**Transcripts are auto-generated.

Erwin  

Hello and welcome to another episode of The Truth about real estate investing Show. This week we have on Superstar real estate accountant extraordinaire. I know she’s extraordinary as stress tested her myself with my outrageous tax questions can deduct, fill in the blank a million different ways and she CFO to our own configure investment portfolio of both residential and commercial holdings not to mention our four businesses in one registered charity. Those are each a corporation as well. Are you seeing a single accountants out there? Know that you are a hot commodity? Everyone else? You don’t know the benefits of an in home CFO into the one who understands your books, does your accounting for cheap, takes your calls from the CRA on your behalf and applies for all your mortgages refinances. I literally took a call from the CRA this week while standing in Sherry’s office on speakerphone, so she could feed me all the answers. Not to mention she’s an amazing mother to our two kids, Robert and Bruce. I give the kids silliness. Sherry is the disciplinarian and loving one hand, she’s responsible for all the compliments that we get from our great kids. They’re, for example, she’s the one that got the meat to eat vegetables. Thanks to some early walltime yelling, yeah, straight up revealed that her kids not so much anymore, though. They’re quite well behaved now. And either Reggie’s so right or wrong, something worked out. I’m introverted one, while the kids have regular conversations with adults, adult parties that we bring them to. Yeah, our kids get invited to many functions where other kids are not invited, including their CrossFit class that they attend. That’s meant for teenagers, but the gym trainer and the owner, and the owners believe that they’re well behaved enough so they can, yeah, they’re in a class with kids that are like 510 years older than them. I don’t know where they got this from definitely wasn’t for me. Please do allow me one parenting moment. My youngest, Bruce, he won’t get the mat have his Brazilian jujitsu class. It’s not that big a deal. That’s classic like 13 He’s not the biggest though. But anyways, as you know, I’m a fan of hacks as in like efficient shortcuts. And so I’ve been teaching Bruce tactics to counter the trips and throws those classmates are taught in class versus countering what’s taught in class the most the kids practice, because that’s what they’re taught in class. I’ve been teaching them how to counter those trips and throws and worked out specifically using single and double leg takedowns were successfully countered and took down each of his classmates, including his sister Robin, as super proud, but you can’t win them all. My daughter unfortunately lost all of her sparring matches, so still much learning to be done for all parties, including myself, like they think I can be a much better parenting coach all the time. No one said I was perfect. I’m definitely far from it. Speaking of hacks as efficient shortcuts, now in how they pertain to wealth creation, this is the last call for tickets to the wealth hacker conference wealth hacker.ca. After this episode, I don’t think I mentioned it over again. At least for a while. Wealth hacker dossier for tickets, this event was the event of the year last time, don’t take it from me take it from the people who attended, they’ll all be back for this time. And the entire community will be there as expected. You know, rock star key spire rain Rich Dad trust your talent, of course, I win all the other smaller groups that are out there, they will be there in force. Why? Because our investment community faces the greatest risks I’ve seen. I’ve never seen such widespread financial trouble. These times honestly make 2009 look like a blip for like for the context of a Canadian real estate investor. And there’s more challenges coming. I’m hearing regular requests for private borrowing. I’m hearing from lawyers, I’ve even receiving them myself my email. I’ve never even advertised myself as a lender. So anyways, these are people not investing, but they’re looking for liquidity. As in they’re trying to hang on to stay liquid. As they’re not looking to sell. They’re trying to avoid having to sell for losses. So it’s tough out there. And it’s only gonna get tougher, I expect at least two more interest rate increases. And for that reason, fear is high. The time for greed assume so you’ll want to be learning from the best of the best experts. My friend and sixth time best selling author Derek Foster, who learn to invest while studying Warren Buffett. Derek is outperforming Warren Buffett’s Berkshire Hathaway this year in 2022. Derrick’s up 5%, Berkshire Hathaway’s but even on the year, and while the rest of the stock market is down 20 to 30%. So I want to learn from people who can completely beat the market. I think we all can benefit from that. Jordan Anderson is our leading crypto expert. He’s likely the best crypto expert you can find in Ghana to speak to the subject. And I think if you’re a real estate investor, you understand the need for hard assets and how fiat currency is yuck. So you want to hear what Jordan Anderson has to say and how he’s investing his own money. Jesse is our keynote speaker. If you google him, he’s worth well over 200 million and he started from nothing. Start from nothing used to sleep on his friends couches because he had no money He’s almost been broke many times. Now he’s worth over 200 million. And that has nothing to do with being married to billionaires. So he will be sharing how to overcome challenges and thrive in markets like these cherry chan real estate account, we’ll be sharing how to retire faster with corporate structures, so you can pay less tax, she’ll have some advice and advice. And because, yeah, this is the time, the will the time is upon us soon. Maybe even now, I don’t know, to be investing more cherry in her accounting partners have been consolidating lessons from their experiences working with 500 Plus real estate investor clients. And since no one hides anything from their accountant, you know, real estate investors usually highlight their losses to their accounts so they can account for them properly. Harvest tax losses account. So the truth about real estate investing returns, losses, and more importantly, the path forward cherries on the show today to share about the burning client. I’m asking her why she knows she has told me what the burning questions are, that she’s getting from clients. They include tax implications of short term rentals and an Airbnb, especially when selling where clients lost money. And all that surrounded was around not understanding the risks, setting up businesses and corporate corporations specifically for investing in the United States. Please enjoy the show. I give you my lovely wife, Jerry Chang, pitcher chin.

