Whether you’re real estate rich or just getting started on the road to home ownership, it’s never too late to seek help from a professional financial advisor. Armed with tried and tested tax saving strategies and sound investment models, a good financial advisor will not only help you avoid many of the most common mistakes and, for that matter, some of the least common they’ll also play an important role in helping you achieve the kind of financial freedom necessary to ensure you meet both your personal and your financial goals.
While the connection between real estate assets and the need for a good financial advisor hasn’t always been an obvious one, the increasing importance being placed on property ownership as part of a diverse financial portfolio means it’s an area that should be given serious consideration. And developing an understanding of the important role a financial advisor can play in helping attain both short- and long-term financial goals can go a long way toward helping families and individuals maximize their financial potential, whatever stage of life they’re at…and whatever their financial situation.
Analyzing Financial Data by Dave Dugdale
“It’s not a service that should be considered as being just for the rich,” says Corrine Spiegel, a financial advisor and Senior Vice President with BMO Nesbitt Burns Inc. in Toronto’s Forest Hill. “That’s a common misconception. We help all kinds of people position their assets in ways that are tax effective, whether it’s to produce growth or income, taking care of a child’s education needs, or looking after an estate and inheritances.”
Spiegel, who’s had over 30 years’ experience in the financial service industry, is also quick to point out that it’s never too late or too early, for that matter to seek the services of a financial advisor. Using her own children as an example, Spiegel suggests that kids should be taught the basics concerning such areas as savings, investing and understanding credit as early as possible, and certainly upon entering the workforce.
“A good financial advisor can turn your life around, whatever your age,” she adds. “And it’s never too late. Older people, for example, generally have more issues than younger people, and as you age, you don’t know when you’re going to lose your competency. So questions such as is your will in place, do you have powers of attorney established, do your RRSPs have the correct beneficiaries, all become important things to consider. And a lack of understanding of the concepts could be a problem.”
What to Look for in a Financial Advisor
If you haven’t already got a professional financial advisor working for you and your real estate portfolio, it’s never too late to add one to the team of experts looking out for your interests. But what, exactly, should you look for in a financial advisor? The following simple checklist will help ensure you find a financial advisor that’s a good fit:
- First Impressions: Go with your gut. Do you like them, and do they listen?
- Get Personal: A good financial advisor will set aside time for a preliminary “getting to know you” meeting. Don’t just talk business. Find out what makes them tick, what they like and if they’re compatible with you and your family.
- Down to Business: Any financial advisor worth their salt will offer a no-obligation, complimentary financial plan, usually as part of a follow-up meeting.
- Lead by Example: Ask for examples of strategies that have proven effective and which are repeatable. Ask how they might apply to your particular needs and goals.
- The Proof’s in the Pudding: Ask for evidence that their techniques and strategies work. And what’s their track record? While for reasons of compliance and confidentiality they can’t share specifics, they may offer a theoretical record highlighting scenarios they’ve dealt with. They may also be able to provide a client performance report (with names redacted).
- References: Ask for references. Be specific and ask for examples pertaining to situations that may be similar to yours. A good financial advisor will have a number from which to choose, as well as reference letters.
- Compliance: Ask for proof of their compliance history and track record.
As for how to find a reputable financial advisor, ask your friends and family for referrals (assuming they’re having good success). If that turns up empty, ask those professionals whose services you’ve used in other areas lawyers, accountants, bankers, etc. for prospective candidates (they’ll usually offer at least three each, so be sure to do your homework and kick the tires).
Financial Advisors and Real Estate
In addition to helping with such key areas of your financial plan as investments, estate planning, tax planning and succession planning, a good financial advisor should serve as the contact point for numerous other services, including those pertaining to real estate.
“If your portfolio contains any kind of real estate assets, be it a second home or rental income, then you may want to consider finding a financial advisor with experience in real estate,” says Spiegel. “Real estate is a very good strategy in any financial plan, and also serves as a very good anchor as a core holding within the diversification of a portfolio.”
With the help of a real estate savvy financial advisor, investors should properly evaluate every piece of property owned—not only for their long-term investment potential, including looking at projected returns and future income projections based on expected rate of returns, but also the often less considered areas of tax savings. For those just entering the real estate market, a good financial advisor will help answer the all-important question, “Can I afford to buy real estate?” by revealing a client’s net worth as well as cash flow, helping to determine whether they have a surplus or deficit, and whether they can carry a mortgage, taxes and utilities.
Key to the door by Alan Cleaver
And sometimes it’s the simplest of fixes that can so greatly impact a client’s life. An example of the kind of cost-savings a good financial advisor can assist with included a scenario where a client rented out their home while living in a rental property themselves. After a financial plan demonstrated that their lifestyle was in fact costing them money they were earning taxable income from their home while also paying rent with after tax dollars the principal home was sold, their mortgage and debts paid off and a new home purchased in which they were able to live without the burden of paying unnecessary taxes.
Understanding Complex Real Estate Issues
A good financial advisor can also prove their worth in more complex real estate scenarios. For example, one area of savings they can assist with that would help those looking to move to a bigger home or who are considering the purchase of a second home is that of bridge financing, often required when closing dates don’t line up. While traditional banks do provide bridge financing, this can be quite an expensive process requiring a lien being registered on the title and an appraisal. But a financial advisor can, at least for those clients with a higher net worth and who have money in their investment portfolios, take advantage of unique strategies that can help clients avoid having to pay these additional costs.
In addition to strategies involving bridging loans, other cost saving areas that can positively impact a client’s portfolio include ways of making mortgages tax deductible by harnessing the assets in an investment portfolio. Guided by their financial advisor, investors can use their investment portfolio to pay off their mortgage and then borrow the money against their house to buy investments. Known as the “Smith Manoeuvre”, this perfectly legitimate strategy creates an audit trail that clearly tracks the mortgage loan to the investment, thereby satisfying the requirements to make the loan interest tax-deductible.
Other potential real estate strategies that a good financial advisor can assist with may include the following:
- Second Homes: Assisting with the purchase of insurance products needed to cover capital gains tax while an owner is still insurable, thus ensuring a cottage, for example, stays in the family.
- US Property: Canadians buying US property may fall into the trap of US estate tax liability. If so, their estate may end up owing tax to the US on the value of all of their foreign assets, even if they are held in Canada. Strategies exist that can avoid this potentially devastating scenario.
- Estate Freeze: This strategy effectively freezes the value of the capital gain of a property, locking in the maximum tax bill at the current rate. In effect, it stops the tax bill from increasing, potentially allowing beneficiaries to be able to continue to own the property into the next generation
- Vendor Take Back Mortgage: If a vendor has a large capital gain in a property being sold, a vendor take back mortgage can spread capital gains taxes out over a period of up to five years, effectively reducing their tax burden and therefore making it a more attractive offer.
- Buying Investment Property: A good financial advisor should have a number of models available to project investment property values and potential incomes, as well as determining mortgage rates and risks.
- Taxes on Expropriation: If your property is expropriated, strategies are available that will defer taxes owing on capital gains.
While most strategies aren’t necessarily complex, the fact of the matter is that few people have ever heard of them or would be able to access or execute them without the help of a professional financial advisor.
“These aren’t necessarily strategies people think about,” says Spiegel. “People usually just think of the real estate in their portfolio in the simplest of terms. They very often don’t look at the tax consequences of what they’re doing with their real estate, whether it’s relating to their principal residence or income property.”
Title photo by Ken Teegardin