loans for an investment property

[Alex_FORD]

I know of a $60k condo (+$90/mth condo fee) in a small town in BC. And, I'd like to buy it, rent it out to a tenant whenever possible, and use it as a vacation condo when its vacant.

Is CMHC only for personal residence? Is it possible to get this condo CMHC approved? Do I have to tell the bank that its going to be a personal residence? Is there any legal commitment that states that I can't turn it into rental property after the loan has been issued?

without CMHC aproval, can I use my equity in my Calgary house in leau of a large down payment?

[lint]

for any revenue property, you will need 25% down. You might be able to get around this by claiming that it will be your primary residence. Harder to do with a revenue property that is in a different city.

If you have the equity in your place, borrow the 25% of the new property as a down payment. A mortgage broker will be able to help you out with the details.

[Alex_FORD]

is it true that they won't issue a mortgage for low amounts like $20k?

[eljefe]

As long as you fit the credit criteria and have ample funds put down against the property they will set up a mortgage for 40k or 20 k or 15k if you want.

If its truly that good of a deal go for it:thumbsup:

[Alex_FORD]

I doubt that its a really good deal. I think the condo is cheap for a reason.

Yet, I still feel like I can't loose, even if the PITA factor is too and I sell in a couple years, I think I can break even.

Breaking even would be nice, because it would give me a chunk of cash to do something else with.

[sputnik]

Why dont you just refinance your house and pull $60k of equity out and pay for the condo with cash? Then use the income from the rental to help pay the mortgage for your house.

[lint]

Originally posted by sputnik
Why dont you just refinance your house and pull $60k of equity out and pay for the condo with cash? Then use the income from the rental to help pay the mortgage for your house.

One reason would be that the mortgage interest on the rental property is tax deductible. If he were to take the entire $60K of equity from his own home, that mortgage interest is not tax deductible, since the CRA does not consider the downpayment of a rental property to be an investment. Same total debt, but with a minimum downpayment, he also receives the tax advantages.

When buying revenue property, use as much "other people's money" as you can.

[Alex_FORD]

Thats interesting stuff.

So what you are saying is...

if I pocket the rent money, it is taxed as income,

if the rent money goes towards an expense such as loan interest, then it is deducted from my gross revenues before calculating my taxable income.

if the rent money is used to pay off the principle of the mortgage, do I have a capital gain? or taxable income? or is there a special category for rental income? I don't think I'm asking the right questions here, but hopefully you can see my
confusion.

[lint]

Originally posted by Alex_FORD
Thats interesting stuff.

So what you are saying is...

if I pocket the rent money, it is taxed as income,

yes


Originally posted by Alex_FORD
if the rent money goes towards an expense such as loan interest, then it is deducted from my gross revenues before calculating my taxable income.

Not just loan interest, but any costs associated with the maintenance of the property. Another general rule is that revenue property is used for the tax write offs. Unless you're able to generate a good cash flow, it's more advantageous to have a loss to write off income from other sources. All the while, your investment/equity continues to build on a tax deferred basis. If you maintain the property as a loss, the only tax you will pay is when you sell the property, and that is on the capital gain (or a percentage of) which is taxed at a lower rate than income.


Originally posted by Alex_FORD
if the rent money is used to pay off the principle of the mortgage, do I have a capital gain? or taxable income? or is there a special category for rental income? I don't think I'm asking the right questions here, but hopefully you can see my
confusion.

You will trigger a capital gain when you sell the property. Not while you're paying down the mortgage. While paying down the mortgage principle, you will be building your equity.

[Weapon_R]

Do you have a primary residence? If not, say that you want to move to BC.

Do you have a CMHC mortgage? If so, get a GE mortgage. Tell your broker that you only want a GE mortgage. It will be harder for them to find out that you have a current mortgage.

Refinance your home and use the money to buy out the BC home if you have one.

[Alex_FORD]

Originally posted by lint


You will trigger a capital gain when you sell the property. Not while you're paying down the mortgage. While paying down the mortgage principle, you will be building your equity.

I heard that some taxes on capital gains/losses have to be paid on an anual basis rather than an acrual basis, is this true with revenue property?

Also, what is a 'GE mortgage'?