Cherry  

What’s keeping you busy these days? Planning the wealth hacker conference?

Erwin  

Was that keeping you busy?

Cherry  

I know like you’re taking on most of the work I’m taking on most of the stress.

Erwin  

I think there’s lots of stress and work to spread around. Why don’t we agree to do this?

Cherry  

Well, I think there is a need in the market, to be honest, to answer the question like, What are we doing next? Like how are we going to survive this recession? And I think recently one of our clients sent in a question. And it just got me thinking this is really the reason reason behind why we’re doing wealth hacker conference, like how do I protect my investment income? I mean, this is pretty hard to answer. Like, I don’t know why this client thinks that the the account and the boring accountant here will be able to provide a solution to that question, because we didn’t get everything right. Yeah. But then the reality is that everyone is looking for a solution. And so that’s the reason why we gather all these expert to help answer that question in wealth, the upcoming wealth hacker conference.

Erwin  

I think that’s the answer for for today. When we plan the conference back in 2019. We plan that we will do the conference again back in 2019. We were not thinking we’d be in this situation, going through a gold pandemic pending or we’re already even recession economic winter. But yeah, but that’s what we’re leading to now. Because we’re here to answer what the current today’s problems are.

Cherry  

Yeah, well, I mean, I tell people, I have clients who come to my team and ask, Oh, is cheering not doing accounting anymore? That’s not true. I always tell people that I am a problem solver. I don’t care if it’s accounting tax, or whether it is answering a question for clients how to protect their investment income. That doesn’t matter. I’m just they’re out there to try to solve problem. And today we’re seeing that problem, how to protect your investment, how to protect your investment income as well. So those are the questions that we’re trying to solve.

Erwin  

Because we’re seeing, like, we’re recording this October 20. Again, we’re in recession pending recession, pretty much every investment category is down over the last 12 months. Stocks crypto real estate, where should we start? private lending is a hot topic these days. I’m hearing lots of pain out there. No one that I know personally, at least not that I know of no one to share with me. But I keep hearing from your other lawyers and mortgage people that there’s a lot of pain out there from people who have lent money and people who have borrowed money at high interest rates

Cherry  

is actually really sad. You see it on the news all the time. Like recently, I saw another news article that this older lady who wants to invest in real estate, sign up for a course that’s hosted by someone in BC. And this lady the course heavily promoted promissory note. So private lending without promissory note is essentially you sign a piece of paper saying I owe you to me, and promise me to pay certain amount to me. And that’s it. And there is no backing, no underlying backing, there’s no security,

Erwin  

sometimes there are often there isn’t. Yeah.

Cherry  

So in that situation, the borrower went bankrupt. And older lady it was boring against the property to parties that like sorry to lend out the money. And now there is nothing

Erwin  

she borrowed from like her home. Yeah, just paying interest on that. Yeah, exactly. Where does the money

Cherry  

I mean, within my clientele, I’ve heard problems from a few of our clients not being able to collect. Some clients are losing money on lending, lending now doing private lending. Another client actually participated in this type of scheme. It’s not really a skim. I never really, yeah, strategy. Like it’s been promoted heavily by a lot of people on YouTube as well. I’ve seen a few, a few of the videos from influencers. Yeah. And basically the

Erwin  

ideal place to go to get quality information. With some people throw us in that category as well.

Cherry  

Yeah, sir. Yeah. So like the one like the strategy basically works like this, if you are like, I’m the one that’s boring and lending money to you. And so you need, say, $200,000, as the mortgage, you like, the house is free and clear, you’re just boring $200,000 from me, so I can structure that $200,000 loan, a portion of it is in my own name. The other portion of it is in RRSPs, name my RRSP. And then the last portion of it is the in a TFSA accounts name. So three portion, but it’s the same like total $200,000. But because they are trying to rank the put the, they are trying to play around with the ranking of the debt. So for example, the money that will go to me, so my portion of the law, my personal name, not in any register account is going to be ranked first. So by ranking first against your property that I’m lending money on, essentially, I’m first I assume the lowest amount of risk. So it could be giving me a 3% 5% 5% loan there right now is 5%. That’s what the bank are going for. So let’s say the first 50,000 Is that 5% loan, I borrow from my line of credit, lend it to you 5% 5%, clear, nothing happened now. And then the ranking sets the RSP, that’s right, second, would be ranked second. So RSP second mortgage, so RSP would be the second mortgage. So over there, I’ll lend you $100,000. And because it’s ranked second, so the interest rate is high, maybe 7% 8%. Because like CLA can, you know understand because you go ranking, the loan itself is ranked second you earn high interest rate. And then the last portion is the TFSA. So TFSA account would lend you say another $50,000, that TFSA $50,000 loan, because it’s the third mortgage on the property is assuming the highest amount of risk, and therefore you will give 15% on that TFSA third loan. So by doing this, what the ultimate goal of having this type of arrangement is that majority of the income is going to go to your TFSA account. And a lot of you would know the TFSA account has no tax on it. So when you withdraw money, when you’re earning 15%, on your $50,000 loan, you pay $0 tax. So this is a pretty good deal, like good deal to redirect some of the income from your personal name all the way and then from potentially from your RRSP name to the TFSA account. And you’re while you’re still generating reasonable amount of income. So what happened with this type of structure is that when you fall through, if you are in some of our common case, clients case, the borer is not able to return the money. So what happened is that let’s say the property is 200,000 was 200,000. I lend 100%, loan to value 200,000. Now the property go down $250,000. So when I take over the property, and I sell the property in the open market, I’m only able to get $150,000.

