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Cash flow or equity paydown!

[quote user=bizaro86]I'm 25, and own 4 residential rental properties.


Very VERY impressive !



When I was 25 I couldn't even spell "residential property" let alone in English let alone image I'd own [or better co-own with investors] over a 1000 when I am 50.



At you age TAX MINIMIZATION/DEFERRAL and WEALTH CREATION is critical, not cash-flow. You do that most effectively at your age with a mortgage that is so high that essentially you have little cash-flow, enough to sleep well and pay all expenses.



Read today's Financial Post here on "Real Estate as a secret tax shelter": http://business.financialpost.com/2011/04/06/a-secret-tax-shelter/
 
[quote user=ThomasBeyer]I'd own over a 1000 when I am 50.





Now THAT is impressive.



Regards,



Michael
 
[quote user=ThomasBeyer]I'd own over a 1000 when I am 50.



Along with hundreds of other partners.



Just staying with FACTS.



Best regards.
 
Lucy,



I'm having a bit of trouble with a few things you said in your last post.



First, you said "What is going on in the GTA market is alarming". When you use "GTA" you are talking about an area that stretches from Oshawa to Hamilton. There are a ton of markets within this geographical territory. I'm not sure if you meant to, or how you can, make a generalized comment on such a large area.



Prices have been increasing in Toronto at high rates for the past few years. You said the last peak was in 1990. What happened between 1990 - say 2005? If prices were stagnant (personally I don't know), is it possible that a 10% run up the past few years are only pushing prices to proper market values?



What are the "most desirable properties in the desierable areas"? When you talk about a $200,000 premium what are you referring to? Are you talking about paying $200,000 over list or $200,000 over what the property is actually worth? $200,000 over list in Toronto is highly uncommon, if not outright non-existant. Sometimes there is $60,000 - $70,000 over asking, but keep in mind the properties that usually get overbid like this are intentionally priced low (under market) to generate interest and bidding wars. If you're talking about $200,000 over actual worth, is a property not ACTUALLY worth what someone is willing to pay for it?



Where are these $800,000 homes in the suburbs? Places with prices this high, Bloor West, High Park etc., have had high values for a number of years. High prices of homes in actual suburbs (Oakville, Burlington) have also had high prices for years.



How can you say we are definately approaching the peak within a few years? Using Toronto proper as an example, house prices are cheap by international standards. Maybe we are approaching the peak, maybe Toronto prices will just keep on trucking. People have been saying for 4 or 5 years that the condo market in Toronto is about to crash. Still hasn't happened (and people are still saying that this year).



There are still lots of houses in the "suburbs of Toronto" available for under $350,000. I get the sense you are referring to places like High Park and Bloor West where prices are already anywhere from $675,000 - $800,000. Those are not suburbs (at least in my opinion).



I'm not necessarily saying your points are wrong. I just think you have made very generalized statements and exaggerated your numbers to make your point.
 
[quote user=markl]


Do you have a principal residence? If so you should use the cash flow from your properties to pay this mortgage off first as it is not tax deductable plus you can get the re-advancable kind of mortgage where you can then have your equity accessable to invest with monies that the interest rate is tax deductable.






Your primary residence is not tax deductible unless you have a readvanceable mortgage and use a Smith Maneouvre. The advantage of your primary residence is that any capital gains on it are not taxable.
 
[quote user=bizaro86]





I think this is the crux of the matter. I'm 25, and own 4 residential rental properties. I could pay them all off, and the income wouldn't replace what I'm making now from my job, not to mention my wife's employment income. That strategy doesn't make sense for me at this stage in my life, so I keep my amortizations long, mainly to improve my TDS so I can qualify for additional funding. The extra cashflow helps when saving for additional downpayments as well, although it's not significant at this point compared to employment savings.














It is interesting to see another RE investor my age(25) going through the same motions I am. Clearly you must have had an exceptional beginning or substantial help to be so saturated within the RE market this early. Either way, my hats off to you.









As for myself, I own one residential rental property with intentions of expanding to my second within the near future. I am finding the new TDS rules are having an adverse effect on me finding the right lender. Though I haven't dedicated my efforts to looking quite that hard yet. Perhaps you were fortunate in evading the 50% add to income proponent?









I have the impossible dream of leaving my fulltime endeavours at the ripe age of 35-40 and simply living of my cashflow and expanding using leverage/savings, meanwhile eventually cashing in off any capital gains while I hold for the longterm. So my objective is somewhat different. I could and would very likely benefit from mortgage paydown in the sense that the more positive cashflow I sustain, the closer I feel I become to my emancipation from the shackles of work.









I would love to be able to play in this sandbox, since the leases are net and the tenants are businesspeople, so I think feelings are less likely to enter the situation. If I had the money to purchase these types of properties, I would.
Click to expand...









As would I, however the necessary down payment these kind of investment vessels require is simply too overbearing on my modest income to afford. Perhaps one day when I have more equity in my portfolio.
 
The only way your principal residence is tax deductible is if you use the funds from say a LOC secured on the property properly documented to purchase an investment. Were you just verifying this for me?



And yes you are correct there are no capital gains on your principal residence.
 
Correct, this is essentially what the Smith Maneouvre constitutes as you describe. I fully plan on using this tactic myself, as it's great when paired with a monthly dividend distribution fund like a REIT. Less volatile, consistant returns and the dividends are tax deductible themselves!
 
[quote user=Trizzy]It is interesting to see another RE investor my age(25) going through the same motions I am. Clearly you must have had an exceptional beginning or substantial help to be so saturated within the RE market this early. Either way, my hats off to you.





