Part # 2 Being a landlord & letting someone else pay your mortgage, taxes, & maintenance.
“Landlords grow rich in their sleep.”
-John Stuart Mill (1806-1873)
Investing should create cash flow. If you are not receiving cash flow, you are getting tax incentives, an equity increase or appreciation. Usually, cash flow is king. Investing in real estate typically means purchasing an income producing asset that is currently or can quickly generate cash flow for you. * Decide what you want from your real estate investing: lump sums of money ( aka Flipping ) or constant passive income (aka Investing ). This will help you decide which moves to make.
There are many opportunities to buy properties and quickly increase the existing cash flow. Or buy properties that have no existing cash flow but are in such demand that they can be quickly turned into income generates with minimal effort. *
Some questions to ask yourself before you purchase a rental property:
- Are there a lot of vacancies in the area currently?
- I am able to cover the expenses for several months should a unit suddenly become vacant?
- Does the rent cover the expenses plus provide positive cash flow?
- Do I have the 20% down payment?
- What is the resale value of the property? Is there equity to be made within the next year? Two years? Etc…
- Am I familiar with the Tenancy Act?
- Are there tenants already in place? If so, are they in good standing? Are there leases in place? Am I agreeable to the terms? Do the tenants have tenure?
- What renovations/upgrades are required & will these increase the rent you can request?
- What are my financing options?
Things every potential landlord should be made aware of:
The Smith Manoeuvre!
The Smith Manoeuvre is a strategy that Fraser Smith developed as a financial planner and then wrote a book about it in 2002. Its basic premise is to make your mortgage tax deductible, but it can do so much more for your personal finances than just that.
To properly execute a Smith Manoeuvre, you need to have a readvanceable mortgage such as Scotiabank’s STEP or BMO’s Readiline. With this form of mortgage, your Home Equity Line Of Credit (HELOC) increases with every dollar paid down on your mortgage principle. With a Smith Manoeuvre, you then use this credit line to invest in income producing stocks, preferably in the form of Canadian dividend-paying companies. For this loan to be tax deductible, you must invest in a non-registered account. RRSPs, RESPs, and TFSAs do not qualify. You also cannot make any non-investing purchases with the HELOC. This is to keep a clean paper trail for the CRA and to show that the entire loan is for investment purposes.
On top of your regular mortgage payment, you also make additional payments from the dividends paid out as well as the tax credit received from your investment loan’s interest paid. All these payments to your mortgage will provide new room in your HELOC to borrow for investing.
By continuing this cycle, your mortgage will be paid off sooner and you’ll have a much bigger portfolio than if you waited until the mortgage was paid off to invest. And of course, the debt you now have is tax deductible, where your mortgage was not.
This strategy does leave you with a large credit line debt, but once the mortgage is paid off you’ll have some options:
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You could sell a portion of your stocks, equal to the debt, to pay it off.
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If the dividends are more than covering the interest, you may be better off never paying off the debt.
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My favorite is a bit of both. Leave the portfolio untouched. Continue paying an amount equal to what your mortgage payment was, but use it to pay down the HELOC. This could be further accelerated by also using dividend proceeds remaining after covering the interest payment.
If you’re interested in doing a Smith Manoeuvre, it’s recommended that you speak to a financial planner. This can be a complex strategy and you need to be comfortable with a large amount of leverage, even as the prices of your stocks jump up and down in value.
Please visit http://canadianfinanceblog.com/the-basics-of-the-smith-manoeuvre/ for more details on the benefits of the Smith Manoeuvre.
Enviromental assessments
In Nova Scotia, any building with 4 or more units requires an Enviromental assessment. The cost of which increases with every level of the Assessment required. Often, the seller will have already had one prepared & it can be asked for in the offer as a condition of the sale.
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