Erwin  

You’re simplifying processes actually pretty ugly process. But yes, yeah. So that 100 control the property and all these all the cash cash flow, for sure.

Cherry  

The $150,000 that you get back from selling the property, the first $50,000 is gonna go to the first mortgage, which is then the like to unregister a personal one. So your first one will be totally recover. You don’t have any goodness, yeah. Now the next $100,000 is going to go into your RSP, because it’s based on the ranking of priority. So then that $100,000, get that 100, that your RSP get back $100,000. Now, then your TFSA also has the last the third mortgage, the $50,000 that we mentioned, but there is nothing going into the TFSA account, when TFSA accounts incur that $50,000 loss, there is nothing to write off against. That’s it, it’s gone forever. So you can’t write it off as a capital loss in your personal name because of the ranking. So when things go, Well, this type of strategy worked really well. But when things doesn’t go well as in the example, like I mentioned, what’s going to happen is that your TFSA account, taxpayers TFSA account is going to absorb all the loss. You can’t recoup any of the last because TFSA account there is no it’s not taxable. The amount that you earn in the account is not taxable. The amount that you lose in the account is also not deductible. Oh crap. So then you lose the contribution room, you lose whatever you accumulate there. You start from scratch, you lose the contribution room to well, you contribute it that $50,000 somehow at some point but it’s gone, it’s gone. The contribution room is gone. RSP is your contribution when we go on to if you lose money in The RRSP Yeah, the contribution room is used up when it was done, it was used up, it’s being used at the time when you count your bill, not whether you take money out or not, or how our portfolio is performing,

Erwin  

right? So when you do take RRSPs out, you’re just taking less, you never actually get to have a capital loss.

Cherry  

You don’t have capital loss, you have less money to take out, oh, arguably, you would have made some money on the tax saving, right, arguably, but that’s how it works. So those are why those strategies don’t work now. So for people who just lend money out directly using their own personal name not using TFSA or RSP, if there is a loss incurred, you will be able to write it off likely as capital loss. You could potentially write it off as business loss. But it is a lot more strict in terms of rules being applied, if you want to write off as business loss,

Erwin  

but in the case of the the old lady in the article, not likely, yeah. This sounds like an investment,

Cherry  

it will be more likely a capital loss, meaning the laws would only be able to be apply against capital gain that you make

Erwin  

wunderbar. So what are we were talking offline about private lending. My own thing about private lending is I don’t personally want to do it because I don’t want anymore I already have we already have an exposure in real estate. I don’t want more exposure to the real estate market. I don’t know if everyone understands how to gauge risks.

Cherry  

I think the biggest challenge with people who have promissory note is because it’s not promissory note, private lending to private lending, is because they want to be able to make a high return and not really understand their risk, understand the risk or not really needing to lift a finger. Literally, the lender don’t need to pay for anything. So it’s always the borer who paid for the lawyer, the lawyer, the borrower would pay for the mortgage fees, lending fees. No, yeah, no brokering fees, Dad’s velcroing fees. And then as well as probably the institution fees, all the fees are being borne by the borrower, whereas the lender really just show up at the law of legal office to sign. So a lot of people and clients are attracted to these type of deals, because they’re easy. And then you get like 10% return, like Where else would you be able to do that by signing that away. But people don’t usually do the level of due diligence, they only focus on the percentage return, they don’t look at their risk tolerance. And that’s where the biggest problem is, I personally have no problem with people investing in this type of strategy or investment vehicle, it’s just that you have to understand that hey, like, if things go south, you have that risk. And people don’t focus on the risk side, they only look at the 10% 15% or 20% of it is promissory note. Right? They don’t

Erwin  

understand the risks. Yes, that’s the problem is ever since a friend of ours had had their second when the owner stopped paying the first and they had to take over. It’s pretty painful. Like there’s large legal fees, like it was over $10,000 in legal fees immediately, that our friend had to pay being the second in order to take control the property, and then also that the start making the payments on the first mortgage. Right? That’s not something I want to get into. We’re not in a financial position to be taking on other people’s mortgages. I don’t know if everyone understands these things.

Cherry  

Yeah, like so what happened in that particular property was that I actually have a YouTube video on it. So for anyone who wants to go on my YouTube channel, there is a video on hydel, I think turning $50,000 losses to $100,000 or $200,000 gain. So what happened was that so our friends mortgage was second to the lender, a lender, a banking lender, a bank and everybody’s bank. Yes. So the borrower was not able to make any payment anymore without telling her so she’s a second mortgage holder. So the bank is starting the foreclosure process ha says getting all the legal fees exactly, and adding on all the fees that would otherwise be charged. And so now all of a sudden that first mortgage say $200,000, all of a sudden there’s an additional $50,000 on fees being charged by the bank. And the probably you would property would be able to be sold for like maybe $300,000 minus all the fees, maybe net 250. So then there is no room to repay her own loan amount of the loan could be $50,000. So so then what she did is to take over the entire property. And at closing when she took over the property, the bank said that we can’t sell it to you because the owner the previous owners still owe us after paying all the fees and other $10,000 to pay it. She had to on top of the $50,000 loan that she had she had to actually pay and other $10,000 Cover the owners. The owners should For the issue, the fees being imposed by the bank. What people don’t understand is that when you’re ranked second and your loan to value is really high, there is nothing left, realistically, legal fees until legal fees. So what she did is she then turned around and then renovated that property and subsequently sell it for a lot higher. A few years, but not immediately.

