Limited Partnerships
Colin Keddy, RFC
Partner & Director of Private Wealth Services

 

Colin has a well-established reputation for financial planning throughout Canada's financial sector. He is recognized for his expertise in developing customized, comprehensive wealth management strategies. 

 

Colin's innovative use of sophisticated financial planning and software analyzes the potential productivity of numerous strategies to deliver a clear, accurate picture of an investor's current status and financial future. 

 

Key objectives are reducing tax liabilities and mitigating risk while increasing both cash flow and protection benefits. 

 

Colin is a Registered Financial Consultant (RFC)

Mortgage syndications require an investment minimum of $ 25,000 to $ 50,000.

 

For more information regarding the various types of Real Estate Investment contact Colin.

To Contact Colin Click here

A Limited Partnership is a legal entity which together with a general partner (GP) holds the properties they acquire. Effectively, the Limited Partnership ‘owns’ the properties. Collectively, everyone who buys Units of the Limited Partnership is a part-owner (Investors). Usually, the Limited Partners don’t know each other, and normally they aren’t involved in the management of the real estate


 

In a limited partnership, a general partner manages all the day-to-day activities of the Limited Partnership on behalf of the Limited Partners and brings in limited partners using a subscription agreement. Activities include: buying properties, collecting rent, paying mortgages and taxes, maintenance, repairs, upgrades, and all tenant management. This makes Limited Partnerships a great ‘care-free’ way to invest in real estate.

 

Each limited partner’s exposure for losses is limited to that partner's original investment. The subscription agreement for a partnership documents the investment experience, sophistication and net worth of the potential limited partner.


 

Private investors invest in companies by completing a subscription agreement, which is an agreement between the issuing company and the investor documenting how many shares are sold and the price of the shares.


 

A subscription agreement is an application by an investor to join a limited partnership, and it is also used to sell stock shares in a private company. All limited partners must be approved by the general partner. The limited partner candidate fills out a form documenting the investor's suitability for the investment in the partnership.

 

Adavantages of Limited Partnerships:

 

Real Estate is a straight-forward asset.
Real Estate is something that most people understand. It’s tangible—you can touch it. Everyone lives somewhere.


Well-selected and well-managed real estate can deliver healthy profits. According to the great industrialist Andrew Carnegie: “Ninety percent of all millionaires become so through owning Real Estate.”

 

Care-Free Investing
Invest in real estate without any of the normal landlord responsibilities: rent collection, tenant management, maintenance, repairs, bookkeeping, accounting, etc.

 

Diversification
Each investor ‘owns’ a (proportionate) share of each property.

 

Instead of owning a single property, each investor owns a small portion of each property in the entire portfolio, and therefore shares in the total profit. If there happens to be one property that develops a problem, the problem is resolved by the General Partner, and no single partner is responsible for the problem—only their small share.

 

Limited Risk
The Partnership is a Limited Partnership. This ‘limits’ any single investor’s risk to the amount invested.

 

Tax Advantages
In some cases, depending on an Investor’s individual situation, there may be tax advantages to investing via a Limited Partnership.


 

It is recommended that you consult with your financial advisor(s) and accountant to determine how a specific Limited Partnership could benefit you personally.

 

Deferred Plan Eligibility (RRSP, TFSA, etc.)
Some Limited Partnerships are eligible investments for ‘Deferred Plans’.

A ‘Deferred Plan’ is an investment account that allows for taxes to be deferred or paid at a later date. Two common examples of Deferred Plans are Registered Retirement Savings Plans (RRSP) and Tax Free Savings Accounts (TFSA).

 

Growth vs. Income Options
Limited Partnerships can be structured for Growth or Income, or a combination of both.


 

An Income-focused Limited Partnership will pay out periodic (i.e. quarterly, annual, monthly) payments to its investors. Some investors are looking for regular income (i.e. those who are retired), and an Income-focused Limited Partnership can be an excellent choice.

 

A Growth-focused Limited Partnership makes most or all of its payments to investors at the end of the term. This allows more of the invested capital to work for a longer period of time, and this structure is intended to generate higher overall returns. For investors looking for higher potential returns and those without a need for regular income (i.e. RRSP or TFSA investments), a Growth-focused Limited Partnership is often a preferred choice.

