website in the next few days. But I just want to make sure to point out a few, and we've already talked about those here, but very quickly reputation of the builder timing of the project. Is it ready to go? Please, when you go see a VIP presentation, you need to see that they've got all the documents, all the research that was done, because if they dig a hole and they find that Arrowhead, and now it could be related to some whatever native something, settlement and stuff, they could stop the project for four years and then your money is tied up.
Making money on the buy, make sure you get a discount. You do not go as a VIP and pay the same price as all the other VIPs. Sorry, at The REITE Club, we always have a VIP price that we agreed with the builder and you want that unrestricted clean assignment clause, as we said, oh, here's another one, no requirement for pre-approval. There will be places where if you want to reserve a unit, they want to see a letter from the bank that says that you will have the money to buy it at the end. A cap on development charges and a reasonable deposit structure. All of these are part of the criteria and you'll be able to to review all of that one. We sent you that PDF.
Let's talk quickly about financing and then I'm going to jump into some questions that we've received over the last couple of weeks. I like to use OPM for this, and I'm about to start a campaign here actually tomorrow afternoon. I'm going to send an email to a thousand. Actually, it's about 1,200 people and here's the title, "Do you prefer 14% annual ROI or 20% annual ROI?". That would be the subject line. I'm hoping a few people will open the email. In a nutshell, here's what I'm offering. You supplied the money for the deposit or part of it.
I will pay you 14% annual interest cash with monthly interest, or you wait until the project ends. I will pay you at the end, but then I'll pay you 20% annual interest. It's up to you to decide. All of these numbers are flexible. You can offer 12 and 18. You can offer 13 and 17, 14, 20 when I'm offering people and we'll see how it goes. Here's one very important thing. Last two weeks ago, somebody came to me and said, hey I have the money, you have the deals. Why don't we do a standard joint venture where we go 50, 50. In other words, output all the money that you need. Then at the end, whatever the margin is, we'll split it.
I actually told them, I like that idea. Let me write up a contract. That was two days before I talked to Cory above the HST and then we realized what a nightmare. I don't even want to go into the details of why that will be a nightmare, but do not do this strategy. Do not get somebody to supply the money and split it at the end because it will involve HST. You don't want to do that. The other thing you don't want to do is put in writing things like, okay, I'm gonna pay you a bonus. I'm going to pay you a service fee. I'm going to pay you a profit split. I'm going to pay for something like that.
As Cory would say, the minute you put this in writing and I don't care what wording you use. CRA will see that as a fee. You will have to pay HST on that or the person you paid the money to, will have to pay HST. Clean and simple, my suggestion, which is what I'm using, go to people, have them put the money, supply the money to you, pay them interest, whether you pay it monthly or simple, the year after you paid them, the interests you supply them with a T5 for earned income from interest. Keep it simple, my recommendation.
If you don't have to use OPM, that's even better. Frequently asked questions, we answered a lot of them in previous events but now here's the first one. This is for Cory, I know you already answered that, but because we call this the Q and A section. Please come back and elaborate a little bit more. Somebody said, the money we make in assigning our unit, the straight income or capital gain.
Cory: Based on the intention, this is going to be a fee or coughing entitlement. I know you're going to hold the units for awhile, your intention is still to earn a fee, it's active business income
Daniel: Of course, you could always go to CRA and say, hey, I was going to move there, but now I got a new job here and I cancel now, I'm assigning it and that might work once. But if you do five over the next three years, they're going to catch on.1
Cory: What's interesting there is, I think that one of the questions came in the chat about that is, CRA ruled on this four times in the past few months. Out of four times, they ruled the zero in favor of the taxpayer. One example was when I bought this unit for my daughter. She was going to go to university. She didn't get accepted. I had to sell the unit. I earned this fee. They tried to claim capital gain. Serious said, no, it's a business income fee. It has HST. That was actually a situation where you had a personal reason why you bought it and then you were frustrated by that reason.