Erwin  

She held it for at least three years. Yes. Right. So the market saved her.

Cherry  

Yes, absolutely. And it’s not for everyone, right? Like how many people are able to close the property and resell it for a profit? Exactly. Yeah. Because

Erwin  

love people got in probably got into private lending, because they didn’t want to be landlords. Now, here’s someone who is forced to become a landlord. Yes, yes. And take on a mortgage and take on, I forget who lived in the property as well if there was a tenant or not, to the previous owner. But so to me way too much risk for the return. Just me personally,

Cherry  

like everyone’s priority investment priority is different. And there are options out there that could generate similar amounts of return, or would give you similar amount of return. But with lower risk. Like we mentioned, our wealth hacker conference speaker, their foster, he was on the show before he talked about how he used the stock dividend portfolio to retire till today. I think those are a lot less risky, compared to like doing and truly passive. Yeah, exactly. So those are the options available, and which is why we’re having this conference to present all the options available. There’s not one answer to every single question

Erwin  

there isn’t. But we believe in people having options, like our own our own investment plans for next year, like we’ve talked about growing our dividend paying portfolio of stocks. And I can’t think of anyone better to learn from the derrick Foster. Derek is actually up 3% This year, while the stock markets down 23%. And so as the real estate market, I don’t know where the real estate market is. But yeah, we’re probably down somewhere around 23% to this. But you know, we made some smart decisions last year, we didn’t get everything perfect, but we locked in some mortgages. We refinance a lot of them at the beginning of the year, as well. Again, I kind of wish we sold some at the peak, in order to have more cash, we didn’t get everything perfect, but we did better than most.

Cherry  

We’re very blessed. Yeah, we’re

Erwin  

very blessed.

Cherry  

There’s always something that in your life, you can look at. Whether we were able to sell it at a peak or were losing money, we have some unrealized losses. We’re so very blessed. We’re so in the position to say that hey, like we are still surviving. Like we have no financial problem, knock on wood. We’re doing okay, we have no health problem. We’re doing like way, way, way better.

Erwin  

I’ll trust you that we’re okay financially, since you have all the books. And I just trust that you know that number. Molly, before we start recording, we talked about other things you see your clients doing. We talked about, like markets and stocks and crypto, we’re all down. I don’t know anyone who’s really avoided that. That’d be accurate.

Cherry  

The stock market is down and we see losses in the tax reporting side from tax reporting side. But you also have to understand that tax reporting side, it’s like four months later, so like, oh, maybe a year later. So we’re seeing it in what we do. And we’re seeing it from our clients books. We’re also seeing a lot of people investing in or at least engaging us to start talking about structuring investing in the US. We also see a lot of our clients trying to increase the cash flow by renting all their properties via short term rental.

Erwin  

Okay, said a mouthful. Let’s just before we move on for stocks and Kryptos, for example, what is the tax treatment of losses? What is the what do people do with those losses?

Cherry  

So while that is a great question for tax purposes,

Erwin  

so as in crying bed at night, so

Cherry  

you’re talking about private lending losses, or

Erwin  

yeah, let’s handle each one private lending losses. How did they I think you already covered that.

Cherry  

Yeah, private lending losses, I

Erwin  

already covered an RSP you’re just Sol

Cherry  

Yes, there is nothing, you can’t really claim anything. If your private lending loss is incurred in your own name, you’re the lender and you lend it to small business, you might be able to claim something called allowable business investment loss. So you have to check and they always see I always do audit. The benefit of claiming allowable business investment loss is that even though it’s only 50%, again, if you lost $100,000, only $50,000 is can be claimed that 50,000

Erwin  

claim. So continue with your example $100,000 loss 50,000 can be deducted from your income, regular income, regular incomes to reduce your tax liability, yes,

Cherry  

but if you lend it to someone that is just using it to for whatever reason, as an investment not a small business, then chances are you will not be able to claim it as allowable business business investment loss, you will have to claim it as capital loss, capital loss is still 50% but capital loss can only be applied against capital gain that you make. Okay. So it gets complicated.

Erwin  

Okay, speak to an accountant. Mm hmm. Generally though the people that we see losing money in private lending, they’re lending to real estate investors, the landlord laborers are,

Cherry  

yeah, sometimes people aren’t using corporations, sometimes they’re not, right. So

Erwin  

after lending their lending to a corporation or an individual is that,

Cherry  

that makes a difference, that makes a big difference. Because a lot of them are doing it as an investment, right? They’re not doing business, right. So depending on the structure, and see if the corporation that you’re lending to qualify, then you may be able to have another way. And then which is a lot more beneficial. To be honest,

Erwin  

he gets a lot of borrowers are using corporations, that would lend to the corporations to protect it or protect their liability. Assets, protect, protect their personal assets, oh, boy, this could all get really messy, more messy. And as you think about private lending, I didn’t want to take someone’s house from them. But that’s great. You want to secure a second mortgage or a first mortgage, whatever on your home, I don’t really want to take it away from somebody. Which is why again, like I don’t want to get into this right, versus a lawyer that I met for meeting that we’re doing, we borrowed a friend of a friend’s lawyer, lawyer office, and then I got to meet the lawyer owner that wrote that practice. And we are talking about real estate and how they how she originates private mortgages. And it was really interesting. What do you what’s the underlying security? Right? He says, all these are like 100 unit apartment buildings by like investors with like, 30 years, 40 years track of years track experience, never lost money. I’ve never lost my technically Oh, fascinating. Then they said, Oh, how can I invest? She’s, she’s like, first of all, if I like you, you have to have a million dollars to invest. It’s like, oh, sorry. My point is that there’s wonderful stuff out there available for private lending. From the surface level, there’s not advice, obviously, from the 30,000 foot view, it looks like a wonderful opportunity. But it’s only available to the ultra wealthy.

