Cash flow Pay down Mortgage or put in the bank

[paul85s10355]

Hello



Fellow Investors what would you do in this situation. I have one prperty that cashflows 357 dollars. I have used some of that money to pay down my mortgage and turned my 35 year mortgage into 22 years. My question is I want to buy another rental property in 3 to 5 years and should I be putting the cash in the bank or continue to pay down my mortgage then pull the equity?



Lets hear the opinions.



Thanks

 

[bizaro86]

I would consider paying off any non-deductible debt you have first (eg mortgage on personal residence).



If you want to combine your two objectives, why not get a readvanceable HELOC on your property. That way you get the mortgage interest savings of paying down the mortgage now, but can still access the money later if you want to buy another property.



Regards,



Michael

 

[invst4profit]

I would echo Michaels suggestion of paying down your personal mortgage and applying for a HELOC when the time comes to expand your investments.

I would even go so far as to remortgage your rental property to the max, as it is paid down, in turn using that profit to pay down your personal mortgage thereby providing you a larger credit line when needed. Your HELOC used to purchase a investment would then also be deductible.

 

[housingrental]

I believe Greg's advice to be not ideal as could make your investment property debt not tax deductible as used toward non investment purposes.

Could an accountant confirm?

 

[acurAspec]

Adam,



I am not 100% sure on this but it depends on how the write-downs were treated so far... I believe that if you write off the depreciation of your investment property to get a break on taxes for that year, you will pay taxes on gains when you pull equity out. If you haven't depreciated your property at all, then any equity you pull out will be yours and free to do what you wish.



Sasha

 

[invst4profit]

I do not believe it should matter. First off you are pulling out equity that you have already paid income tax on (principal pay down) and ultimately you will pay capitol gains on the appreciation, at time of sale, regardless of the size of the mortgage on the property.

As far as what you do with the money you pull out it should not be relevant. At least I know I have and I know many other investors that regularly pull out the principal pay down and have always continued to claim the full interest on the mortgage as a deduction.

Never thought twice about it. Not going to start now.

 

[Thomas Beyer]

Cash is King - Cash-Flow is Queen (TM)



Keep some healthy cash reserves, like most Fortune 500 firms .. and then decide what do with extra cash:

buy more property, go on vacation or buy bling-bling (yacht, fancy car, exotic vacations, jewellery, ..) , or pay down debt .. all good options and the allocation depends on many other factors like RRSP contribution room, kids, spouse, plans in life, age, other income, health, travel plans, age of car, desired life style etc. ..

 

[gwasser]

I think that paying down your residential non-tax deductible mortgage down is a good idea. But after it is paid down significantly, rather than having tied up a lot of dead money in the house, take out the Heloc as suggested earlier.



Make sure, you use the heloc for 'safe' investments. After all it is secured by your family residence; the last thing you wish to loose. In August 1987 a financial planner suggested I take out a heloc out on my paid off house to invest the money in mutual funds. Two months later in October 1987 we had the most severe market crash since 1929 (22% down in one day!). Boy, was I happy I didn't follow the advice of that financial planner!



Here are some ideas to use your heloc for:



1. When building your real estate portfolio, aim to have your average level of leverage at 60% of that portfolio. So, you buy at a LTV of 80% then lateron refinance to a max LTV of 60%. That is once your mortgage is significant below that that level (60% LTV). Use the refinancing funds and your residential heloc plus savings to buy your next rental propery with LTV of 80%, once paid down to 60% buy your next property etc,.



In these risky times having a portfolio with an overall LTV of 80% is in my opinion too dangerous.It probably also will cash flow little. On the other hand, having no leverage reduces your ROI significantly. So you need to be balanced!



2. Invest in good quality dividend paying stocks or ETFs until you have enough to buy your next investment property. If you do this, you probably have a short investment time horizon and should invest accordingly.



3. When your portoflio becomes significant in size, diversify! My suggestion: 50% Real Estate (ala REIN) and 50% paper securities. Regarding paper securities have 50% in high quality, dividend paying stocks or ETFs; 30% in fixed income and 20% in cash.



This should make you sleep well at night.

 

[housingrental]

To clarify the issue I'm referencing in my above post was concern that the interest payments might no longer be tax deductible under Greg's proposed structure.



[quote user=acurAspec]Adam,



I am not 100% sure on this but it depends on how the write-downs were treated so far... I believe that if you write off the depreciation of your investment property to get a break on taxes for that year, you will pay taxes on gains when you pull equity out. If you haven't depreciated your property at all, then any equity you pull out will be yours and free to do what you wish.



