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RRSP vs Real-estate

MarkLabrosse

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Here`s a question that I`ve been thinking about...

If you take equity out of your home in the form of a HELOC (lets say at prime) and use it for downpayment money,
do you factor that in as a second mortgage of 6.25% (and choose an amort. period). in the cashflow analysis?

I`m self-employed so I won`t be able to make RRSP contributions anymore (no "income"). I can reroute this money to pay back
the HELOC that I use for downpayment but what if this makes the prop cash flow negative. Does this turn an otherwise good investment into a "bad" one?

Thanks,
 

markl

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First off no need to choose an amort period on the HELOC treat this as an interest only payment second mortgage.

I don`t understand the second part why would you diverting money to pay down your HELOC increase the negative cashflow on the property? If you pay it down your interest payments will go down there for helping your cashflow.

Hope this helps

regards,

Mark Loeffler
 

timk519

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QUOTE (MOPBRealty @ Oct 18 2007, 02:50 AM) I`m self-employed so I won`t be able to make RRSP contributions anymore (no "income"). If you`re paying income taxes, you`ve got income and can do RRSP contributions. I`ve been self-employed since 1986 and have a decent RRSP fund.
 

MarkLabrosse

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QUOTE (markl @ Oct 18 2007, 12:29 AM) First off no need to choose an amort period on the HELOC treat this as an interest only payment second mortgage.

I don`t understand the second part why would you diverting money to pay down your HELOC increase the negative cashflow on the property? If you pay it down your interest payments will go down there for helping your cashflow.

Hope this helps

regards,

Mark Loeffler

Thanks Mark,

Perhaps I need to be more clear. Your positive cashflow is greater if you pay back the HELOC less quickly ie. interest only.
I guess this leads to the question: in the early stages of real-estate investing what is the best use of the positive cashflow?
Do you put it back towards the mortgage or somehow use it to buy more realestate? If you put it back towards the mortgage I would imagine that paying back the HELOC (at prime) would be the way to go. Your thoughts?
 

RobMacdonald

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In the cash flow analysis, you can treat the HELOC as an interest only payment as mentioned above which is a better reflection of the actual cash flow on the property. If you`ve reduced your self employed income, so there is no need to make an RSP contribution, then you may want to consider paying down your principal balance of your mortgage rather than the HELOC.

Contributing to an RSP is a tax strategy. Your HELOC is used for the downpayment on an investment and therefore is tax deductible. A tax deductible loan is a `benefit` with respect to your income tax situation, and therefore you may not want to reduce it. Assuming you have a first mortgage on your principal residence, this mortgage portion would not be tax deductible. If you divert the cash flow you would have contributed to an RSP, into a prepayment against your principal residenc, you can free up equity to use for future invesments. The future advance of the `new` equity, would also be tax deductible under CRA guidelines. This strategy allows you to convert non-tax deductible debt into tax-deductible debt quite rapidly, which has been shown to be a very similar benefit to contributing to an RSP.

Having the right mortgage product like a STEP through Scotiabank, or a Matrix through Firstline is one of the keys.

If you want more information, I would recommend getting a copy of the book `The Smith Manoeuvre`, by Fraser Smith.

Rob Macdonald
General Manager
Peter Kinch Canadian Mortgage Team
604-939-8326
 

MarkLabrosse

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QUOTE (timk519 @ Oct 18 2007, 06:08 AM) If you`re paying income taxes, you`ve got income and can do RRSP contributions. I`ve been self-employed since 1986 and have a decent RRSP fund.

What I meant is that what I pay myself is far less than what I make and therefor my contribution room is significantly reduced compared to what it used to be before I was self-employed. So my "company" has money coming in each month that I can use for realestate.
How do I best use this money? Do I wait and save until I have enough for another downpayment? OR do I use my HELOC for the down payment then pay it down aggressively each month? Thanks
 

MarkLabrosse

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QUOTE (RobMacdonaldCMT @ Oct 18 2007, 09:46 AM) In the cash flow analysis, you can treat the HELOC as an interest only payment as mentioned above which is a better reflection of the actual cash flow on the property. If you`ve reduced your self employed income, so there is no need to make an RSP contribution, then you may want to consider paying down your principal balance of your mortgage rather than the HELOC.

Contributing to an RSP is a tax strategy. Your HELOC is used for the downpayment on an investment and therefore is tax deductible. A tax deductible loan is a `benefit` with respect to your income tax situation, and therefore you may not want to reduce it. Assuming you have a first mortgage on your principal residence, this mortgage portion would not be tax deductible. If you divert the cash flow you would have contributed to an RSP, into a prepayment against your principal residenc, you can free up equity to use for future invesments. The future advance of the `new` equity, would also be tax deductible under CRA guidelines. This strategy allows you to convert non-tax deductible debt into tax-deductible debt quite rapidly, which has been shown to be a very similar benefit to contributing to an RSP.

Having the right mortgage product like a STEP through Scotiabank, or a Matrix through Firstline is one of the keys.

If you want more information, I would recommend getting a copy of the book `The Smith Manoeuvre`, by Fraser Smith.

Rob Macdonald
General Manager
Peter Kinch Canadian Mortgage Team
604-939-8326

Brilliant!! Thank you. I will investigate this further.
 

timk519

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QUOTE (RobMacdonaldCMT @ Oct 18 2007, 12:46 PM) Assuming you have a first mortgage on your principal residence, this mortgage portion would not be tax deductible. If you divert the cash flow you would have contributed to an RSP, into a prepayment against your principal residenc, you can free up equity to use for future invesments. Interest payments on the principle residence is also paid wth after-tax dollars, so the faster you can get rid of it, the less in pre-tax dollars you need to earn in order to make those interest payments.
 

EdRenkema

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QUOTE (timk519 @ Oct 18 2007, 10:24 AM) Interest payments on the principle residence is also paid wth after-tax dollars, so the faster you can get rid of it, the less in pre-tax dollars you need to earn in order to make those interest payments.

I thought this conversation was getting too complicated, keep it simple, pay down your personal mortgage as aggressively as possible, if the HELOC is already in place you`re effectively creating more available equity in the HELOC.
As far as RSP goes, I always put in the maximum amount, then if I think I might need it, I keep it liquid and take it out in the next yr, less the withholding 10% of course.
 
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