Reuse down payment to qualify for more mortgages?

deco

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Registered
Aug 26, 2018
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#1
I have a secured line of credit. A friend told me that he thought it was possible to some how reuse your down payment through the use of a secured LOC to purchase more investment properties. I’m guessing that this has something to do with the Smith Manouvre. Any points on this matter would be greatly appreciated ! Are there any books on this subject?

Thanks Again


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Caleb West

Multi Family Commercial|Collaborative Office|
REIN Member
Feb 7, 2017
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#2
Hey deco

Step 1 Liquidate all existing assets from non-registered accounts and apply it towards a down payment for the next step.

Step 2 Obtain a re-advanceable mortgage from a reputable financial institution, which allows you to pay down the mortgage and increase the credit limit (HELOC) simultaneously.

Step 3 Withdraw the HELOC portion of your mortgage to invest in income-producing assets like preferred dividend paying shares or exchange traded funds (ETFs). Your HELOC limit increases with every regular mortgage payment applied, which allows you to invest the newly available money.

Step 4 When completing your tax return, deduct the annual paid interest amount from your HELOC.

Step 5 Apply the tax return and investment income (dividends, rent, etc.) against your non-deductible mortgage and invest the new HELOC money available.

Step 6 Repeat steps 3 to 5 until your non-deductible mortgage is paid off.

Scenario 1 – Tyler will own his home free and clear after 22 years and will use the remaining three years investing all his annual available cash into investments. Waiting this long impedes his investments from growing year-after-year and his net worth totals $604,000 ($400,000 home plus $204,000 investment portfolio).

Scenario 2 – Although more time consuming than scenario 1, because Tyler now must ensure he receives an average annualized 4 per cent return on his investments over 25 years instead of 3, Tyler's investment portfolio will be $10,000 more than scenario 1. The benefits of compounding are the reason for this.

Scenario 3 – Tyler will no longer have a mortgage after 22 years, just like scenario 1, but he will have a $300,000 tax-deductible investment loan. Despite borrowing the money to invest, Tyler begins year one with an investment portfolio approximately equal to year five of scenario 2, which compounds his returns greatly. In year 10, his investments are worth the same as year 20 of scenario 2. His tax refunds increase annually to the point where he receives approximately $4,000 more annually in the last few years. The higher starting investment amount, coupled with compound returns and increased tax refunds to offset the interest charges of the HELOC portion of the re-advance-able mortgage (investment loan) allow him to invest higher amounts sooner. Even though he's paying more interest than both other scenarios, his net worth after 25 years equals $641,000.

The Benefits
The Smith Manoeuvre has many benefits. For starters, your net worth will increase (as per example above) assuming you can maintain the same annualized return in your investments as your borrowing rate. Your tax refunds will continually get larger, year after year, as the interest on your investment loan is tax-deductible. Finally, mortgage debt is a fact-of-life, so why not apply the Smith Manoeuvre, pay your mortgage off faster and transfer the debt into a tax-deductible format? Well, there are some risks.

The Risks
As with any investment plan, there are risks. The Smith Manoeuvre doesn't decrease your debt; it simply transfers it from a common mortgage, which isn't tax deductible in Canada. In order to do this, you must follow the correct steps and tax forms to setup a re-advance-able mortgage to use as an investment loan. If you don't, the CRA could invalidate your application and the primary benefit of the Smith Manoeuvre will cease to exist. In order for your net worth to increase, you must have a solid investment plan that will yield you more than your borrowing rate. In the example above, the borrowing rate and investment annualized return were both 4 per cent; however, even if the annualized return falls a half-per cent to 3.5 per cent, Tyler's net worth of scenario 3 will only be $6,000 more the next highest scenario (1). At 3 per cent, the Smith Manoeuvre will be the worst of all three scenarios by over $12,000. So as you can see, the rate of return is definitely important.

Who should do it?
Canadians who own 25 per cent of their home should qualify for a re-advance-able mortgage. Good candidates for the Smith Manoeuvre are people who are comfortable servicing 'good' debt, want to maximize tax returns and understand leveraging their real estate assets to increase their net worth. Home owners that like to 'set-it and forget-it' should not consider this manoeuvre as it requires a solid financial investment plan, with regularly schedule performance checks to ensure you're getting and maintaining an annualized return above your borrowing rate.

Those interested in pursuing the Smith Manoeuvre should obtain a copy of the book titled Is Your Mortgage Tax Deductible – The Smith Manoeuvre by Fraser Smith. After reading it, consult a licensed financial adviser familiar with it who gives free consultations and evaluations as final outsiders check to ensure it is suited for your wealth strategy.