[Alex_FORD]

Originally posted by Weapon_R
Do you have a primary residence? If not, say that you want to move to BC.

Do you have a CMHC mortgage? If so, get a GE mortgage. Tell your broker that you only want a GE mortgage. It will be harder for them to find out that you have a current mortgage.

Refinance your home and use the money to buy out the BC home if you have one.

I have a CMHC mortgage in Calgary, and with the recent increases in property value, I have atleast $100K in equity which is not a big deal - anyone that bought a couple years ago is doing as well or better than me, so I'm not trying to brag about it.

[D. Dub]

Originally posted by Alex_FORD
I know of a $60k condo (+$90/mth condo fee) in a small town in BC. And, I'd like to buy it, rent it out to a tenant whenever possible, and use it as a vacation condo when its vacant.

Is CMHC only for personal residence? Is it possible to get this condo CMHC approved? Do I have to tell the bank that its going to be a personal residence? Is there any legal commitment that states that I can't turn it into rental property after the loan has been issued?

without CMHC aproval, can I use my equity in my Calgary house in leau of a large down payment?


You can get a CMHC mortgage for a rental property and/or a vacation property. Just different rules apply than with a single family, primary residence.

PM me or email me -- I'm a mortgage broker and I can help you look at/figure out the options -- whether its a mortgage or secured line of credit that would fit you best.
:D

[lint]

Originally posted by Alex_FORD


I heard that some taxes on capital gains/losses have to be paid on an anual basis rather than an acrual basis, is this true with revenue property?

Also, what is a 'GE mortgage'?

I haven't heard about that with property. When you sell you get taxed. Not until then. But if anyone else can shed some light on the subject, I wouldn't mind confirmation.

[lint]

Originally posted by Weapon_R
Do you have a primary residence? If not, say that you want to move to BC.

Do you have a CMHC mortgage? If so, get a GE mortgage. Tell your broker that you only want a GE mortgage. It will be harder for them to find out that you have a current mortgage.

Refinance your home and use the money to buy out the BC home if you have one.

what would be the advantage of refinancing his existing home to pay off the BC home out right? Right off the bat he'd be losing the tax advantage.

[Alex_FORD]

Originally posted by lint


what would be the advantage of refinancing his existing home to pay off the BC home out right? Right off the bat he'd be losing the tax advantage.

Yeah, he's got me curious about the advantages, too.

BTW Lint, I'm not sure that consolidating my loans would take away any tax advantage, but I dont think that I would do it unless there was some sort of advantage.

I can see the merging of personal and business data would be an accountant's nightmare, and it might leave me vulnerable to reassessment by RevCan.

[lint]

Originally posted by Alex_FORD


Yeah, he's got me curious about the advantages, too.

BTW Lint, I'm not sure that consolidating my loans would take away any tax advantage, but I dont think that I would do it unless there was some sort of advantage.

I can see the merging of personal and business data would be an accountant's nightmare, and it might leave me vulnerable to reassessment by RevCan.

Property ownership generally isn't considered a business, at least not in the sense of taxation. Unless you're holding it through a property management company, and one that is incorporated, it is treated the same as yourself. Self proprieter, partnership, etc, all get treated as one entity. Rental income is simply added to your own personal income.

The reason not to consolidate loans is to leave an easier paper trail for the accountant. Any time you're borrowing to invest, keep it separate. One LOC for investing. A separate LOC for purchases/emergencies. Debt consolidation is good when it's all bad debt (non-tax deductible). You never want to mix bad debt with good debt (tax deductible). And to clarify, I use the term tax-deductible meaning at least a portion will be tax deductible. I don't want to have to keep typing out "based on your marginal tax bracket". I know the entire portion is not tax deductible.

For example, on your primary residence, the mortgage interest is not tax deductible. The mortgage interest on your rental property is tax deductible. Keep them separate, makes it easier for tax purposes. Also, the total debt you would be incurring is the same. Say for example that you still owe $140K on your mortgage, and you need $60K for the condo. Total debt is $200K. You borrow $15K of equity from your current home through a HELOC and apply that as a down payment on the condo. Now you have a $140K mortgage, a $15K line of credit and a new mortgage of $45K on the condo. Total debt = $200K. You haven't increased your debt loan at all. But now the interest on that $45K mortgage you've taken out for the condo is tax deductible (or a portion of it, what ever your marginal tax bracket is).

