Michael Matthew - Investment Across Borders
Michael Matthew, CPA, CA has over three decades of experience as a professional accountant and has carved out a niche of specializing in guiding Canadians through the intricacies of real estate investments both in Canada and the United States. Michael earned his Bachelor of Arts in Honours Chartered Accountancy Studies from the prestigious University of Waterloo. Michael is the author of "Eh To Zen Real Estate: Peace Of Mind Strategies For The Canadian Investor", which offers investors a roadmap to navigate the complexities of cross-border real estate investment.
In this episode, you will be able to:
- Master the art of Canadians investing in US real estate to diversify your portfolio and maximize your returns.
- Uncover real estate investment tax strategies that could potentially save you money and optimize your investment.
- Discover the benefits of investing in landlord-friendly states and how it can positively impact your real estate investment journey.
- Explore real estate investment for Canadians and how you can navigate the process effectively for long-term success.
- Learn the ins and outs of setting up LLCs for real estate investment to protect your assets and streamline your investment process.
The key moments in this episode are:
00:00:00 - Getting Started in Real Estate Investing
00:01:28 - Investing in the US Market
00:06:20 Real Estate Market Comparison
00:09:43 - Finding Properties and Property Managers
00:13:40 - Advantages of Real Estate Investing
00:14:32 - Diverse Real Estate Investment Opportunities
00:18:37 - Choosing Property Types for Investment
00:29:22 - Gratitude and Best Wishes
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Read the full transcript:
Michael Matthew
To become a successful real estate investor, you need to get some education. There's books, there's all kinds of videos out there. You need to get a coach or mentor and you need to take action. You do those three things, you're going to be well on your way to having a very successful investment career.
Mike Swenson
Welcome to the Real Freedom show where we inspire you to pursue your passion to gain time and financial freedom through opportunities in real estate. I'm your host, Mike Swenson. Let's get some real freedom together. Hello, everybody. Welcome to another episode of Real Freedom, Real Estate Leverage Freedom, where we highlight people building time and financial freedom through different opportunities in real estate. I'm your host, Mike Swenson, and from time to time we've had quite a few guests actually from north of the border here in the United States and excited to talk about real estate investing, particularly Canadians investing in the United States market. And so we've got an expert here, Michael Matthewatthew, background, also as a cpa. So you definitely have kind of a full understanding of investing, the tax strategies and advantages of all that. We also have a book, a to Zen Real Estate, which just came out. And so I'm sure a lot of kind of the topics of what you'll talk about we'll cover here today. But Michael, we're so excited to have you on the show. Welcome.
Michael Matthew
Well, thanks so much for having me, Mike.
Mike Swenson
Why don't you just share kind of a little bit about your background and your work and we'll go from there.
Michael Matthew
So I got started in the real estate investing area over a decade ago. I started going to these conferences in the US Were dealing with real estate and business topics. And I started to think about how best can I fit. And I realized fairly quickly that one of the biggest areas of neglect for my fellow real estate investors was dealing with their taxes. Either don't do it at all, which is bad, or they do it grudgingly. And so it's very slow and it's full of mistakes. Or they do it correctly but spend way too much time on it and then all they need is a letter from the tax authorities and they just get paralyzed with fear because they don't know how to deal with it. As a cpa, I deal with the tax authority on a weekly basis. And I realized that, well, exploring my own investment opportunities would be a great thing for me to help the fellow investors with their weakest area, which is the taxes. And so I started specializing in doing the taxes for various people involved in real estate. So right now I Have clients who are realtors, I have clients who are investors. I'm the CFO of a home builder, so I'm seeing it from many different angles.
Mike Swenson
So kind of talk about maybe the types of clients you have in terms of wanting to invest in the US versus Canada. Can you just kind of give us a little bit of a summary of what's different? Why would people prefer to invest in the US As a kind of diversification of location? Or what would be the reasons why the Canadians would want to invest in the US and is that just instead of Canada or in addition to Canada?