Cherry  

Well, to put it another way, like these people would have a bigger appetite for higher risk stuff as well, like they can risk to lose some of the money. And I’m pretty sure that they would have not put the entire million dollars in that particular one property, probably over a month. But yeah, so then, if you are able to afford to do that, like, that’s the easy way to diversify your risk. Lend it to different people, different borrower to diversify. Exactly. So

Erwin  

it’s the thing I think the most people most people get, like, they’ll look at someone’s like Instagram, for example. And they’ll like them, and that’s enough risk analysis for them. I like them. And we’ll let the lend to them. Oh, yeah, move on. We got a lot of other things to cover. And it’s cottage rentals bigger than us investing?

Cherry  

Well, they’re both I wouldn’t say necessarily caught Asia, I think a lot of people are trying to do college and short term

Erwin  

rental. Yeah. What are clients asking about in that area?

Cherry  

short term rental is tough like they like I mean, you and I did short term rental in the past, we try to do it passively. Meaning that we hire a property manager to do it and pay 20% Pay 20% and all that. But then if you really look at the numbers, I don’t know if it is necessarily better than having strict rental. Now we shut it down. Yeah, we shut it down. But like in general, I’m talking about in general. Now, a lot of the people have to understand that like having that short term rental a lot of time means that you do have to handle the tenants on a regular basis. It’s a real business. That’s a business like a hotel. Yeah. So what all it also means is that there it comes to a different type of tax implication, especially when we talk about selling the short term rental. So a client of ours is considering buying this cottage rental that has been running as a short term rental, and the seller is asking for HST on top Oh, so and so this is I don’t know the exact number. Let’s say you find a property for a million dollars. And the the 10. The seller is asking for HST on top the reason why they’re asking for HST on top is because they have been using the property for short term rental and short term rental are primarily consider the rental period for less than 30 days. So when you do short term rental and your property only does short term rental for sure you’re going to your property is considered to be converted to commercial property, you’re conducting commercial activity and therefore, you would have to it’s a commercial property when you sell it, you will have to charge HST if the buyer is using it for personal use basis. If the buyer is also going to buy it as a short term rental, they could sign the form and get registered for HSC. They may already be registered for HST, and by providing the valid HST numbers to the lawyer or causing, you can get exempted from paying the HST as the buyer, but at some point that property have it’s ever been converted Back to a longtime residential or for you to use personally, then you have to pay the HST on fair market value at the time of conversion. Damn, I wouldn’t buy this. Yeah, it’s no different than like buying a unit at the hearse resort. If you for any of you who knows our D hers is a it’s a resort place up in

Erwin  

hotspots on resort and has condos available for sale. Exactly. And

Cherry  

you can put your unit into a rental pool. And for those of you who put the rental the unit into your rental pool and the hotel, manage it and rent it out for you, they have to charge HST on the sale,

Erwin  

how much of the year does have to be rented for to be considered commercial?

Cherry  

So see, this is a great question. And this is the reason why I have to prepare this. This stack of paper is actually not an easy answer. So typically a property as consider a residential complex in the eyes of the excise tax act, provided that is considered like you know you live in it’s a house, it’s a house or a condo unit or townhouse, whatever. Now, so there are typically the rule is that it’s always a residential complex. And so unless it’s brand new, you don’t need to charge HST on the resell value. Unless three conditions are all met. The first condition is that it’s it’s like a hotel is being run like a hotel. So what does that mean? You’re hurt? Yeah. So what does that mean by run like a hotel, then that means regular housekeeping, regular housekeeping, there is a common reception area, that could be one of the conditions that they look at, you may not have a common registration area, but doesn’t mean that it’s not a hotel. It’s always available for public to rents and short term rental. Those are like some of the characteristics of a hotel. The second condition is that it is not used primarily as a place of residence. So it’s not used primarily for someone as a long term place to live in their primary home. Yeah, so it’s not 50% More than 50% not. So you have to like it’s written in such a convoluted way. So then you have to go like not not, so you’re not hotel, you don’t live in it for more than 50% of the time. And then the last condition is that all or substantially all of the leases are for less than 60 days. So what’s all or substantially all, meaning over 90% of the leases are for less than 60 days. So how do you prove that your number is less than 90%? And this is on a

Erwin  

service project. Second of all, the midterm rental people are less paying attention. 60 days is important number.

Cherry  

Yeah, 60 days is actually specified in the act. It’s not me making up the number. It gets a bit confusing, because what

Erwin  

post municipalities are saying 30 days is the cutoff between what’s considered short term. But to appease disposition tax purposes, you need to be over 60 days.

Cherry  

Yeah, for so then you don’t have to charge HST on the sale of the property. Oh, yes. Oh, absolutely.