My parent's co-signed the mortgage for my first principal residence, which was bought at the right time/place in Edmonton. The capital gain from that paid for a good downpayment on my current principal residence. Downpayments for the other properties came from a strong propensity to save on the part of both my wife and I, along with 2 professional incomes.



I actually feel bad about the whole discussion, as my intentional was not to brag (and it's not a boast-worthy accomplishment) but to show how people in different situations have necessarily different outlooks on the appropriate amortization length. It's not a question that has a right/wrong answer for everyone, it's a question that has a right/wrong answer for a given person's situation.



[quote user=Trizzy]I have the impossible dream of leaving my fulltime endeavours at the ripe age of 35-40 and simply living of my cashflow and expanding using leverage/savings, meanwhile eventually cashing in off any capital gains while I hold for the longterm. So my objective is somewhat different. I could and would very likely benefit from mortgage paydown in the sense that the more positive cashflow I sustain, the closer I feel I become to my emancipation from the shackles of work.




I agree with you completely, and do intend to pay off my portfolio and live off the cashflow. I'm not doing this to see how big a pyramid I can build, but to provide a comfortable and secure lifestyle for my family. However, the income from my current portfolio (even if paid off) wouldn't replace my income. Thus, I need more properties before I can even think of retirement. To continue buying properties, I need to keep my TDS low, or I can't qualify for more mortgages. So I keep my amortizations long and my payments low. When I'm finished buying, then I'll divert my savings and cashflow to debt repayment (starting with my principal residence.) Until then, I'm using that money for more downpayments.



Regards,



Michael
 
[quote user=Rickson9]Along with hundreds of other partners.


indeed !



What is better: you own 100% of a 12 (or 24 or 48 or 100) suiter .. or 33% of 1000 ?
 
[quote user=ThomasBeyer]What is better: you own 100% of a 12 (or 24 or 48 or 100) suiter .. or 33% of 1000 ?



100% of 333 units > 33% of 1000 units, all without leverage is better, for me; if we're comparing apples to apples.



Best regards.
 
This is a good post Lucy

Unfortunately this type of thing is not well supported on this forum

A shame

A good time to sell selected properties





[quote user=Lucy]I have been investing in real estate for 30 years. The last peak was in 1990. What is going on in the Gta market is alarming. I imagine the Vancouver market is even more pronounced. Prices are now rising at 10 % per year for the last couple of years for most desirable properties. It's a freight train waiting to derail. These types of appreciations are not healthy or sustainable. The overall stats lump many types of homes together in many different areas showing a smaller annual increase however when you look specifically at the more desirable properties, in the desirable areas, these are where the frenzies are happening. Buyers are paying $200,000 lot premiums on $800,000 homes in the suburbs. Jumping at the $200,000 premium without consideration simply because last year this same type of premium was only $150,000 and "we should have bought last year, look how much money we would have made."
I was at a mastermind meeting last Friday where I voiced my concerns and I was scolded for thinking like a "loser" by newbies investing for only the last 6 to 12 years.
We are definitely approaching another peak sometime in the near future. Of course no one knows exactly when but these types of appreciations cannot be sustained forever.
If the last peak occurred 20 years ago and one is in their later years, say 50 to 60 and the next peak may occur 10 -20 years from now, I would work real hard to pay down your base choice properties and enjoy your cashflow as much as possible. They don't have to be residential types investments. I am especially fond of quality commercial and prestige buildings as they are NET leases.
I may think like a "loser" but this is the way I see it at my age. I don't have much confidence in this type of appreciation for much longer. At these rates of appreciation my kids will need to pay $1,000,000 for a semi detached home in the suburbs of Toronto in 6 or 7 years.
I don't think so.
 
Hi Rickson9

Remember or conversation on focusing on the positives :)

Your #1 fan

Adam





[quote user=Rickson9][quote user=ThomasBeyer]I'd own over a 1000 when I am 50.



Along with hundreds of other partners.



Just staying with FACTS.



Best regards.
 
[quote user=VinceTassone].. it is far easier to own a larger chunk of the pie


that is true of course ! Is easy the goal though ? It is even easier to not own any real estate !!



[quote user=VinceTassone]a complimentary skill or need to the table


Please feel free to re-read one of my earliest reinposts from over 2 years ago (now buried and unfindable in the rein search engine) . One way is to use other people's money !



Many people have money ... most in fact ... and most are looking to invest it wisely ! Most folks don't want to be bothered with all teh complexities of looking for areas where to buy real estate, then evaluating it, then getting a mortgage, then monitoring it for 5+ years, then deciding if/when to exit .. so these are very complimentary skills of the real estate expert and the money person !
 
The discussion on doors is amusing. It shows that many of us, despite our wisdom and success, still find it challenging to manage the ego. I know I do! Best regards.
 
[quote user=Rickson9]The discussion on doors is amusing. It shows that many of us, despite our wisdom and success, still find it challenging to manage the ego. I know I do! Best regards.





I regret bringing it up, since comparisons get personal and really don't add value to the conversation. Next time I'm going to stick to hypotheticals when talking about how different life stages have different appropriate paths.



Regards,



Michael
 
Going back to the original question "Cash Flow or Equity"? I would personally go with Cash Flow for the reasons below:



1. Allows you to have a reserve fund incase you need it.



2. Gives you the option to pay down your mortgage with a lump sum if you wanted to.



I like the added options!
 
And protects you should interests shoot to the moon because from where they are at now, the moon is very close.
 
Hello Friends.........



I also believe that all without leverage is better .



Thanks
 
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