Michael Matthew
It can be either. But the reason why the US investment is so attractive is actually for multiple reasons. One of the first reasons is just the cost of entry. I for instance, put in a bid on five homes in a small town in Ohio. The total asking price was $230,000. Those same five houses in the Toronto area, which is where I live, would have cost over 1.1 million each or 5.5 million total. While you can get an occasional good deal in Canada, you have to tie up so much of your capital in one property where you could diversify and pick up four, five houses or maybe more in the US for that same investment. And then you protect against things like vacancy. Because if you have five houses, one tenant moves out. Well, you're still getting 80% of your income. And the other big thing is dealing with getting out the bad tenants. Because obviously as an investor, you don't invest in investor friendly states. So places like Texas, Florida, the Carolinas, Georgia, things like that. Things like that. And I know in Texas one of the property managers apologized that they couldn't kick someone out for 30 days. In Ontario, where I am, it can take over a year just to get a hearing to kick them out and then it's several months after that. So you could go as much as a year and a half with no income because it's such a tenant friendly jurisdiction. So I always advise my clients the first thing to look at is a landlord friendly state or not. Because you're just taking too much of a risk if it's a tenant friendly state. Unless of course, you're just wholesaling, which you never actually take possession. Any other type of real estate investment, you got to start someplace where the landlord friendly laws are in place.
Mike Swenson
Yeah, for sure. And I think for people that it doesn't mean that there aren't investors investing in more tenant friendly states. It's just if you're going to stack up your chances for success or stack up your chances for kind of having things within your control. That's why you would want to prefer some of those states because like, yeah, to your point, if it's 30 days, I know there was another state and I'm not going to mention it just in case I misspeak. But where basically like when ownership changes hands, you can say, hey, ownership is done and now you need to be out within like a week. And so there's laws like that out there. And so not that you want to be a jerk and you don't have to do that, but the laws are in your favor to where you can if you needed to. Right. And I think that's the key piece versus having to wait, like you said, in Canada, over a year to be able to get a hearing. That just makes your job a lot harder to be able to make a profit.
Michael Matthew
Yes. And as you say, we're not looking for landlords to be abusive. You just don't want to be abused. That's the, that's the real distinction there.
Mike Swenson
Now, what is the market like? So you had mentioned Toronto. Obviously Toronto gets a lot of press for having really high prices. What are some of the maybe less large metro areas like in terms of prices compared to a place like Toronto up in Canada?
Michael Matthew
In Canada, Toronto and Vancouver, anything anywhere near those cities. It's virtually impossible to get a property to cash flow unless you're doing a real fixer upper. But to get something that doesn't need a lot of work, I've done the math. You'd have to put down a ridiculously high down payment. Our standard down payment is 20%. Some of these places you'd have to put down 50% to make it cash flow, which means, of course, it doesn't cash flow. You're just artificially manipulating the numbers so you can pretend it cash flows again. It comes back to that concept of you're tying up so much of your capital in one property. As everyone, I think, who starts investigating real estate quickly learns, one of the major advantages is that you're able to leverage your properties by only having to put up, say a 30% down payment at the most and borrow the rest. That's great, but only if that 70% mortgage is affordable. It's not in the major centers in Canada. In some of the smaller centers it is. But you have to understand you're going to get virtually no appreciation on your home price cash flow. From a rental income perspective, your appreciation could be very, very flat. You know, when I bought my condo very close to where I live now less than a mile away. It increased in value 25% in two years. You don't get an appreciation. The prairies of Saskatchewan or something?
Mike Swenson
Well, even in Minnesota, you know, we talk about, you know, a lot of investors that are maybe out of state, but maybe in the US it's kind of that balance of, you know, if you're more on the coasts, you're maybe more likely to get higher appreciation, less cash flow. Here in the Midwest, it tends to be a little bit more cash flow, but less appreciation. And yeah, you can make a lot of money on the appreciation if you confront not having any cash flow. And so it's, it's finding that balance. And every investor is different, right? So they have a different appetite for risk, a different appetite for returns. And so it is finding that balance. And yeah, if you can certainly afford to go negative cash flow, great. You then don't recoup any of that money until you sell. And so there, therein lies the challenge.
Michael Matthew
Yeah, it's a very dangerous game. And I had a client who had that exact situation. They were negative cash flow. And I was quite happy when they listened to me and sold the property because it's great when you sell it in five years, but in the meantime, they were really scraping by, trying to cover the shortfall each and every month. And property taxes don't go down over those five years. Right. Your utilities don't go down, they just go up. So they're actually going to be even more out of pocket as time goes by.
Mike Swenson
Now, you had talked about, you know, picking, you know, friendly states that are going to be advantageous in terms of kind of risk, risk perspective and that sort of thing. How do you work with folks on finding the properties or finding people to manage the properties? What are some of your thoughts? Obviously, they're, you know, a whole country away. And so being able to have good boots on the ground is really important.