Sasha

 

[housingrental]

I think you should check with an accountant - or hopefully one will advise on this message board.



I think what you have wrote above as a suggestion could result in the original investment properties debt to go from tax deductible to not tax deductible.



If so, and if you are deducting it, this could be a huge issue when X years later CRA comes back to you looking for additional funds from this (+ more) and you do not have the cash available at that time and you could have structured things differently initially X years prior to have saved you $'s.



[quote user=invst4profit]I do not believe it should matter. First off you are pulling out equity that you have already paid income tax on (principal pay down) and ultimately you will pay capitol gains on the appreciation, at time of sale, regardless of the size of the mortgage on the property.

As far as what you do with the money you pull out it should not be relevant. At least I know I have and I know many other investors that regularly pull out the principal pay down and have always continued to claim the full interest on the mortgage as a deduction.

Never thought twice about it. Not going to start now.

 

[invst4profit]

My accountant is fine with it. That doesn't make it right or wrong. Personally I don't care and definitely am not concerned. I have friends that have done the same for twenty years. I will definitely continue. And reap the benefits.

 

[Nir]

[quote user=paul85s10355] Hello



Fellow Investors what would you do in this situation. I have one prperty that cashflows 357 dollars. I have used some of that money to pay down my mortgage and turned my 35 year mortgage into 22 years. My question is I want to buy another rental property in 3 to 5 years and should I be putting the cash in the bank or continue to pay down my mortgage then pull the equity?



Lets hear the opinions.



Thanks


Hi Paul85s10355,



To answer this question I always distinguish between 2 types of investors - those still growing their business and those who want to retire or let's just call it no longer grow their business.



You are obviously still trying to grow your business. Therefore, I'd maximize LTV! maximizing LTV doesnt sound good by itself but what's behind that is BUYING MORE!

what's the purpose of paying your mortgage faster then refinancing after say 3yrs and taking that equity out just don't do both and end up with the same result. (well you can still re-fi and take out equity if value went up or/and principle down)



I'm not trying to pay any of my mortgages faster. Instead I use any extra cash I have to invest in RE.

Cheers

 

[bizaro86]

[quote user=Nir]I'm not trying to pay any of my mortgages faster. Instead I use any extra cash I have to invest in RE.





What are you doing with it between purchases, savings account? That earns 1% interest?



Paying down a non-deductible mortgage that has a readvanceable LOC offers two benefits over saving the money up for another downpayment, and you just borrow it back off the LOC once you've paid it down (aka saved) enough for another downpayment.



1) While the money is off your mortgage (before you borrow it back) you're saving interest at a higher rate than you would earn interest in a bank account.



2) Since the personal residence debt paid off is not tax deductible, and the new LOC debt taken on for the next down payment is tax deductible, you'd have gotten a free tax deduction without increasing your total amount of debt.



Now, my first reason doesn't necessarily apply if your properties are cashflowing fast enough that you could buy another property every month or two using the cashflow, but it doesn't sound like the OP is in that situation to me, since he gave the amount of cashflow in his post.



Regards,



Michael

 

[invst4profit]

You should be aware that in most cases you will only be allowed a LOC on your home up to 80% of the value of the equity you have in the home. This means that for every dollar you pay down your mortgage you will only be able to access 80cents unless it appreciates (which it should).

 

[bizaro86]

[quote user=invst4profit]You should be aware that in most cases you will only be allowed a LOC on your home up to 80% of the value of the equity you have in the home. This means that for every dollar you pay down your mortgage you will only be able to access 80cents unless it appreciates (which it should).





The first part of this is correct but the second part isn't. If you have a readvanceable LOC, you'll either be able to get 100 cents on the dollar or zero, to a total of 80% LTV.



Examples:



1) 100,000 property, 80,000 mortgage, readvanceable home equity line of credit. (80% LTV)

You pay off 1000 of your mortgage, putting it to 79,000. Your limit is 80,000 (80% LTV), so you can re-borrow the full 1000 right away.



2) 100,000 property, 90,000 mortgage (CMHC insured principal residence)

You pay 1000 of your mortgage, putting it down to 89,000, which is still above the 80% LTV limit. You can reborrow zero dollars.



The total LTV is always limited to 80%, but if you're already below that you can get 100% of the money back right away. I've done it the same day.



Regards,



Michael