CRA has three or four criteria you have to meet. In their opinion, all four of these situations weren't met. It's a very hard threshold to meet that exclusion.
Daniel: Thank you so much Cory. A question that was asked a couple of days ago, can you rent during the interim occupancy? First of all, can you explain to people what interim occupancy needs?
Meaghan: I'll take a stab at it, but maybe Milena can do the more technical route. For instance, this is where basically the unit is complete but the builder hasn't at this point got the condo registered. You will call it someone who can live in the unit, but the condo isn't registered yet. For a stock townhouse development, it might be a four or five month period, while that takes place for one of these high rises, it could be upwards of a year. Most of them you can rent during the occupancy period. That is something you would want to negotiate when you're doing your agreement of purchasing sale.
Daniel: Hold on here. I was talking with one of our experts a couple of days ago and he said, what happens is that when the building is, as you say finished, they will give me the keys and from my unit and I can now quote unquote, move in before I even own it, because they need to get to 75% occupancy before they can register the title. At that point, they can now, I have to close them. They go to give me whatever 30 days, 60 days to close at that point. That's what's called interim occupancy.
Here's the thing about the rental though? I'm not sure exactly in what circumstances Meaghan was talking about, because if I'm going to buy. They gave me the keys today and it might be six months before I can actually close. And it will be a rental of course. Why would I not want to rent next week rather than wait? Like until I own the unit. That would be advisable. However, this is my position. Somebody else could have a different position if I'm going to be assigning the unit.
I want to show the unit during the interim occupancy. I do not want a tenant in my unit because, hey, I don't know what the unit will look like when I go with a potential buyer to, it might scare a little bit the buyer to know that there's already a tenant in there, and now they're going to have to deal with the tenant and see now I have to make appointments 24 hours in advance in order to go see.
For all of these reasons, I have no intention of renting my units even though I have the keys to get in, because I am assigning them and I want this to be nice and clean and unrestricted. That is my point of view. Is it better to assign before or during the interim occupancy three options? Yes, assigned before, assigned during interim when it's empty or assigned during rent. But again, that depends on what you want to do at the end. I just saw a question in the chat. Somebody says, what's the best time to assign? This is a really broad question because really the best time to assign probably in my view is during the interim occupancy, because now you can actually take the people in the unit.
The difference between selling a unit to somebody from a piece of paper and some photographs, and maybe a little video versus having come up in the building, looking at the pool recreation area, looking at the beautiful garden, going up to the balcony on the fourth floor and looking at the marina, that will be a completely different experience. Therefore, I am waiting for interim occupancy in order to assign my unit. Having said that, when somebody came to me in December and said, hey, you have a unit there in Niagara falls that I would really like to have, and he's ready to pay me $200,000 for it. That's what he got it and on assigning it.
There's so many factors here in that question. How long is the development going to take? How much do you need? How much did you pay at the beginning? Is it possible that after a month, you can already make 50,000 bucks and you're happy with that, then assign it after a month. There's too many variables there to answer the question. Generally, I would say, at least for me, I'm going to wait until I can show the units in person to get the maximum price and hopefully have seven or eight people who are going to do a bidding war to get my units and then maximize my profit.
Meaghan: One of the other factors in this is what the builder will allow. What I have seen in my experience is that some builders actually will not allow you to assign it during that interim occupancy period.. You have to do it beforehand. To your point, if you can negotiate that, we'll call it for The REITE Club members as part of the deal. That's fantastic, but we'll call some of the ones that I know that's closing right now, like the builder, because it's just like a pain for the builder to have people changing hands, when he's during occupancy. Sometimes they do want to have that all done before the occupancy period starts like all assignments before that.
Daniel: Thank you Meaghan. That just became criteria number 19. I have the permission to assign during interim occupancy. Thank you. Continuing with the general question that we received. You foresee that possible interest rates this year might have an impact on RWA strategy and any of these. First of all, we are not sure about the eyes. Number two, please again, for the people who were there in the eighties and nineties, we are dealing with free money here. If they go from, I don't know, 2.25% to 2.5% or 2.75%, even 3%, it is still free money. I don't think that's going to keep people from buying a condo when they need to buy a condo.