Erwin  

The million dollar property example that’s $130,000 HST, I would

Cherry  

argue that million dollar which would be inclusive of HST, so it’s divided by 1.13.

Erwin  

But the seller is covering their ass by making it on top.

Cherry  

Yeah, yeah, that’s exactly what the salary example like the the salary is doing in the examples. Yeah, so but then we would have to advise our client like, hey, like, at some point, if you change the use, you have to cough out that, whatever. 100,000 $130,000. At some point, she’s complicated. Oh, it is complicated, but you may keep it as short term rental forever, then you have no issue at all. You don’t care. Interesting. A lot of those resorts, even though in BC they’re selling it plus GST or plus HST, selling it as a set business as a short term rental business. So those are like you have to look at it almost differently, even though there are exemptions. So looking at it, like you’re buying a business. Yeah, exactly. So when you’re buying a business, obviously HST is applicable. But then you can get exempted from paying the HST.

Erwin  

And I’m guessing this is like kind of like a wild wild west, because for example, it’s I see it a lot there on social media, people are doing rental arbitrage. Say for example, you were to rent a property you owned to a property manager, who’s gonna then operate our short term middle term rental business, put it on Airbnb, for example. So even though your lease is with the property manager,

Cherry  

so it’s probably like a residential lease, regular residential lease, then you don’t know what that person is doing. And if they turn around,

Erwin  

everyone knows what they’re doing.

Cherry  

No, like, if I’m the landlord, I land I rent it to you. And then you turn around and real realistically, if you turn around and rent it as on Airbnb, then how would I know? How would I know? We’re not suggesting something like this? No, I’m just saying like that. That’s That’s the reality. And then how do you define it? Like, technically speaking, technically speaking, I would still have that same sort of liability, potentially. But I don’t even know this position. Yeah. Oh, boy. I could, but I don’t know. Yeah, we

Erwin  

don’t know. That’s my point. That’s my point. Is that this kind of wild wild west? Yeah, it is. Because for example, I’ve spoken to a couple of investors who are doing these strategies, and they do not have short term rental insurance. They tell me that the property manager does. I’m like, this is kind of gray.

Cherry  

Yeah. So how do you enforce your property management is going to pay you so long as possible like for the damage or destroy damage

Erwin  

to them like Oh, great. I tried to simplify my life only to see more people

Cherry  

so the Airbnb like the short term rental. So like, I also got client who asked me about cottage, the same criteria apply actually this literatures about the cottage space on the cottage example.

Erwin  

Okay, but the rule should apply to a condo apartment. Because I play Yeah. Same as with the Deerhurst example that doesn’t even have a kitchen. You don’t know how you can argue residential, and then there’s no kitchen. Well, while there argue that that has, yeah, some do. Yes. Yeah. Interesting. So people need to pay attention to these terms. And then I would say is from the investment standpoint, like this can’t be your only investment strategy for that property. But you need to have multiple options. Absolutely. Because this there’s a, there’s a chance to this one, this one option will fail since somebody municipalities are banning short term rentals. And then once all the short term rentals, join medium term rentals, then they’ll have there’s a chance to be too much supply. And then if you ever need to get that strategy, and then What’s plan B. Right? Do what a lot of people we know are doing trying to get people off of Airbnb just renting their property directly. Yeah. All right. Anything else in college rentals, anything else on short term rentals? Are people making money with them? Is it profitable?

Cherry  

I think to some people they are if they are hands on naturally is profitable. You’re earning the management. Good. Good. See, right. But if you’re not hands on, like how we operate it before, it’s harder to make money. Yeah, you’re just escaping the landlord tenant board control. But you’re not necessarily making a lot of money.

Erwin  

Yes, yes, I’d have more much more expensive property than I hope most people do. Yeah. And also, we don’t generate the rents like a cottage would. A friend of mine told me yesterday she paid $6,000 in rent for a week for a cottage. But like 1000 square foot bungalow with a hot tub. $6,000 We got a deal. Wow. Not we didn’t get that kind of prices. That’s where we failed with our Airbnb.

Cherry  

I mean, we got a deal from for our own college rental.

Erwin  

But I would also add, like, I don’t know how long this lasts. I think this is this is a bit of a vacation, boom. I don’t know if the boom continues. And also with so many people getting into it. Will there be an oversupply of vacation properties? I don’t know. But I see risks. I see rents everywhere. There’s opportunity as well, potential opportunity. I’m not saying no to it, just be aware of it. So why are people engaged in you speaking to you about us properties,

Cherry  

they’re our clients, then they’re looking into investing in the US. And we got lots of clients because they got sold to these properties because they are supposedly providing a lot of return. cash on cash return. And no rent control. Everything is better and free. Some of them are investing in like the Troy so they’re okay. Yeah, so not necessarily all in Florida. Okay, Texas. Some of them yeah, in Texas as well. Yeah. Dallas.

Erwin  

I know claims and friends of mine. They got whacked in coral. What is it? Keep Coral Coral? Yeah, very sad. And yeah, I was sharing with you before we were recording like I was reading The Economist this morning. The advice that that insurance adjusters are giving they’re giving hurricane victims is photos are everything. Get your claims ASAP, because some insurers are going under? Great, some insurers will go bankrupt and then I don’t know, I don’t think we get paid. And then to add to that the fastest growing insurance provider in Florida, and they also have the highest market share is a state backed insurance company. So meaning it’s a government insurance company is the fastest growing. That’s to me, this is fear. Private industry doesn’t want to share these properties. Right? This is Florida is supposed to be like, you know, the home of capitalism. Here we have a state backed insurance company.

