My brother Mike and I purchased a rental property together back in May 2019.
This was our first property together, and the first rental that Mike ever purchased.
It’s a small bungalow in Windsor near Windsor Regional Hospital.
Mike dedicated a lot of time and effort to finding this property.
Overall, it’s been a great investment.
We’ve had the same, good tenants for 5 years.
No major expenses.
And It was a private sale, just before the local real estate market really started to heat up.
So in hindsight, we got a heck of a deal on the place.
As it’s been 5 years, we’re at the end of our 5-year mortgage term.
For the last few weeks, we’ve gone back and forth a few times debating which interest rate term to choose (yes, even mortgage professionals face this same tough decision).
At the same time, over the last week or so, I’ve had countless conversations with business clients about whether or not they should start selling off assets, in light of the new capital gains rules that come into play at the end of June.
For those not familiar with the announcement, last week’s Federal Budget announcement revealed that the capital gains inclusion rate will increase from 50% to 67%.
To simplify, that means that as of June 25, people with more than $250,000 in profit made on the sale of assets in a year will have to pay taxes on a larger portion of that money.
What I’m just realizing now, is that despite multiple calls with clients regarding panic selling of their real estate… Mike and I have not once even considered this option.
And if ever a convenient time to sell, now would be ideal given the mortgage is maturing.
But here’s the thing… Mike and I share many of the same philosophies when it comes to business and real estate.
A few of those philosophies are as follows:
- Do the opposite of what everybody else is doing. (i.e. if the masses are going one way, we prefer to go the other way)
- Always play the long game.
- Single-family homes in Ontario are becoming a scarce commodity.
Concerning point #1, I’m not saying that everybody is going to sell their assets before June 25, but I am quite certain that some will do so, and many others will lose sleep over contemplating the move.
Regarding the next two points… they go hand-in-hand and make it a pretty simple decision just to sit tight and continue to enjoy our investment.
Now don’t get me wrong… this increased tax sucks, big time!
And it impacts different groups very differently (ask any medical doctor what they think of the increased tax).
But what was obvious from the most recent budget announcement, is that our government intends to keep on spending.
And as we’ve seen over the last decade or so, government spending leads to increased asset prices.
This more than likely isn’t going to change anytime soon.
So for those holding real estate assets, think long and hard before you put the for sale sign up, only because capital gains taxes are increasing.
The magic of real estate investing gains is not in the selling…
It’s in the fact that you can mortgage those properties, pull out much of your gains/appreciation tax-free, and allocate those funds to another productive asset.
Obviously, everyone’s situation is different.
And it’s important to assess how any tax changes impact your situation.
But don’t just start selling stuff off because it seems to be the popular opinion at the moment.
Think long and hard about why you own these properties in the first place, what’s your long-term goal for these properties, and whether it is worth it to pay less taxes now and not own that property 10 years from now…
Just some things to think about…
All The Best,
Vince
P.S. I know it sounds self-serving for a mortgage professional to tell you that the beauty of real estate investing is borrowing money against the property… but it’s true! Call me and we can do the math on it together.