If you go with Weapon_R's suggestion, refinance your principle residence and take out the entire $60K to put down on the condo you will have a new $200K mortgage on your principle residence, none of the interest which is tax deductible. Same amount of debt, $200K, but you've just lost that tax advantage of borrowing to invest.

[D. Dub]

Lint makes sense...besides leverage is your friend----look at Trump

[lint]

Originally posted by D. Dub
Lint makes sense...besides leverage is your friend----look at Trump

Thank you.

Actually, all you need to do is look at any individual who is really wealthy. They understand the principle of other people's money.

[Alex_FORD]

Originally posted by lint


Property ownership generally isn't considered a business, at least not in the sense of taxation. Unless you're holding it through a property management company, and one that is incorporated, it is treated the same as yourself. Self proprieter, partnership, etc, all get treated as one entity. Rental income is simply added to your own personal income.

The reason not to consolidate loans is to leave an easier paper trail for the accountant. Any time you're borrowing to invest, keep it separate. One LOC for investing. A separate LOC for purchases/emergencies. Debt consolidation is good when it's all bad debt (non-tax deductible). You never want to mix bad debt with good debt (tax deductible). And to clarify, I use the term tax-deductible meaning at least a portion will be tax deductible. I don't want to have to keep typing out "based on your marginal tax bracket". I know the entire portion is not tax deductible.

For example, on your primary residence, the mortgage interest is not tax deductible. The mortgage interest on your rental property is tax deductible. Keep them separate, makes it easier for tax purposes. Also, the total debt you would be incurring is the same. Say for example that you still owe $140K on your mortgage, and you need $60K for the condo. Total debt is $200K. You borrow $15K of equity from your current home through a HELOC and apply that as a down payment on the condo. Now you have a $140K mortgage, a $15K line of credit and a new mortgage of $45K on the condo. Total debt = $200K. You haven't increased your debt loan at all. But now the interest on that $45K mortgage you've taken out for the condo is tax deductible (or a portion of it, what ever your marginal tax bracket is).

If you go with Weapon_R's suggestion, refinance your principle residence and take out the entire $60K to put down on the condo you will have a new $200K mortgage on your principle residence, none of the interest which is tax deductible. Same amount of debt, $200K, but you've just lost that tax advantage of borrowing to invest.

I understand completely. But I would have to question the last paragraph, ie I think an accountant would find a way to get the tax deduction.

Why do I think that? Because with a proprietorship, business and personal are all one anyways.I think that an accountant would know how to document things even if the priciple residence is the security on the loan.

Not a perfect comparison, but if I was to use a personal credit card for business, there would be a way to declare the interest as a business expense.even if the business has no plans of repaying the principle.



Originally posted by D. Dub
Lint makes sense...besides leverage is your friend----look at Trump

I'll second that

[Alex_FORD]

Originally posted by lint


Thank you.

Actually, all you need to do is look at any individual who is really wealthy. They understand the principle of other people's money.

:werd: But, if you start quoting Robert Kiyosaki, I'm out of here! :rofl:

[lint]

Originally posted by Alex_FORD


I understand completely. But I would have to question the last paragraph, ie I think an accountant would find a way to get the tax deduction.

Why do I think that? Because with a proprietorship, business and personal are all one anyways.I think that an accountant would know how to document things even if the priciple residence is the security on the loan.

Not a perfect comparison, but if I was to use a personal credit card for business, there would be a way to declare the interest as a business expense.even if the business has no plans of repaying the principle.



I will go out on a limb and say that in the second example, there is no way to get the deduction on the mortgage. As I stated earlier, CRA does not consider a down payment on a property to be an investment. Therefore, since you've paid off the revenue property in full, and left yourself with a larger mortgage on your principle residence, they will audit your ass if you try to claim it. This isn't the same as expensing a credit card. Different circumstances. It's how the paper trail is created and your expenses have been separated.

To use a better example. Say that you've saved up $15K to buy a car. Along comes a great investment opportunity, where coincidentally you need to invest a total of $15K. What do you do?

