Saving for your next house faster
The more I talk to real estate agents, the more I realize how much they want to own real estate. Sometimes it’s an agent with four houses looking for the next one to rent out. Sometimes it’s an agent who just bought their first home and looking to start renting. In either case, they are looking for a way to start increasing the properties that they own.
Which leads to the question: how can you make that happen faster?
Well, there are two sides to that question. If you are purely looking for how to get your next house faster, buy it personally and move in. When you move in, you only need 5% down. On a $500,000 house, that’s $25,000. If you purchase it through the PREC, you will likely need 20% down or $100,000.
But the second side to that question, and the part that is more important in my mind: how can you get that property debt-free faster? And the answer to that question revolves around taxes. The key to this is understanding how much extra tax you will pay when you own the property personally.
For this example, we will assume a personal tax rate of 40% (income over $100,000) vs a corporate tax rate of 12.2%.
To get your down payments, you will need to generate almost triple the amount for the corporation to hold the property. You need to earn $113,895 in the corporation to pay the 12.2% taxes and have $100,000 for the down-payment. Compare that with earning only $41,667 and paying 40% personal taxes to have $25,000.
But those mortgage payments are what get you.
To pay off the remaining $475,000 personally, at a mortgage interest rate of 1.69%, you have to earn a total of $971,197 to get it paid off in 25 years. When you compare that to paying off the $400,000, even at a mortgage interest rate of 5.99%, you only need to earn $879.759.
In the end, to get debt-free you need $19,209 less revenue if you hold the property in the corporation.
Before you go and buy that next property, think about the taxes.