I can't wait until this real-estate market collapses.......

[MoneyGuy]

Originally Posted by V

So here's my question, then. If I refinance my mortgage on my rental property, that's tax deferred income of course. So is the interest I'm paying on that new extra piece of my mortgage still tax deductible, even though I may not invest that money? It is, after all, interest from my rental property.

I don't know if I'm making this clear. Let's just say my one and only goal in all of this is to be able to pay off my principal mortgage, and never need to make another mortgage payment ever again. Let's say I have two houses right now, with mortgages of 200k for each of them (to keep it simple). I also have a HELOC of 125k (room to go up to 200k). I have a mortgage on my principal dwelling of 100k. What's to stop me from paying 75k from my HELOC onto my rentals, then refinancing my rentals and paying the money from that onto my principal dwelling? In the end, I have no mortgage, and all of that debt is now spread around my rentals and my HELOC, in essence, taking my non-tax deductible payments on my principal mortgage and turning them into tax deductible payments on my rentals.

I'm a certified financial planner. In the situation you describe, the interest would not not be deductible. Deductibility is determined by the eventual use of the money. If it's for investment purposes (to buy stocks, mutual funds or income-producing real estate), then it's deductible. To increase your debt on a rental property and then use the money for personal purposes disallows the deduction.

[Red]

Originally Posted by Flames in 07

True, investment earnings are taxed, but my point was that your break even rate is not whatever your mortgage is at.

Different strokes I guess. I've been quite assertive over the last 2 years and made about 1/2M. And I very much feel like I earned it, largely from utilizing 'dead money' in my primary residence.

Lastly for anyone keeping track of this thread that are looking to buy their first house, many people will get a 4 bedroom and rent out to three others. They pay a good part of your mortgage, and you are now 'long' real estate.

1/2M? You must be doing something really wrong. Most people I've met on them internets have made much more than that in half the time.

:-)

Sorry, nothing personal.

[photon]

Originally Posted by V

Now, are you talking about your principal dwelling here, or a rental? Because it's hard to borrow against your house if you don't owe a whole lot of it. I think I get what you're saying, though. You're of the school of mind that spreads your own money over as much as possible so as to increase your gains. Paying down a rental property with your own money means you won't have the cash to spend on another house. And another, and so on. That works if you have the cajones.

Both my principal dwelling and a rental actually. In a market like this, I'm trying to maximise my exposure to the market movements. When I can see things starting to become less favorable, I'll change my strategy to one that fits the economy, like maybe scaling back and paying off some properties entirely so I convert from gains through market value increases to income through rents on fully owned properties. Or some of the other strategies.

Someone said timing is important, and that's true. The nice thing is with the economy barring a significant event such as the discovery of free energy or a world war, you can usually see the economic indicators turn well in advance.

And really, as long as I watch it to not over-leverage, what's the risk? The bank isn't going to forclose because my house is worth less, as long as I can make my mortgage payments.

But the possibility is there I agree of overextending yourself and having it all collapse. But even then, take what you've learned and start over.

Originally Posted by Red

BTW, I have some investments on the market and am thinking to buy land soon (retirement property) so I am obviously not against investing. I just don't agree with people risking their homes to do it. Most of those people don't have the funds to withstand any downfalls.

It is possible to utilize some of the equity in your house without risking it entirely. As long as you can make the payments the banks not going to take it away. So just ensure that if you do borrow against your home, worst case scenario if you lose the investment totally you can still make your payments. Sure that would suck, but you'd still be ok (ie not homeless).

Or save up and start with capital not from a home.

I agree that many people overreach and don't have to funds to withstand downfalls (heck lots of people wouldn't be able to withstand a 3% interest increase!), but I wouldn't dissuade them from investing. They just have to start at the beginning and learn to do it properly.

Otherwise, what's the alternative? Work for someone your entire life with nothing to show except a dependancy on the government and your family? Yuck!

[Red]

Otherwise, what's the alternative? Work for someone your entire life with nothing to show except a dependancy on the government and your family? Yuck!

It's not that bad :-) If you really want to invest you could pay off your house quickly, save a few bucks and invest that. We are talking a few years of really buckling down. Short term pain for a long term gain.

You could work and save for retirement. Earning a lot of money in your young age doesn't gurantee you good retirement. You still need to save for the future. Just look at Mike Tyson for the extreme case of someone not thinking of the future :-)

Plenty of ways to not depend on the government. Ultimately it's not what you make, but what you keep.

[V]

Originally Posted by MoneyGuy

I'm a certified financial planner. In the situation you describe, the interest would not not be deductible. Deductibility is determined by the eventual use of the money. If it's for investment purposes (to buy stocks, mutual funds or income-producing real estate), then it's deductible. To increase your debt on a rental property and then use the money for personal purposes disallows the deduction.

Yeah, I was afraid someone was going to say that.

First of all, I want to mention that I will be going to an accountant to discuss this all. It's not like I'm looking for all my information from CP (although any I get is appreciated), I'm just banging a few ideas around in my head.