Cherry  

So like I well, I personally what consider having us property, but after I crunched in the number, the biggest challenge that I see that people don’t usually mention is foreign currency exchange rate risk. I think we were on our way to Orlando to our marketing conference. And sitting next to me was this lady who’s also a realtor, a local artefill realtor, and she bought this property in Florida, which is around $350,000 market, a detached house in a gated community. And I was lending the whole time the total three hour flight talking to her about this property. And she shared with me the number like it could be rented for $2,700 a month. And property management is about 10% or $270 a month, which is all great. But then when I come back and crunching the number, the biggest challenge that I have is the foreign exchange currency risk I have on paper, it looks great. But then because of how the US dollar has gone up, in relation to the Canadian dollars, the probably the US dollar has to stay at that point for me to make money. So what I mean is that back in 2008, basically the US dollar is on par with the Canadian dollars, if at that point in time you just buy a property in the US, which was also the best time to buy. Even if it doesn’t go up in value, just by holding on to the property and you saw it today, the property would have gone up the conversion of the Canadian dollars. Sorry, the US dollar has risen for like now 1.42. Canadian. Yeah, somewhere around there. Yeah. So even if the property value doesn’t go up in value on the fly, you make all your money in ethics, which contrary to today’s market, you’re paying 1.4 the market now is terrible getting in right now people don’t talk about that 1.4 conversion, which is which makes me worried because you know, like it’s realistic. Are you going to not spend your money in Canada? Are you not going to retire in Canada? What are your long term plans with owning that property?

Erwin  

Or being able to earn income in US dollars? Great. Yes, absolutely. But if I’m investing right now, I’m probably buying Canadian stuff. Yeah, because my goal was further.

Cherry  

Yeah, so like people don’t talk about at 1.4 40% conversion. So you have to pay 40% more. So that means in the future, if the dollar goes down against the Canadian dollars or US dollars goes down, then the property has to go up that in value big enough to cover your foreign currency loss. So I hope people will actually understand what I’m talking

Erwin  

about to do like, people, I think things are, especially our audience will understand like cross border shopping. Yeah, you go cross border shopping. You know, you go to Buffalo. When when the dollar is closer, when the dollars when are Canadian dollar strong. It is not strong at all right now. Yes. Dollars incredibly strong. It’s been one of the best investments of the year.

Cherry  

Yeah, exactly. So then you, you have to understand that it’s not good value to go back to American stuff. Yeah, like, Well, I’m not trying to say you shouldn’t do it. And you just need to account for the potential that the dollar is going to go down. And the house is just another variable that you can’t control.

Erwin  

But even if you put in you know, put yourself in the Americans shoes, you have a super strong dollar. They are probably coming like when we were Niagara Falls just last month, there were tons of Americans are in Canada, because their dollar is so strong. It makes sense for it to go for them to go the other way. Anyways, but yes, foreign exchange rates risk is something it’s a big mountain to climb, if you’re going to buy today. Yeah.

Cherry  

And then the other thing that people don’t always talk about is the cost of compliance and costs of setting up a structure. So I got clients who come to us and say, like, we should set up all these corporations or I talk to this lawyer in this particular state, and they said that I should set up an LLC to own these properties. C stands for so I think LLC stands for limited liability corporation, but LLC is actually kind of like a follow through structure. So it’s just provides limited liability protection to the person who owned that LLC. But essentially, ultimately is the person who’s b Who owns the LLC that reports the income and expenses. It’s a flow through entity.

Erwin  

Where’s it based? Where’s the entity base? State, okay, it’s

Cherry  

because there’s a tax filing status. Let’s put it that way. It’s

Erwin  

it has to be in a state. It can’t be just being the country of us. It’s a

Cherry  

tax filing status. It’s not something that you create you like to the IRS that you’re filing as LLC. Anyway, the point is, with that LLC, see it doesn’t recognize LLC, okay. And so LLC is being recognized as corporation in the CIS eyes, because it has many attributes of a regular corporation. So when you file taxes

Erwin  

are coming together to different tax law structure. Yes.

Cherry  

So then in the US you file as if you are owning the property in your personal name. In Canada you are filing because you need now need to file both taxes both sides of taxes in Canada, your personal name like CLA is considering that LLC as a corporation. So now you have a foreign corporation. Now, if you pay tax on the US side, under perfect integration, both psi, the Canadian government would give you credit for what you actually pay in the US. But because you have this LLC set up, the government doesn’t recognize it. So you pay tax in the corporation. In sorry, in the US, you pay the tax under the LLC and the personal name over here in Canada, you don’t get recognized for the tax that you pay. So any money you drew out from the LLC, it will be taxed again, in your personal name in the Canadian side, so you pay double tax. And so like, the biggest mistake that I’ve seen is that, hey, like, if you do that, you just work with a lawyer, random lawyer in the States, they may offer you certain type of deal, it would only be applicable, those structure would only be applicable to the people who are located locally in the States, they’re not necessarily applicable to people who invest from Canada, crazy. And then when we promote, not promote, when we put forth a plan that would avoid double taxation, it’s often very complicated, and clients do not like it. And clients do not understand it. And then clients don’t want to pay for it. And clients also didn’t understand that they, they have to set up like three, four entities in order to achieve that objective of not paying double taxation. They don’t take into account the potential costs of filing. That’s what I’m trying to say. And they’re surprised by like, Hey, I have to file taxes for three entities with this much money. And on top of that, you’re Canadian psi has reporting as well reporting risk responsibility as well. So it gets like super complicated. If you’re buying a single family rental gets really complicated on one side, on the other side,

Erwin  

sounds like to me you need some scale for, for this to make sense for the structure. Yeah. And also, you need to be able to make so much money to cover this foreign exchange risk, and are highly motivated to invest in the US.