The Bottom Line
The Smith Manoeuvre is the simple legal concept of "after every mortgage payment you make, you borrow the principle amount and re-invest it." For those that understand that their debt level will not decrease – and are comfortable monitoring and maintaining investment returns – the Manoeuvre can greatly increase your net-worth.




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deco

New Forum Member
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Aug 26, 2018
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#4
Cash is cash.

An LOC is like cash.

Once spent it’s gone.

The only way to “reuse” it is to buy a property and refi it a year or 3 or 5 later, either with a flat or ideally with a higher value, and pull cash out and then use that cash for more properties.
Thanks Thomas


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deco

New Forum Member
Registered
Aug 26, 2018
9
0
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#5
Hey deco

Step 1 Liquidate all existing assets from non-registered accounts and apply it towards a down payment for the next step.

Step 2 Obtain a re-advanceable mortgage from a reputable financial institution, which allows you to pay down the mortgage and increase the credit limit (HELOC) simultaneously.

Step 3 Withdraw the HELOC portion of your mortgage to invest in income-producing assets like preferred dividend paying shares or exchange traded funds (ETFs). Your HELOC limit increases with every regular mortgage payment applied, which allows you to invest the newly available money.

Step 4 When completing your tax return, deduct the annual paid interest amount from your HELOC.

Step 5 Apply the tax return and investment income (dividends, rent, etc.) against your non-deductible mortgage and invest the new HELOC money available.

Step 6 Repeat steps 3 to 5 until your non-deductible mortgage is paid off.

Scenario 1 – Tyler will own his home free and clear after 22 years and will use the remaining three years investing all his annual available cash into investments. Waiting this long impedes his investments from growing year-after-year and his net worth totals $604,000 ($400,000 home plus $204,000 investment portfolio).

Scenario 2 – Although more time consuming than scenario 1, because Tyler now must ensure he receives an average annualized 4 per cent return on his investments over 25 years instead of 3, Tyler's investment portfolio will be $10,000 more than scenario 1. The benefits of compounding are the reason for this.

Scenario 3 – Tyler will no longer have a mortgage after 22 years, just like scenario 1, but he will have a $300,000 tax-deductible investment loan. Despite borrowing the money to invest, Tyler begins year one with an investment portfolio approximately equal to year five of scenario 2, which compounds his returns greatly. In year 10, his investments are worth the same as year 20 of scenario 2. His tax refunds increase annually to the point where he receives approximately $4,000 more annually in the last few years. The higher starting investment amount, coupled with compound returns and increased tax refunds to offset the interest charges of the HELOC portion of the re-advance-able mortgage (investment loan) allow him to invest higher amounts sooner. Even though he's paying more interest than both other scenarios, his net worth after 25 years equals $641,000.

The Benefits
The Smith Manoeuvre has many benefits. For starters, your net worth will increase (as per example above) assuming you can maintain the same annualized return in your investments as your borrowing rate. Your tax refunds will continually get larger, year after year, as the interest on your investment loan is tax-deductible. Finally, mortgage debt is a fact-of-life, so why not apply the Smith Manoeuvre, pay your mortgage off faster and transfer the debt into a tax-deductible format? Well, there are some risks.

The Risks
As with any investment plan, there are risks. The Smith Manoeuvre doesn't decrease your debt; it simply transfers it from a common mortgage, which isn't tax deductible in Canada. In order to do this, you must follow the correct steps and tax forms to setup a re-advance-able mortgage to use as an investment loan. If you don't, the CRA could invalidate your application and the primary benefit of the Smith Manoeuvre will cease to exist. In order for your net worth to increase, you must have a solid investment plan that will yield you more than your borrowing rate. In the example above, the borrowing rate and investment annualized return were both 4 per cent; however, even if the annualized return falls a half-per cent to 3.5 per cent, Tyler's net worth of scenario 3 will only be $6,000 more the next highest scenario (1). At 3 per cent, the Smith Manoeuvre will be the worst of all three scenarios by over $12,000. So as you can see, the rate of return is definitely important.

Who should do it?
Canadians who own 25 per cent of their home should qualify for a re-advance-able mortgage. Good candidates for the Smith Manoeuvre are people who are comfortable servicing 'good' debt, want to maximize tax returns and understand leveraging their real estate assets to increase their net worth. Home owners that like to 'set-it and forget-it' should not consider this manoeuvre as it requires a solid financial investment plan, with regularly schedule performance checks to ensure you're getting and maintaining an annualized return above your borrowing rate.