Michael Matthew
No question about it. You need boots on the ground for sure. The good news is we tend as investors to go where other people have already gone. And so I've had enough experience now with various real estate coaches and other investors that I can usually find people in terms of Realtors, in terms of property managers, even lenders that will work in the major places that people tend to invest. As I mentioned earlier, out west, Arizona, Nevada, also very popular investment states. And so it's just a question of getting a referral, really. And the thing that people need to understand, and I mentioned that in my book, that you may be a Little daunted by the fact you need so many people. You need an attorney, you need a lender, you need property manager, you need a contractor. The truth is, if you get one solid person, they tend to know other people that are related. So property managers often know contractors because if it's a big job, they're not going to do it, they're going to sub it out. And so you get a solid referral to a property manager, they can put you in touch with a contractor and real estate agents will know appraisers, that sort of thing. So with one or two or three referrals, you can get the rest of the people on your team fairly easily just by asking those people you started with, who do they know that are in the fields that you still need assistance with?
Mike Swenson
Yeah, I mean, it's so nice. We work on some multifamily properties to just, you know, if the property managers are going to do it themselves, they come back and say, hey, here's three people I talked to. Here's what their quotes were, right? So it makes your job a lot easier. They can, you know, help front some of that information too. But yeah, the key is, is the relationships, right? Like you're going to live and die by good relationships and you want well vetted out people because if that relationship doesn't work, you're going to have a tough time. But if you have somebody that's shown that they can be successful for other people, that's. That's really important.
Michael Matthew
Yeah, absolutely. At the end of it all, it's a fairly small investment community. The fact that you're in a real estate investment, it already marks you as a small, small minority of the population. And so, yeah, word gets around. And just in my own business, by going to the conferences I mentioned, I met this couple who are from Ottawa actually, and I had conversations with them and while they didn't become clients, they referred me to an anchor client that when I went out on my own full time, they gave me basically a whole ball's worth of work and got me off to a good start. So one key referral can certainly make all the difference.
Mike Swenson
Have you ever heard the phrase you're the average of the top five people that you hang around? Well, real estate agents, I'm excited to increase your five with you. We're launching the Real Freedom Investor Agent tribe to help you get educated and connect with others to build your real estate investing journey and also to help you along the way as you're working with real estate investors. So come check it out on our website real freedom.com go to the store. We have a membership, we have a mastermind group and private coaching to help you stay accountable to your real estate investing goals and to make sure that you connect with like minded people to accelerate your progress and to cheer you on along the way. Check it out realfreedom.com click on the store now what do you talk with people that are, you know, maybe considering real estate but considering other investment options? They're like, hey, we're, we're interested in real estate or we've got a friend or family member that's done real estate before, but I'm also considering xyz. What are some of the things that you talk with them about in terms of, you know, why real estate makes sense for them as an investor, real.
Michael Matthew
Estate has several advantages for sure. One of them is the leveraging that we spoke to. If you want to buy cryptocurrency, if you want to buy gold, if you want to silver, you have to come up with 100% of the money yourself. You're not going to get a loan to buy that with. However, it's very common with real estate obviously to get a mortgage, it's tangible, unlike crypto. It's something that gives you the opportunity to work it in many different angles beyond the traditional buy and hold rental type operation. You can fix and flip, you can do short term rentals, you can do wholesaling. There's so many ways of going about real estate investment that you can find something that works for you. You have the flexibility to do it really anywhere. Now with the Internet, it's so easy to work these things remotely and you're able to get eventually a full time income by working part time. If you're a day trader, you can make great money, but you're on the computer the whole day. It's also, I think, not subject to the swings, but the stock market and certainly crypto, yes, they'll go up more, but they also go down more. And overall the trend, at least since the 1950s has been roughly real estate prices double every 10 years. So it's moving in the right direction and it's an asset. That is something that as I said earlier, people will always need. They don't need those other investment types.
Mike Swenson
Do you find that a lot of your clients are starting out with single family as a beginning point or they may be just jumping right into multifamily or you'd mentioned your short term rentals, you know all the different options out there. Do people Start with single family just because they maybe feel comfortable there?
Michael Matthew
I think so, yeah. I think most of them start off a single family because of the comfort level, because many of them own their own home. And so they something's very relatable. I personally am a fan of small apartment buildings because something 10 to 20 units, let's say those buildings are not 10 to 20 times the work of one single family, but the returns can be 10 to 20 times. So for a little bit of extra work, you can get a dramatically better return and you have those protections against income loss if that one tenant moves out because you have multiple tenants. It's also something that once you get above 4 units, it's all about does the property carry the loan? And a person's personal credit is very secondary. I know that's a concern certainly with Canadians. They often have great credit, but only in Canada. They have zero credit in the US and so starting off with a project that's evaluated on its own merits is actually easier for them in some ways to get the financing they need.
