Ideally one should utilize leverage whenever possible.   A great way to create a retirement savings plan by using other people’s money is to save for a down payment and purchase a rental property.  The goal is to ensure you rent to suitable and responsible tenants and let them pay off the mortgage.  Over time the principle will be paid off with their money which you didn’t have to work full time for.  

The initial investment for the down payment is all that is required ( On February 16, 2010 Finance Minister Jim Flagherty introduced tighter qualifying standards, including raising the minimum required down payment for investment homes from 5% to 20%) and the cash flow from the tenants ideally should pay for the expenses and mortgage. 

Using a corporation to do this transaction is not necessarily recommended for a number of reasons, but could be a better route for some.  For this blog I recommend that you keep the property in your personal name so that when you decide to sell you recover the principle paid as tax free income.  If you let the tenants pay the full mortgage off; 25 years later the full purchase price of the home is your tax free retirement income.

Furthermore, the gain on the sale over the adjusted cost base of the property (purchase price + capital additions + legal and real estate commissions) is a capital gain.  Capital gains are 50% tax free which makes it a very desirable form of income to obtain. 

Further leverage can be gained if you include family members.  The capital gains (if the property increases in value) can most likely be split off into lower tax brackets.  Also qualifying for the mortgage is easier when you include working family members and makes the investment possible where otherwise the opportunity may not exist.

Another option if you don’t have much income or savings is to find friends or relatives and pool resources and incomes to qualify for the purchase and build a plan for greater prosperity from there.  Of course always be careful with who you go into business with.  Always write up an agreement spelling out responsibilities and terms of the partnership, and the compensation for any partner who contributes more than the others.

Usually the higher interest payments in the beginning allow you to reduce any taxable income.  After a time the interest portion will be reduced and you may start paying income tax.  At that time there may be enough equity in the building to refinance.  Usually from an economic point of view is desirable to use equity as leverage to make another purchase and begin paying more interest instead of paying taxes on rents without additional properties.  If you decide to refinance; the interest will no longer be deductible unless you use the proceeds from the mortgage to buy another building or use it to buy investments or finance a business.  If you use the funds for personal reasons the interest will not be a tax deduction and that is not recommended.  Owning two rental properties in same municipalities allows you to also claim auto expenses to collect rents.

If you own a profitable property with a positive cash flow or desire to spend on a tax deduction, landscaping and repairs are deductible expenses that add value to your rental investment.  To be classified as a repair the work done must be considered as only restoring to original condition, otherwise it will be classified as a capital improvement.  Capital improvements are instead added to the adjusted cost base of the property which reduces the taxable value of the property when sold.  Expenses on the other hand are a deduction in the year they are incurred.  An example of a capital improvement would be installing hardwood flooring where there was carpeting.  The test would be that the replacement product is more expensive and also of a better quality.

One method to reduce any taxable income from rental income is to depreciate the property so the rental income is zero.  This will create recapture when you sell the property but the reasoning behind that plan is you should have the cash flow from the sale to pay the additional taxes.   Recapture is when you depreciate the property below market value and the depreciation claimed must be put back into income at time of sale.  You are not allowed to use depreciation to create rental losses but you are allowed to break out even.

If you decide to build a new rental building a good source for building trades are accountants who have a good source of clients they can recommend to you, and you can be on your way to a good investment that should make you more prosperous.