- Joined
- Sep 14, 2008
- Messages
- 392
Many investors are familiar with the Smith Maneuver, and I will outline it briefly below, but also, let`s combine that with a few other ideas that result in the best rental property cash flow strategy I`ve ever seen.(For some of you, this will be old hat, but bear with me, I`m excited about sharing for those who haven`t seen this yet)
Here`s the basic benefits:
1. You will switch personal mortgage debt to tax deductible business debt.
2. Stop having thousands of dollars just sitting in your "rental account" that could be working for you.
3. Maximize your tax deductions on your business to make it as profitable as possible.
Step one:
Open a revolving mortgage/matrix mortgage/total equity plan, each bank calls it something different.
Its basically a loan program that says "your house is worth $250,000 so we`ll give you a total of $180,000 in credit." So that means if you only have a mortgage on your home of 120,000, then you get the rest of the credit in a HELOC (home equity line of credit).
Having this allows you to increase your HELOC every time you pay down your mortgage because the bank is keeping your total credit amount the same. As you pay down your mortgage, your line of credit increases.
Only use your HELOC portion for real estate business. Don`t spend that credit on anything but real estate stuff so that 100% of the interest is tax deductible (this keeps things simple and clear for CRA).
Step two:
Have all of your monthly expenses from your rental properties (mortgage, insurance, property tax, utilities, etc) get paid from your HELOC, NOT from some chequing account somewhere.
Step three:
Take every rent cheque that you get from your properties and pay down your principle residence mortgage with them.
Step four:
Make sure the bank keeps raising your HELOC as your mortgage gets paid down.
WHY WOULD I DO THIS?
1. In a few years, you`ll have NO mortgage payment on your principle residence, YEAH! Instead, you`ll have a huge business LOC that`s completely tax deductible. With this, if I buy no more properties, EVER, I`ll have my principle residence mortgage paid off completely in 2 years, instead of 27!!! I like the sound of that.
Once you`re mortgage is paid to zero, simply use your rental income for something else, or pay down your business LOC with it.
2. Why have $3000 sitting in an account for each rental property as a buffer when you can use your Line of credit as a buffer against possible property problems. If you have 3 rental properties, you could easily have $10,000 cash sitting in a bank, while your paying interest on $10,000 that you borrowed from the bank.
IS THIS LEGAL?
Yes, there is no CRA law saying you must use rental income to pay for rental expenses. You can use investment income however you want, I use mine to pay off my mortgage and let my line of credit pay the expenses.
CAUTION: Although many accountants say this is a great strategy, I am not an accountant myself. Although I did research this, take it with a grain of salt.
Comments anyone?
Here`s the basic benefits:
1. You will switch personal mortgage debt to tax deductible business debt.
2. Stop having thousands of dollars just sitting in your "rental account" that could be working for you.
3. Maximize your tax deductions on your business to make it as profitable as possible.
Step one:
Open a revolving mortgage/matrix mortgage/total equity plan, each bank calls it something different.
Its basically a loan program that says "your house is worth $250,000 so we`ll give you a total of $180,000 in credit." So that means if you only have a mortgage on your home of 120,000, then you get the rest of the credit in a HELOC (home equity line of credit).
Having this allows you to increase your HELOC every time you pay down your mortgage because the bank is keeping your total credit amount the same. As you pay down your mortgage, your line of credit increases.
Only use your HELOC portion for real estate business. Don`t spend that credit on anything but real estate stuff so that 100% of the interest is tax deductible (this keeps things simple and clear for CRA).
Step two:
Have all of your monthly expenses from your rental properties (mortgage, insurance, property tax, utilities, etc) get paid from your HELOC, NOT from some chequing account somewhere.
Step three:
Take every rent cheque that you get from your properties and pay down your principle residence mortgage with them.
Step four:
Make sure the bank keeps raising your HELOC as your mortgage gets paid down.
WHY WOULD I DO THIS?
1. In a few years, you`ll have NO mortgage payment on your principle residence, YEAH! Instead, you`ll have a huge business LOC that`s completely tax deductible. With this, if I buy no more properties, EVER, I`ll have my principle residence mortgage paid off completely in 2 years, instead of 27!!! I like the sound of that.
Once you`re mortgage is paid to zero, simply use your rental income for something else, or pay down your business LOC with it.
2. Why have $3000 sitting in an account for each rental property as a buffer when you can use your Line of credit as a buffer against possible property problems. If you have 3 rental properties, you could easily have $10,000 cash sitting in a bank, while your paying interest on $10,000 that you borrowed from the bank.
IS THIS LEGAL?
Yes, there is no CRA law saying you must use rental income to pay for rental expenses. You can use investment income however you want, I use mine to pay off my mortgage and let my line of credit pay the expenses.
CAUTION: Although many accountants say this is a great strategy, I am not an accountant myself. Although I did research this, take it with a grain of salt.
Comments anyone?