Mike Swenson
Yeah, absolutely. I find that commercial lenders, it feels more commonsensical, if that's a word, and simpler because, yeah, there's less hoops. It's. Does the investment make sense? If the investment makes sense, the lender is more comfortable doing something like that versus, like you mentioned the credit piece. And that's really important. And then do you find that once folks, you know, kind of get into it, maybe they bounce around to a different asset class as they gain a little bit more familiarity or they're more comfortable with, you know, hey, we've got a couple single families now. We want to jump into something like multifamily.
Michael Matthew
It's a mix. Some people, they start off doing one thing, have good success at it, and think, oh, well, that's what real estate investing is. It's not about anything else except what I'm doing right now. And part of the reason that I wrote the book is to introduce the different asset classes you can invest in and the different ways. So for instance, you can right now in Canada become a part owner of a house for literally a dollar. And I'm sure that surprises many. Obviously you're not going to own a whole house, but it's a way that you can get a share of the gains that are available in the real estate market without having to have that huge capital behind you.
Mike Swenson
Going back to the location piece, do you find that kind of similarly, if they have success in a certain state or a certain location with a property manager they tend to stick there or for diversification. They do want to go to different areas.
Michael Matthew
I very much encourage them to stay there. For the reason that you're kind of getting at. They already have the property manager in place, they already have the contractors. I know one of our biggest frustrations in the home building business in Ontario is you get a crew that does a good job for you and then you start a site that's two hours away and you want to hire again. They said, yeah, it's not happening. There's no way we're traveling two hours each way to work on your site. So getting qualified people in your area can be chore at times. And if you have a good team in place, you should really work that market to death until it's shown to be so good a place to invest that everyone comes in and bids up the prices. That's when you tend to look out to other locations. I know one of my real estate coaches is a big fan of doing turnkey properties in the Atlanta area. So just outside of the city itself. So in the suburbs, they'll buy a property, fix it up, put a tenant in on a multi year lease and basically you give him a check and you get checks. All your headaches are taken care of. He hasn't been able to do that for the last three or four years because there's just no properties available. But I just spoke to him a few weeks ago, he says, yeah, it's looking good. We're going to start buying in Atlanta again because the market has shifted. So he's going to use, I'm sure, the same crew, the same everything. Because he's already gone to the trouble of putting a quality team in place.
Mike Swenson
Now thinking through maybe some of the logistical questions that people might have. So I often hear from people, okay, if we buy a property, you know, maybe we put together an LLC or we put together some sort of, you know, corporation to be able to have that asset. So it's not in our individual name. Do you have any thoughts or maybe some considerations for people about, you know, some people, it's like put every property in its own entity. Some, it's kind of group them together. What are some thoughts that you might have for people as they consider options like that?
Michael Matthew
That's a great question. And it's something that I think stops people from investing not just in the States, but just locally here in Canada because they just don't know how to go about it. And to invest in the States in anything other than wholesaling, you're going to need to set up an entity just for legal liability protection purposes. And what's different about Canadians is we can or should never own an LLC directly. And that's because it results in double taxation. In the US it's so common. I start to think that they give out LLCs the bottom of cereal boxes because it seems like every real estate investor has several of them. Works great if you're a U.S. resident because you have the protection of a corporation and you then flow through all the income and expenses to your personal U.S. tax return and that's the end of it. However, for Canadians, you can do that first step, but then you have to file as a Canadian resident, you have to file your Canadian personal tax return. You're going to want to claim the tax you already paid in the US and that won't work because our taxes authority says, where'd that credit come from? You explain it to them, yeah, that came from a corporation. You say, no, no, no, no, it's a flow through. We don't know what that is. So in other words, our tax authority, the cra, does not recognize an LLC as a pass through or disregarded entity. So you're stuck with paying tax at what they call the corporate level, trying to claim it in Canada at the personal level, which you can't, which means you pay full tax again in Canada. So the typical setup I recommend is what I call a triple C corporate structure, which is my term. And you set up a Canadian corporation which owns a C corp, typically in Wyoming, and then you have an LLC in the state that you're investing in. So let's say you're investing in Florida. You then get to take advantage of the LLC being flow through because it flows through to the C corp, since that's all in the US that works fine. And in terms of how many properties go into an llc, what I tell my clients, I can tell you the cost of maintaining and setting up a new llc. What I can't do is value the benefit to your peace of mind. Because some people say, you know what, I had problems with one property before, I almost lost two or three other properties. I don't care. I know it's going to be more money to maintain, but I want everything separated so if there's a problem with one, it stops with that one. Other people say, like in my case where I had five houses worth a combined 230,000, I'd have no problem putting them all in one LLC because it's the value. So most people, they'll Pick a number somewhere between half a million and a million dollars and once their next property puts them over that they'll open up a new LLC. So you could have theoretically three properties in each of 10 LLCs in 10 different states and all those income and expenses from all 30 properties flow through to one C corporation. You're only filing for one corporation at the end of that whole scenario, which is the C Corp. And you can certainly use a Florida LLC to invest in Georgia as an example. You just file a one time registration fee. And I get a kick out of this because Georgia thinks the Florida corporation is a foreign corporation. So you have to register your born Florida corporation in Georgia and then you're able to conduct business in Georgia.
