Part 2 of 2
By Christopher Seepe
In part 1 of this article, I provided a summary of the kinds and amounts of costs you might incur when purchasing a multi-residential building, using an 11-plex outside of Toronto as an example. I discussed land transfer tax, CMHC insurance and building insurance. Look for a separate article that I have written that details how much you should insure your building for.
Here is the remainder of my discussion on the closing costs for buying a multi-residential property.
Note 4 – Incorporation
There differing expert opinions on whether or not to incorporate. This is something you have to investigate for your particular situation. I decided to do it for the following reasons:
- Separate legal entity that distances you from personal liability in the event of a claim against you by a tenant or supplier
- Keeps your property and personal finances separate; a big issue with Canada Revenue Agency
- Land transfer tax benefit (see earlier note)
- Set up an estate trust for your family
- Change owners of company is easier than changing owners on title
- Pay yourself a reasonable salary, on which the company uses its pre-tax profits to pay certain payroll- and benefits-related expenses, and salary deductions (to be written off)
- Certain of your reasonable expenses can be written off in the company to reduce your overall taxable income – travel, vehicle operation/maintenance, etc.
This topic is one where a real estate accountant and a commercial real estate lawyer can help you immeasurably.
Note; while you can save money by incorporating a company online by yourself, there are a slew of minutes and other documents that need to be prepared as part of closing the sale of a property. Unless you are intimately familiar with the process, let your real estate lawyer incorporate for you. They will likely have a junior person on staff that does this kind of work all day long and will charge a reasonable fee for the service.
Note 5 – Phase I Environmental Assessment
Most commercial property loans by traditional lenders in Ontario (plus CMHC) require you to obtain a Phase I Environmental Assessment. Depending on the outcome, a Phase II or (heaven forbid) a Phase III might be required. This is a lengthy topic on its own so you should do some research on this item.
- If selling, know what you’re getting into before you list the property. You could be setting yourself up for a bucket of grief.
- If buying, make your purchase conditional, at your sole discretion, upon your acceptance of a Phase I report. If there’s anything that crops up that you don’t like, you have a quick and inexpensive way out of the deal.
- Shop around. I received quotes ranging from $1,500 (plus hidden costs) to $3,480 – for more or less the same service. The lender likely also has an approved supplier list or may require that your chosen vendor passes the lender’s qualification process.
- As earlier mentioned, make sure you know all the costs; minimize the variable expenses which some Phase I suppliers charge.
Note 6 – Lender’s Fees
If you don’t know it by now, you’re in for a rude awakening. Financial lender’s don’t pay for anything, and charge you for everything. Identify all the fees up front and don’t be afraid to negotiate with the lender for charges that are downright unreasonable or not even warranted.
However, you will almost assuredly have to pay the lender’s legal fees, using their lawyer (sometimes they’ll let you use your own). And their fees will be substantially higher than yours and you don’t have much of an option to negotiate them.
Note 7 – Mortgage Commission
Mortgage commission can be all over the map but self-respecting, proven mortgage brokers are worth their weight in gold. I find that 1% of the loan amount (excluding rolled-in fees like CMHC premiums) seems to be reasonable.
Like Realtors®, there are literally thousands of mortgage brokers, but, also like realtors, the really good ones are much less common.
Even with a good one, be aware that, while they may have a fiduciary obligation to you, the truth is they will probably work with you once (or perhaps a few times) but they work with lenders’ representatives every day. Mortgage brokers do not shop your opportunity around. They usually have preferred suppliers and will present you to that small group (perhaps 3 lenders). Find out who their suppliers are and continue to do your own homework. I found one top-notch mortgage broker that I came to respect highly but I continued to do my own research and actually found a lender that was 150 basis points below the best offer my broker had. Of course, he now also has a new preferred supplier.
Note 8 – Title Insurance – you gotta have it
Title insurance has a great many benefits and you should definitely obtain it. In fact, I think just about all real estate lawyers will tell you to do so. The price varies according to the size and type of property. From First Canadian Title’s website, title insurance benefits include:
- Protects against not being able to sell your property in the future, or not being able to obtain financing against your home, as a result of defects that would have been disclosed on an up to date survey, Real Property Report or Location Certificate
- Protection against fraudulently registered mortgages against your title
- Legal fees associated with resolving insured title issues will be covered
- Coverage for renovations completed without a building permit that result in a loss
- Protection should a property not meet municipal zoning requirements
- Protection in the case of someone claiming an interest in your land; for example, an easement for a driveway or a builder’s lien
- Problem solving/facilitates closings—frequently provides coverage for known defects such as encroachments, delays in registration and zoning violations.
Note 8 – Utilities Deposit
As a new account holder, you may also be required to make a deposit with a utility company, which can be notable (eg. electricity $3,000).
The cost of purchasing a multi-residential property can be substantial, and like most things, can be negotiated. Applying yourself to the research and process can save your thousands of dollars.
Christopher Seepe is a commercial realtor, and maintains www.multiresidentialexpert.com, a website dedicated to providing expert advice and sharing his personal investment and ownership experiences to those investing, or looking to invest, in multi-unit residential, income generating properties in southern Ontario, Canada. You can contact him directly at email@example.com