Investing in real estate has always been considered a safe bet. Rarely do individuals who invest in real estate not benefit from their investment.
But what about companies that decide to invest in real estate? Is it as lucrative an investment as for individuals, or are there risks and disadvantages that might arise? What should you consider before using your company to create leverage?
Find the answer to all these questions below.
Leverage explained
Leverage is a familiar principle to accounting experts. For companies, this effect is used to determine the consequences of indebtedness relative to equity. In other words, leverage is a ratio that is used to calculate the risks a company is exposed to before making an investment. This ratio is subsequently recalculated to determine whether the investment in question has been profitable.
Accordingly, incorporated companies can create leverage to invest in real estate and potentially benefit from certain tax benefits if they so desire.
The risks and benefits of using your company to invest in real estate
Although investing in real estate is considered a sure thing for many tax specialists, you should know exactly what it means for your business before taking out a loan.
Here is an overview of the benefits and risks of using your company to invest in real estate.
Benefits
Most companies considering leveraging their real estate investments do so in order to reduce their taxes. This may be true, provided certain conditions are met.
The first thing to know is that incorporated companies benefit from lower taxation on their business income. The rate is only 20% for the first $500,000 generated.
Investing in real estate with your company can therefore be interesting from a tax point of view, since the liquid assets would be less taxed and could be used as a good down payment.
Another advantage of leveraging your business to invest in real estate is the opportunity to generate additional capital. If the calculated leverage shows a positive ratio and if the real estate market plays in its favor, a company can significantly increase its earnings with this strategy.
Risks
As the well-known proverb goes: "He who risks nothing has nothing". The benefits of borrowing money to invest in real estate are significant, but they naturally come with their share of risks.
Although real estate is generally viewed as a fairly sound investment, the market may well change along the way. Should this be the case, the financial consequences could be quite detrimental to your company. Leverage isn't called that for nothing: the multiplier effect of returns can go both ways.
Before borrowing to invest, you should at least be prepared for such eventualities.
What to consider before creating leverage with your company to invest in real estate
Before leveraging your company to invest in real estate, you need to ask yourself some questions. A decision like this deserves careful thought and consideration of everything it might involve.
Is this a good move given your incorporation objectives?
Every company that chooses incorporation as its corporate structure does so with certain goals in mind. For example, these may include paying less personal income tax, acquiring real estate for business operations, receiving additional income or streamlining management.
No matter what motivated you to incorporate your business, you should keep your goals in mind to maximize the value of your real estate investment.
A corporate tax expert will be able to provide you with sound advice to help you make the best possible decision.
Which investment strategy is the most tax-efficient?
Before creating leverage and investing, you will also need to consider different investment approaches and strategies to determine which one is the most beneficial for your company from a tax perspective.
An example of a strategy to adopt would be the creation of a holding company within your corporate structure. In short, a holding company is a company created exclusively for the purpose of holding shares in other companies. This model comes with several tax benefits, such as not being taxed on the proceeds of the holding company's subsidiaries.
Discussing potential investment strategies with a tax professional can help you better understand the benefits and risks of leveraging your business.
Consult with corporate tax specialists before creating leverage
In short, creating a leverage effect with your company could bring you several fiscal and financial advantages. On the other hand, this naturally comes with the risk that the market will not work in your favour and you will lose money.
If you are considering borrowing on behalf of your company to invest in real estate, you should also keep your incorporation goals in mind. Moreover, you should consider the best possible strategy to maximize the potential benefits.
If you are considering leverage investment, you should consult experts in accounting and business taxation. At T2inc, our professionals can provide you with advice to help you implement the best investment strategy for your company.
To learn more about our services for small and medium-sized businesses in Quebec, please contact us.
Frédéric Roy-Gobeil
CPA, M. TAX
As President of T2inc.ca and an entrepreneur at heart, I have founded many start-ups such as delve Labs and T2inc.ca. A former tax specialist at Ernst & Young, I am also a member of the Ordre des comptables professionnels agréés CPA and have a master's degree in taxation from the Université de Sherbrooke. With a passion for the world of entrepreneurship and the growth mindset, I have authored numerous articles and videos on the industry and the business world, as well as on accounting, taxation, financial statements and financial independence.