Mike Swenson
There's certainly a lot of unique little things that people need to remember and yeah, to your point, that might inhibit people from investing, but that's why there's people like you out there to be able to help them kind of walk through those things and show hey, we can help you take care of this. And you don't have to be as nervous about all the little details that need to happen. So is there anything kind of, you know, thinking big picture here, anything that I missed that be important for folks to know?
Michael Matthew
I think we've covered the major things. I just like to tell people that to become a successful real estate investor you need to get some education. There's books, there's all kinds of videos out there. You need to get a coach or mentor and you need to take action. You do those three things, you're going to be well on your way to having a very successful investment career because you've covered the major basis. There are some people that they want to learn everything before they do anything and they end up having all kinds of knowledge and no real estate. There's other people who will invest at the first chance they get and not really do their homework and pay the price. I had a client, and admittedly a hotter real estate market who waived the property inspection before purchase. About $30,000 worth of mold remediation later she was able to start renting it out. And I don't think she'll ever recover that $30,000 in rent. Maybe when she sells the property, but you know, paying three or four hundred dollars to a property inspector would have almost assuredly saved her that 30 grand because she could have still bought the property, but she would have gone back to the owner and said, okay, you got a mold problem. So you either knock your price down by 30 grand or I'm Walking. And legally, once the owner is notified of something, he can't not disclose it to the next buyer. So he could say, well, I'm not going to sell to you, but he's legally required to report it to the next person, which means if he doesn't, he can get sued and he'll lose. So. I know. I was very happy when we paid the inspector to look at those five houses I mentioned. It turns out that the property manager was actually making up landlord tenant laws as he went. And there was also a huge flooding problem because the property was landscaped so that it sloped into the basement, not away from it, which meant every time there's a rain, they had a wet basement. And that was a, I think it was about $350. And that saved me from investing, you know, 200,000 plus in a bad investment.
Mike Swenson
Yeah, we've certainly had our share of horror stories with clients too, where people sometimes look at the price tags of those inspections and there's add ons. Right. So there's a sewer scope inspection, we do radon, there's termites, there's, you know, different things that you can test for, asbestos, lead, all that stuff. And sometimes investors feel like, oh, I can save some money. But if you're in an area where some of those issues tend to rear their ugly head, it's money well spent. You know, where, you know, you spend 200 bucks on a sewer scope inspection and might save yourself ten grand down the road. And then the hard thing is if you, if you pass on the property, you feel like you've wasted that money. Right. But it's saving you from a future suck of income down the road if you have those huge capital expenditures. So for sure, yeah.
Michael Matthew
No, I think that's actually the definition of money well spent because, you know, there's a movie quite a while ago called Money Pit and where the couple bought a large house and then just spent endless sums of money trying to repair it. That's not something you want in your investment. Obviously, paying for those inspections will prevent you from getting stuck with that money pit. You know, 99 times out of 100.
Mike Swenson
We'Ve definitely covered a lot of information here. A lot of key things for people to know in terms of investing specifically, you know, Canadians investing in the US if people want to reach out to you and get a hold of you, how can they do so?
Michael Matthew
The easiest way is to reach out by email. My email address is Michael Matthew I C H A E L at askMichael.
Mike Swenson
CA well, thank you so much for coming on and sharing your wisdom. There's real estate's fun. There's a lot of great things that happen from it. And you certainly can help people overcome some of those, those worries and concerns that they have. So thank you so much, Michael, for coming on and sharing, and best of luck as you continue in the future.