1) You decide to use the entire $15K to invest with and just take out a $15K car loan (@ say 6%) to buy the car. Everyone month you pay down your car loan. But you own the investment outright, and any dividend that it pays goes straight in your pocket. Sounds good, right?

2) You decide to go to the bank and ask for a $15K loan/LOC (@ the same 6%). If they ask for security you have the cash. IF that's a no, then they can have the car. Or your house, etc. You then take your $15K and plunk it down to buy the car. You then borrow the $15K and use it for the investment.

Both scenarios look the same. Same loan amount, same interest rate, same payments. Right? Well, yes. BUT #2 is the one where you can write off a portion of the interest you're paying on the loan.

Keep things separate.

[lint]

Originally posted by Alex_FORD


:werd: But, if you start quoting Robert Kiyosaki, I'm out of here! :rofl:

He's not the only one. But if you can get past the self promotion, they guy knows what he's talking about.

[Alex_FORD]

Originally posted by lint



Keep things separate.

:werd: In fact, thats what your two example are all about.

BTW, I've read two Robert Kiyosaki books and I thought they had good information mixed in with his self promotion. Nevertheless, it was well worth the read. Rich Dad, Poor Dad was actually quite funny, too.

[Weapon_R]

Good stuff in this thread. I did not realize how advantageous it would be to hold debt on a second mortgage.

[Toma]

Lets be realistic..... you are gonna "rent it when you can", so why oh why would you claim this as a rental property?

Fuck the "tax break", pay for it, treat it like a vacation home, then no capital gains when you sell, and no taxable income if you rent it once in a while.

If its not a full time rental property, you would be stupid to treat it as a rental property.

Besides, any tax advantage would be pretty close to the .5 or more point discount you could get on the rate by remortgaging your primary over the rate on a revenue property.

[lint]

Originally posted by Toma
Lets be realistic..... you are gonna "rent it when you can", so why oh why would you claim this as a rental property?

Fuck the "tax break", pay for it, treat it like a vacation home, then no capital gains when you sell, and no taxable income if you rent it once in a while.

If its not a full time rental property, you would be stupid to treat it as a rental property.

Besides, any tax advantage would be pretty close to the .5 or more point discount you could get on the rate by remortgaging your primary over the rate on a revenue property.

You can only hold one primary residence. He's already stated he has a place. Therefore any other property that he owns woiuld trigger a capital gain if he were to sell it.

And why not claim it as rental property? It's not just the tax break on the interest, it's also any of the other tax write offs if he structures it as a capital loss. He can write off portions of his own income, reducing his taxable income and therefore reducing the amount of income tax he pays.

And where do you get a .5% reducing on the mortgage of a primary vs a revenue property? Mortgage brokers feel free to chime in here, but a mortgage secured by a property is a mortgage secured by a property, regardless of whether you live in it or someone else does. The only reason I can see it being lower is because for rental, there is no CMHC, so you need to put 25% down. So you'd be saving whatever percent goes to CMHC if you had a high ratio mortgage.

[lint]

Originally posted by Weapon_R
Good stuff in this thread. I did not realize how advantageous it would be to hold debt on a second mortgage.

you need to find a good tax planner. sounds like there are a lot of tax bennefits that you've been missing out on.

[Toma]

Originally posted by lint


You can only hold one primary residence. He's already stated he has a place. Therefore any other property that he owns woiuld trigger a capital gain if he were to sell it.

And where do you get a .5% reducing on the mortgage of a primary vs a revenue property?
Not true.... you just have to know how ;)

And B
If you or your borker cannot get you .5% lower on your primary versus over your rental.... well, try again ;)

[D. Dub]

Originally posted by lint


You can only hold one primary residence. He's already stated he has a place. Therefore any other property that he owns woiuld trigger a capital gain if he were to sell it.

And why not claim it as rental property? It's not just the tax break on the interest, it's also any of the other tax write offs if he structures it as a capital loss. He can write off portions of his own income, reducing his taxable income and therefore reducing the amount of income tax he pays.