Those interested in pursuing the Smith Manoeuvre should obtain a copy of the book titled Is Your Mortgage Tax Deductible – The Smith Manoeuvre by Fraser Smith. After reading it, consult a licensed financial adviser familiar with it who gives free consultations and evaluations as final outsiders check to ensure it is suited for your wealth strategy.

The Bottom Line
The Smith Manoeuvre is the simple legal concept of "after every mortgage payment you make, you borrow the principle amount and re-invest it." For those that understand that their debt level will not decrease – and are comfortable monitoring and maintaining investment returns – the Manoeuvre can greatly increase your net-worth.




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Thanks Caleb



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ThomasBeyer

Senior Forum Member
REIN Member
#6
Markets not rising fast anymore anywhere in Canada so this refi strategy works mainly on re-development properties or over a longer period.

Example: a $400,000 asset with 2% annual value growth and a $300,000 mortgage or 25% down, in 5 years the asset is worth ~$440,000 and the mortgage about ~$260,000 so a new 75% mortgage, assuming higher rents to cover it, would yield about ~$70,000 in “recycled” aka “new” cash with a new $330,000 mortgage.

This strategy, applied prudently, is THE “secret” of much asset accumulation thus wealth creation of many REIN members I know. Of course done too aggressively in a market like AB or SK the last three years can lead to much misery or even bankruptcy. So be crystal clear about risk, please and have some decent reserves. Some years markets aren’t plus, but minus 2-5 percent !! Cash flow ie rent levels matter and those too don’t always go up in a straight line.

So, like many “proven” real estate strategies they work well in theory but not necessarily well in practice, unless you have lots of expertise which an incubation environment like REIN can provide for those interested !
 
Last edited:

Matt Crowley

Senior Forum Member
Registered
Dec 14, 2013
841
340
63
Calgary
#7
The Smith Manouver is a pretty dangerous strategy all-in-all. If you have been successful at investing and building your reputation, I'd suggest continuing to build using equity, even if you have to raise it. Working with such a thin piece of equity in real estate is not a great idea. Keep in mind that zero professional companies that grow to be even a hundred million in assets under management do so with >80% LTV in real estate these days. Much more typical to see 65% LTV as the top end.

LOCs can be a great tool though, but should be for a short term business plan. Reno, lease-up, then re-fi or sell. Repeat.

LOCs are not for use as a down payment in a long-term hold. Bad idea.
 

slaw

Inspired Forum Member
REIN Member
Jan 29, 2010
54
7
8
#8
"LOCs are not for use as a down payment in a long-term hold. Bad idea."

How about refi after 3 years and pay off the LOC, then use the LOC for another down payment?
 
Likes: ThomasBeyer

ThomasBeyer

Senior Forum Member
REIN Member
#9
"LOCs are not for use as a down payment in a long-term hold. Bad idea."

How about refi after 3 years and pay off the LOC, then use the LOC for another down payment?
LOC is an extension of cash. It’s cash secured by an asset but it’s not free cash. With so called “prime” at almost 4% these days use it prudently. It may make sense for some deals but not others. Most SF houses do not cash flow 100% or even 75-80% levered. Do the math using prudent real world tested honest assumptions. Then decide.


Thomas Beyer, Asset Manager, Investor, Community Improver, Author, Father, Mentor www.prestprop.com
 

Matt Crowley

Senior Forum Member
Registered
Dec 14, 2013
841
340
63
Calgary
#10
"LOCs are not for use as a down payment in a long-term hold. Bad idea."

How about refi after 3 years and pay off the LOC, then use the LOC for another down payment?
That's not really a good idea either. Besides the cash flow problem, its a doubled-down bet on speculation. If the market goes south, how are you going to backfill that LOC when it doesn't cash flow? Do you think you will raise equity then? This is how people lose assets.

LOC works for something like a renovation then refi out the gain in value. Short term money, think 6 months to execute a business plan.
 
Likes: ThomasBeyer

angelapeng

Inspired Forum Member
Registered
Aug 19, 2011
175
18
18
Vancouver
#11
If one does use HELOC as a downpayment, ideally, convert it into a mortgage, because usually mortgage rate is lower than the HELOC, plus, when most banks calculate the debt service ratio, they includes the HELOC portion with higher rate. Thus, agree with Matt, it is for short term use, if for long term holding property, convert it into Mortgage.
 

slaw

Inspired Forum Member
REIN Member
Jan 29, 2010
54
7
8
#12
"convert it into Mortgage."

This is a good idea, I did it once when my HELOC hit 200K and converted it to a mortgage. thanks for all the input