Mortgage Syndication

FLAT is the new UP

by Colin Keddy

 

Given the varying performance of the stock market over the last few years, it is encouraging to see the TSX trending upward lately. That said, investors are likely concerned with a continuing low returns that have dominated the market for the last half decade. In this “flat is the new up” environment investors are looking for options with the promises of better returns and many are

hoping that the syndicate mortgage market will provide the returns they seek.

 

Unlike a traditional mortgage when a bank lends money to an individual to purchase a home, syndicate mortgages are private loans that come from groups of investors that are typically lent to developers in the pre-construction phase. As banks are inclined to lend less and less, the market of syndicate mortgage has become big business with big profit. Like any investment there are risks and not all offerings are equal.

 

A Syndicate mortgage can diversify your portfolio and the following are some things to consider:

 

1. Where is this project in the development stage? Getting a project “shovel ready” requires a lot of work. There are permits, entitlements from city council and environmental concerns as well as a number of other factors. Many companies have raised money before these critical stages receive

approval and that could mean major delays or the possibility of the project not moving forward at all.

 

2. Is the developer’s interest in line with mine? There are offerings where developers have invested their own personal capital and have put  themselves in 3rd position behind the bank and you, the investor. This does not ensure the success of the project but it is an indication they believe in their product.

 

3. Track record. The past experience of the project builder and the developer is a success indicator. If the project is on time, on budget and the developer has a history of returning principal and interest to investors this is also a positive indication. Salespeople may not voluntarily offer information about unpaid interest and lost capital so ask the hard questions.

 

4. Dig deeper. Don’t believe everything you hear or settle for surface level information. Investigative and fraud prevention firms, such as Inquisit Solutions Inc., will conduct a full forensic

accounting of the criminal and business history of an individual. Larry O’Brien, Founder of Inquisit,

and former Mayor of Ottawa was recently quoted as saying: “You need to identify fraud before it

begins. Even if you are right and litigate, how much justice can you afford, and will you even

recover what is lost?”

 

5. Market suitability. While the saying “location, location, location” is true there are other details

to consider. Is the area over-developed? What is the demand? Is the region heavily impacted by

changes in industry such as what we have seen in the oil business out West? What are the city’s plans for development and revitalization? What do the pension funds know about this investment space that we don’t? Success leaves clues. 

REITS (Real Estate Investment Trusts)

What is a REIT?

Real Estate Investment Trusts are much like a mutual fund that invests in a portfolio of real estate of specific types of properties such as apartments, office, retail or hotels. Unit holders get a proportional share of profits and losses. Investing in REITs is generally more predictable than playing the stock market or investing in individual property, plus REIT investments are a lot less work.

Canadian REITs are expected to show good returns in the low teens for the next few years as a total return (distributions plus capital appreciation) given growth and an improved global economy.

In addition, Real Estate Investment Trusts were excluded from the Halloween 2007 decision by the Harper Government which taxed income trusts, making REITs one of the only tax-efficient savings or investment vehicles left for Canadians.

Another reason why REITs are gaining popularity is because real estate is one of the few places where investors can put their money to accrue interest and get tax-efficient cash flow.

Here’s a guide to the benefits and what to look for:

Tax benefits
The tax benefit of REITs relates to distribution. A portion of the distribution from Canadian REITs is classified as return of capital, which is not taxed. It actually goes to reduce your adjusted cost base, so that when you go to sell the unit later, you realize more of a capital gain than you normally would have.

For example, if you buy a unit at $10 and the distribution is $1, and half of that is return of capital, then after one year, your adjusted cost base would go from $10 to $9.50, because that $0.50 return of capital reduces your cost base and you don’t pay taxes on it right away. The other $0.50 is generally business income which his taxable.

If you were to sell the unit a year later, and it’s gone up to $11, you’d pay a capital gains tax on $11 minus the $9.50 cost base, so you’d have a $1.50 in capital gains as opposed to $1 in capital gains.”

The tax treatment benefits both the REIT and the investor. Because the REIT operates as a trust it doesn’t have to pay any corporate income tax on revenue that is generated in the portfolio, so the profits essentially become 100% tax deferred until the investor draws them out of the portfolio.