Cherry  

Well, I feel like we have gone through so many negative things. Maybe you can talk a little bit about the positive things.

Erwin  

I honestly don’t know, we’re heading to a recession. Yeah, there’s gonna be at least two at least two more increases in interest rates in the US maybe more like right now not motivated at all. Right. So

Cherry  

are you suggesting to the audience do nothing?

Erwin  

I can see, like even for cross border shopping doesn’t make any sense right now. Right? I probably wait until I have more clarity and weren’t thinking where things are.

Cherry  

So don’t do private lending. Don’t do cottage short term rental? Don’t Don’t do

Erwin  

I think they’re all fine. Just the investment has to be quality. Right? My challenge is I just see too many people do not know how to judge quality and risk.

Cherry  

How do they get learn how to judge?

Erwin  

Like the whole reason why put on the conference, best practices from experts? Right? You know, we’re down on our crypto, we had the leading Canadian expert on cryptocurrency, and he’s Jordans gonna be telling us exactly what what and when he’s gonna be buying. Right? These are things I asked him for our speakers to say the same thing with Derek Foster, I asked him to share what are you buying? And when are you going to do it? Alright, and how much Alright, he’s gonna be sharing these things at the conference. Now, you and I, we’ve seen some horrible, horrible things happen in real estate, where we’re sharing what didn’t work. And you know, what we think will work going forward and where we’re going to put our own money going forward. Because I still believe next 18 months, two years is our generation’s chance to build, like, significant wealth. This is the time this is this time we’ve all been waiting for. This is our our Great Recession of 2008 2009. This is a repeat of that opportunity. And this is just a repeat. This is just a cycle. Great. Your wealth Hacker dot see if you know anyone wants more information. Journey funnel forwards want to leave off with bigger does not necessarily mean better.

Cherry  

Yeah, so like I’ve I’ve gone to multiple conferences and all they like to talk about by no means I’m just talking about real estate investors. But I’ve gone through all these conferences, even the one that we went to Orlando during the marketing conference. Yeah, it’s a marketing conferences, people always talk about gross revenue. I sold a million dollar US using a one funnel, it’s $2 million dollar side by no means is a bad number. It’s like great, great number. It’s a number that people are striving to get to. But I just wanted to reiterate and which is also the purpose of our conference, is that bigger is not necessarily better. And I just wanted to remind using my little voice to remind people if you want to listen that, you know, whatever you’re investing is just a means to an end. And don’t forget your end or your initial reason to invest for us is to provide a secure financial future to our kids as well as having the financial freedom or just freedom on its own. So like is it going to be real estate can it be something else? Or is it just purely real estate? I don’t know. I’m still learning. I’m Social. Trying to figure out that solution. And I mean, I’m hoping to be able to present that to add the confidence and message to you to everyone. But at the end of the day is a means to an end. Bigger is not better. So I could be owning 200 doors, but I could be negative cashflow. $100,000 a month, you wouldn’t know that. Yeah. So just keep in mind that bigger isn’t always better.

Erwin  

higher returns is not necessarily better. And chasing the

Cherry  

shiny object can be that that shiny object could mean running a marathon, that shiny object could mean doing different things with your kids as well

Erwin  

in the portfolio, because we you and I have been talking about that we need to shift more of our investment towards cash flow. We’ve been so focused on growth and wealth, which has worked are great, but doesn’t necessarily give you freedom. So hence our shift to more generating yield. And then that’s again, something is gonna be covered at the conference. Yes, absolutely. The How to the what and the when in details. Yes, as little risk as possible.

Cherry  

And then never lose sight of your own. Why. Amazing. Thank you, Jerry. Thanks for having me. Don’t forget to subscribe to my YouTube channel.

Erwin  

What’s the call?

Cherry  

It’s called youtube.com/real Estate Tax Tips. Amazing. Thank you. Thanks.

Erwin  

Before you go if you’re interested in learning more about an alternative means of cash flowing by hundreds of other real estate investors have already then sign up for my newsletter and you’ll learn of the next free demonstration webinar I’ll be delivering on the subject of stock hacking. It’s much improved demonstration over the one that I gave to my cousin chubby at Thanksgiving dinner in 2019. He now averages 1% cash flow per week, and he’s a musician by trade. As a real estate investor myself, I got into real estate for the cash flow but with the rising costs to operate a rental business, it’s just not the same as it was five to 10 years ago when I started there. Forget the cash flow reduces your risk. The more you have, the more lumps you can absorb. And if you have none, or limited cash flow, you’re going to be paying out of your pocket like I did on a recent basement flood at my student rental in St. Catharines. Ontario. If you’re interested in learning more, but it’s true for free for my newsletter at www dot truth about real estate investing.ca. Enter your name and email address on the right side. We’ll include in the newsletter when we announce our next free stock hacker demonstration. Find out for yourself what so many real estate investors are doing to diversify and increase our cash flow. And if you can’t tell I love teaching and sharing this stuff.

 

 

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