Now, here's a situation. What I normally do with my rental properties is pay the mortgage payments of my rentals with my HELOC. Then the rent cheques go directly into the HELOC. It kinda breaks even, a little on the positive side, so the HELOC shrinks a little bit, and the rental mortgages drop as normal.

Now the key with the HELOC is that I only have to pay the interest on the balance in one month, about 500 bucks per month. So what if I still use the HELOC to pay the mortgages, but I take the rent cheques and deposit them into my savings account (which then pay off my principal mortgage). I then only pay the minimum requirements into the HELOC. In essence, I'm using the HELOC (borrowed money) to pay for expenses related to the rentals, so that interest is tax deductible. So the HELOC will baloon, since I'm only making interest payments, but my principal mortgage will shrink by over 3k per month. This sounds legit to me. There's nothing saying that I have to use the income from my rental properties to aggressively pay off my loans, is there?

[Lurch]

Now the key with the HELOC is that I only have to pay the interest on the balance in one month, about 500 bucks per month. So what if I still use the HELOC to pay the mortgages, but I take the rent cheques and deposit them into my savings account (which then pay off my principal mortgage). I then only pay the minimum requirements into the HELOC. In essence, I'm using the HELOC (borrowed money) to pay for expenses related to the rentals, so that interest is tax deductible. So the HELOC will baloon, since I'm only making interest payments, but my principal mortgage will shrink by over 3k per month. This sounds legit to me. There's nothing saying that I have to use the income from my rental properties to aggressively pay off my loans, is there?

Pretty sure you are still offside with this, unless the rental properties are negative cashflow. By letting the HELOC balloon, you are effectively saying you are increasing your investment, which could be true if the properties are bleeding money, or if you make improvements. You CAN hold the HELOC at a constant state to keep the maximum in deductible interest, but any increase in it would need to be a demonstrable investment.

[SeeGeeWhy]

Originally Posted by Red

RRSPs don't always make sense. You need a good income to really take full advantage of them. For lower income people paying off their debt/mortgage will give them a better return. And it's guaranteed.

So you put $100 in your RRSP on Feb 28. You get to claim that against your income for the year, and you get a 100% refund of the tax you originally paid on that $100. Another way to look at it is that you get to avoid paying taxes on a different $100 of income. Either way, you're saving roughly $18 in tax, which is an 18% return on your investment.

If you're paying 18% on your mortgage, you are in trouble. If you are paying 18% on your debt, it would be wise to put as much in the RRSP as you can, file early, and then put the return towards your high interest debt.

It is often wise to take on a line of credit large enough to:

1. Max your RRSP contribution
2. Pay a portion of your high interest debt with the tax return
3. Use the balance of the line of credit to take care of the high interest debt

Yes, you still have debt, but it is likely costing you less than the original debt and you also have a tax sheltered investment growing.

Accelerating your mortgage payments is a fine thing to do, but it will not get you wealthy. All it will get you is home ownership at a faster rate. That is all some people are looking for, though, which is fine, too.

What's the first thing people do when their mortgage gets paid off, anyways??

[V]

Originally Posted by SeeGeeWhy

What's the first thing people do when their mortgage gets paid off, anyways??

I think I'm gonna take a trip.

I know what you're getting at, though. So many people so intent on paying the mortgage as fast as possible, and then they refinance for renos. Pretty funny, actually.

[SeeGeeWhy]

Originally Posted by Red

I was fortunate enough to buy a house here long before the craze which in turn gave me a very nice net worth, but I can't say that I made that money. It just happened. I'll never say that making money is easy.

As for the rules; if you borrow 100K and invest it you need to take in to account the tax you pay on the earnings as well. So you right off 5K of interest paid (5% for the sake of argument) at your income rate, but then you have to pay tax on 50% of your dividends which greatly reduces your tax advantage. Add the management fees and you're even worse off. Definetely not 30% saving like you say.

If you have the money locked in an RRSP then you don't pay the taxes now at your current tax rate, but you pay it later at a hopefully much higher tax rate. Afterall you will be older and earning a lot more money. Thus my comment about RRSPs not working that well for lower income people. They don't pay much taxes right now so there's not much gains. When you get older and earn more you jump to a higher bracket so unless you're really earning a lot on your investments in the end you're not really gaining that much.

I stick to my comment that people that aren't in a high tax bracket are better off paying off their mortgage. Save the RRSP room for when they have more to gain. By then they should be mortgage free and have cash to put away. Plus of course there is the freedom of not sharing your paychecks with banks and credit unions.

Quite the opposite my friend. Why would you plan for that? Hopefully when you are retired and withdrawing from your RRSPs you have minimised your expenses and can live comfortably within the lowest bracket.

Now we get into the argument of owning your house and maxing out your RRSPs vs investing for capital gains, etc.

My thinking is that it is all about avoiding taxes NOW, because you can do more with that money than 30 years down the road. If I can turn my money into passive income generated via shareholder dividends from companies I own, why do I have to worry about paying down my house as fast as I can? I will be getting high return on my invested dollar every single year that I am alive and in control of those companies, provided they still operate.