Remember when people are buying a condo, it's not just because they're going, oh, I'd like to have an ice cream, let's go get an ice cream cone. They buy a condo or a unit or something because they need to drive. You're moving there, they're downsizing, or whatever. There was a reason behind it. It's not like buying a bag of popcorn. If you need to buy a condo and now you're paying 2.75%. You're still going to buy the condo. That's my view.
Some people might say, you know what? They just raised the rate to 3.25%. What if we just wait and the media, it's going to come down first of all and if they raised it on the way going up, it's not going to come down. Number two, you want to wait another year and then pay an extra $40,000 on a new unit a year from now. I think as soon as units will be available and people will buy them. It's not keeping me from sleeping whatsoever.
Why would a developer not just go to market and get a higher sale price, want to build, wind up so many assignments and cause some issues. One thing that people don't understand is that we're going to build a project. It needs to have a certain amount of funds in trust for the bank to give them the money in order to start the construction. Recently, we went on a project where there were 64 units. The project is going to start in May. We went there on a tour bus in November. By the end of the date on Saturday, the 64 units were pre-sold.
The builder can go to the bank on Monday and say, Mr. Banker, I just have, or I'm going to have $20 million in my bank account here in the next 30 days. Can you please start working on my financing so I can build this building? It is a great advantage for the developer because what you've seen and people on this call, if you've driven around any place in Ontario you may have seen this where you see it at some point, the beautiful fence. There's a big picture coming in the spring of 2021. Now you're in the summer of 2022, and there's still nothing that has happened.
You're going to be there in 2023 and still nothing will happen in 2024. The fence goes away and you're wondering what happened. What happened is that the developer was just stubborn or whatever, only one or two did not want to do investors assignments or whatever. You did not sell enough units. Now, you have to just walk away and shut them the project. That is the advantage to the developer is when you can, pre-style real quickly and now you can get building.
I think I have one last question here. Are there other closing costs when you assign a unit? The deposit we'll come back to you. The developer has legal costs, maybe a thousand bucks. The legal costs, yours, I don't know, probably a thousand bucks. In some cases here you could have a realtor fee or the developer might actually charge a fee for you to find it a referral fee or something. There were a few fees, but again, all of these are peanuts compared to what you can make as a margin in our RWA strategy.
If you go to the right place at the right time and you get a discount at the beginning and it's a good product and so on and so forth. Meaghan, I'm just going to go back to you too, before we go to Katherine. Any final comment before we see if there's any question that we can address in the Q and A.
Meaghan: No, I don't have anything. I'd say let's go to the people and see what questions they have.
Milena: Same thing.
Cory: There's a high level of questions. I've actually been typing. Everyone else presents to address some of these.
Daniel: Katherine, come on board and tell us what are the key questions.
Katherine: There are quite a few questions. One of the things that we will do, everybody knows that we will transcribe these questions and the answers that our guests have put in and include that in our online community for you as well, because they're excellent questions. Please note everybody that we have provided the contact information for all of our presenters today for you to follow up with them directly, because I know everybody's situation is unique to themselves and make sure that you are touching base with the experts.
There's a lot of questions and even more. There's so many that are popping in. This is from Monica. When you are assigned a condo, do you pay a land transfer tax?
Daniel: No, pay a land transfer tax when you buy something, and not buying, you actually never bought them the beginning either you reserved a unit and now you're assigning your contract to somebody else. There is no land transfer tax, there's no purchase.
Meaghan: Essentially, selling a contract. When you do an assignment, you're just assigning a contract, which is like a piece of paper.
Katherine: Excellent.
Daniel: By the way, it would be really hard for anybody to charge your land transfer tax because there's no title, the building's is not registered and the units are not built. There was nothing there. It's a piece of paper, so you could not pay the transfer tax on a piece of paper.