And where do you get a .5% reducing on the mortgage of a primary vs a revenue property? Mortgage brokers feel free to chime in here, but a mortgage secured by a property is a mortgage secured by a property, regardless of whether you live in it or someone else does. The only reason I can see it being lower is because for rental, there is no CMHC, so you need to put 25% down. So you'd be saving whatever percent goes to CMHC if you had a high ratio mortgage.

Hey I'm a broker :D

Pretty much, a property is a property. That being said -- certain institutions may be a little higher on a rental -- but its not a hard and fast rule. If you are a Triple AAA client with the ability to service the debt; the rates shouldn't differ.

[Alex_FORD]

Originally posted by Toma
Lets be realistic..... you are gonna "rent it when you can", so why oh why would you claim this as a rental property?

Fuck the "tax break", pay for it, treat it like a vacation home, then no capital gains when you sell, and no taxable income if you rent it once in a while.

If its not a full time rental property, you would be stupid to treat it as a rental property.

Besides, any tax advantage would be pretty close to the .5 or more point discount you could get on the rate by remortgaging your primary over the rate on a revenue property.

I could easily agree with this. However, I think I will set it up in the same way that I think of the property. If its a revenue property(in my mind) then I'll probably claim it as such so that I learn and experience a little more about owning a revenue property.

Not everything has to be done at the lowest PITA factor, If I'm interested in the process. If that makes any sense at all...

BTW, What I mostly meant by ""rent it when you can", is its located in a slow economy, and I might not always have a renter, but that would be ok because I can easily handle the payments with my disposable cash flow.

[lint]

Originally posted by Toma

Not true.... you just have to know how ;)

And B
If you or your borker cannot get you .5% lower on your primary versus over your rental.... well, try again ;)

Well feel free to chime in with some "grey" techniques. I'm just talking about working within the system, not skirting it.

There's a big difference between tax planning and tax evasion. Which is what you're doing if you're claiming multiple residences as primary and not paying capital gains tax on the sale of these secondary primary residences.

[lint]

Originally posted by D. Dub


Hey I'm a broker :D

Pretty much, a property is a property. That being said -- certain institutions may be a little higher on a rental -- but its not a hard and fast rule. If you are a Triple AAA client with the ability to service the debt; the rates shouldn't differ.

Was waiting for yor reply.

When I talked to a mortgage broker about it, there was no difference in the rates. And I'd say my credit is pretty good.

[Alex_FORD]

lint,

the smith manuever is a cool idea. I'm currently spreadsheeting some hypotheticals for me, and I'll post them when I'm done

[Toma]

Originally posted by lint


There's a big difference between tax planning and tax evasion. Which is what you're doing if you're claiming multiple residences as primary and not paying capital gains tax on the sale of these secondary primary residences.

Thanks for the lecture
:rolleyes:

There are legal loopholes, and if you dont know them, see an accountant.... making them too public will of course result in the hole being closed, so..... for now its legal....

[Toma]

On the rates....

Well, maybe my credit sucks.... I own several revenue properties, and can usually only get prime minus a half on them.

On my primary, I get prime minus 1

HSBC usually has the best product for me.... all mine are open variables....

[eljefe]

Originally posted by Toma


Thanks for the lecture
:rolleyes:

There are legal loopholes, and if you dont know them, see an accountant.... making them too public will of course result in the hole being closed, so..... for now its legal....

lmao, the only thing I wouldnt want public if I was you is when you sell one of your "revenue" properties as a vacation property and you try not to pay capital gains on it because of a "non-existant" loophole.

[Toma]

Originally posted by eljefe


lmao, the only thing I wouldnt want public if I was you is when you sell one of your "revenue" properties as a vacation property and you try not to pay capital gains on it because of a "non-existant" loophole.
LOL.... no, I dont own any vacation properties...

the rule is specific for vacation/recreational properties......

[Alex_FORD]

Geez. Toma. You have a way of killing a good thread.

BTW, I just finished some calculations on a $19,900 condo where the going rental rate is $450 /mnth. And I estimated my expenses as about $200 / mnth.

The smith manuever, as much as I like the idea, stand to benefit me about $100 in the first year(give or take a couple hundred based on the acuracy of my math). Not that great of a benefit, but I have to admit that I like the idea of converting my personal debt into a business debt that is deductable. Its just that a small rental property would make it difficult to make this conversion.