So if you’re accruing gains and your dividend is in a registered account, you’re not paying any personal income tax until you decide to discharge the capital from the registered account. The opportunity to grow this capital tax free gives investors a tremendous edge in terms of building their portfolio.

That paves the way for strong growth. One private Canadian REIT, for example, boasts 8 per cent annual distribution for investors, with monthly payouts. Each unit costs $10, with a minimum investment of $5,000. Investors can also borrow to boost their overall stake.

With an overall investment of $10,000 at a 8 per cent distribution, monthly payments would be just under $670, and the annual total would equal $8,000. As long as your REIT has a portfolio of steady rental income, those can be reliable expectations.

Of course any real estate property requires management and repair costs, but these can be minimal in a REIT when it’s all handled under one roof for a large number of properties.

REIT investments vs Individual property investments
When investing in REITs, you’re essentially buying into the real estate market. But it’s a much different type of investment than buying a singular property and managing it yourself.

An apartment REIT, for example, buys multiple complexes and properties throughout the country, manages them and handles the portfolio. Unlike amateur investors, the purchases for any new properties are made by professionals with experience and heavy research.

Buying an investment property also often entails managing it yourself, essentially becoming a landlord.

 

Another advantage to REITs is that the real estate industry is heavily regulated, and following all the laws can often be a bit intimidating as well.

And most importantly for some with limited funds, REITs allow you the chance to invest with a smaller share of cash needed to buy a house or apartment. Just $5,000, for example, can get you started at some private REITs.

Choosing a REIT
Just like finding a property, you do need to do some research into REITs to find which ones are the best canadian REITs for you. In addition to the countless REIT companies, there are also various REIT options, such as retail, office or apartments.

Almost all REITs offer diversity of multiple locations and properties, which is a major advantage to an investor who wants to spread out their money.

Multi-family residential is one of the safest REITs, while higher risk REITS are hotels or single-tenant REITs. There are different rates of returns, but investors have to decide what their risk profile is to determine which REIT is appropriate for them.

Investors should also look at where their REIT has properties. For example, Integrity Wealth Group plans to operate mostly in Western Canada, while Skyline has stuck to mostly secondary and tertiary markets outside Toronto.

Many funds stick near company headquarters – following the age-old rule of sticking to what you know best. Investors looking at US REITs should consider the currency risk. Those who get into the U.S. REIT market now are essentially taking the risk that a recovery is on the horizon.

No matter where you choose to buy, be sure to put as much time into choosing your REIT as you would any piece of property. You may even decide to buy more than one REIT to diversify your holdings there even more, but each one should be carefully researched. Many REITs post examples and private returns on their Websites. Past history often can give you the best gauge of future performance.

Public REITs versus Private REITs
Investors can choose between a private or public REIT, and there are advantages and disadvantages to both.

 

Private REITs are less subject to movements in the markets, while investors in public REITs have to deal with shifts in sentiments, which can be hard to predict. Private REITS allow investors to eliminate some of the volatility.

But there are advantages to public REITs: they have strict reporting rules, and are therefore required to be more open. Private companies, due to their nature, aren’t required to report in the same manner to their investors.

 

There’s also more liquidity in the public sector. You can just put in a sell order and trade it immediately to whoever is willing to match the bid price on an exchange.

Public REITs will also have a lesser investment cost, as private REITs can have a minimum of at least $10,000.

Whatever you choose, make sure you’re comfortable with the style of management and portfolio in your REIT. Look for management that has a good track record, has some experience and a long-standing history of transparency.

All REITs investors need to consider how they will manage their debt: Leveraging your equity can increase yields, however it can also put your fund at risk if you leverage too much. Don’t leverage enough and you‘ll end up wasting potential future growth.
 

Public REITs vs Private REITs

Benefits

Public REITs 

Liquidity Can be sold as soon as a matching bid is found.

 

Volatility

Public REITs

Similar to stocks, can shift with varied market sentiment.

 

Minimum investment

Public REITs 

One share

 

Corporate governance

Public REITs

Must follow specific stock exchange rules

 

Disclosure requirement

Public REITs 

Must make public financial disclosures

Private REITs

You can’t just call your broker and sell the same day. Much slower process.

 

Private REITs

Like investing in a real piece of property, slower moving.

 

 

Private REITs

As little as $5,000

 

 

Private REITs

Not required

 

 

Private REITs

Not required

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