Katherine: Good point. Susan has a question for you as well, Meaghan. What does a realtor typically charge for the assignment transaction?
Meaghan: It's very typical to what you'd see on a normal real estate transaction. It'd be like 4% total commission, 2% to the listing agent and then 2% to the cooperating agent. One other thing, and Daniel, this can be like another item on your list of best practices is, it is ideal if you can, to be able to negotiate with the builder to allow this property, your assignment to be sold on like realtor.ca.
I'm going to tell you guys, like 99.9% of builders will not allow you to do this and need to sell it exclusively, which means you're selling it on Kijiji. You're coming to a realtor like me, who has like a database of investors who would be looking to buy it like you can't. When you go to assign these, you can't put them on realtor.ca and sell them that way because you're going to be competing with the builder because the builders always hold back some units that they'll want to sell it at the end. Those are some things, if you can negotiate it, it's amazing. Don't expect that you will be able to get it like rarely, if ever, are you able to do that.
Daniel: I will address you rarely here because we have a situation where that project in New Castle that our friend there whom you know very well negotiated with the builder, that we will be able to list our units, but the ad has to go through that person first and be approved. In other words, the builder has no objection to me doing that when the builder doesn't want me to advertise my one bedroom, one den for $600,000 when he's trying to sell them at $650,000.
As long as I'm matching the price, or as long as I'm more, and as long as I'm not making claims in my ad, that will make my ad look better, whatever. In other words, you're right. It's rare, but again, with The REITE Club. This is the kind of thing that we can get from a builder. We have the right to do it, but it needs to be approved.
Meaghan: That's one of the benefits of working with your group, and then negotiating things.
Daniel: We're trying hard, continue Katherine. Thanks.
Katherine: This one is from Paul. There's so many questions coming in so quickly and there's a long scroll and Cory, this one's for you. I purchased a unit through hold colon if it isn't HST registered, am I able to add this tax registration to this company?
Cory: I was discussing this in the chat a little bit. The term HoldCo is just a term for what a corporation does. A corporation is a corporation. A HoldCo is just a corporation that holds assets, investments, passive items, earning things on. The answer is yes, you can register a HoldCo and HST number. You just have to call CRA like you would for an operating company. It's the exact same thing. Just call CRA and get the HST never registered.
Katherine: Excellent. I'm still scrolling here. There's lots of questions that are coming in, and I know some of them have been answered in the chat. Some of them have been answered. I'm not finding a lot more that are here. There's a new message and it's just come in. What is the benefit to the builder to sell to us with all of these conditions rather than the general public who do not require these terms?
Daniel: We addressed that earlier. We went back to the explanation, like a three minutes explanation, but I replied to that five minutes ago. Why the builder wants to listen to the recording, which by the way, everybody's going to get a link. You'll get a clear explanation of what the benefit is.
Katherine: I think we've answered them all, Daniel. I think we've answered them all that have come in. What I'm going to do is just make sure that we put the contact information for all of our presenters again here. For everybody to follow up with their own individual questions. I personally want to say thank you to all of you. We've had a couple of comments that each one, whether it's Meaghan or Milena or Cory, with all of your areas of expertise and you as well Daniel, that we could do even more lunch and learn with regard to this.
Thank you to everybody. Everything will be up fairly within the next 48 hours. You will be getting a notice for it.
Daniel: Thanks again, everybody. My comments would be, it's not an accident that we have Meaghan, Cory and Milena because from a legal point of view, Milena in our view is, Cory, oh my God, this guy, you have no idea how much knowledge and help you can provide.
Please any accounting questions, not just about HST and not just about what we talked about today, reach out to Cory. It is amazing. Of course, Meaghan top realtor, you care about the business. You care about the profession and you care about the people you work with. Thanks everybody. We'll talk to you at some other point.
Milena: Thank you so much.
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