I recently read a book called the Smith Manoeuvre by the late Fraser Smith, a financial planner, written in 2002. Just a disclaimer, I am in no way affiliated with Fraser Smith or have anything to gain by helping sell his book, but I feel it’s my duty to report to you that this book is a complete game changer! I learned how I could pay off my mortgage in just under 6 years, when I currently still have 25 years remaining on my amortization. Now lets us talk about this powerful financial strategy a bit more.
To summarize, the Smith Manoeuvre is a system that gradually helps restructure the non tax-deductible mortgage in your principal residence into a tax-deductible investment loan where you pay simple interest. Additionally, you will receive annual tax refunds on your investment loan, reduce years off your mortgage, and thus increase your net worth!
Now, you maybe asking…“Is this legit…?” Thankfully, I am happy to report, it IS!! All techniques that’s mentioned in the book are legal and have been reviewed by the CRA. So now, how does this Smith Manoeuvre really work? Here are the steps listed in the book, which assists in converting your non tax-deductible mortgage interest into tax-deductible debt.
In order to take full advantage of the Smith Manoeuvre, you will need to have a principal residence with a mortgage.
Step 1) Obtain a re-advanceable mortgage from a reputable financial institution: A re-advanceable mortgage is different from a traditional mortgage as it’s a mortgage with a home equity line of credit all in one product. When you pay down your mortgage, the principal portion that you pay down simultaneously increases the credit limit on the HELOC. To give you an idea of how that’s done, my current mortgage is with TD Bank with over years left on my term. The penalty is about $2400 to break this mortgage (3 months interest), and I will be switching to Manual Life 1 or RBC, which are two financial institutions I know that provides re-advanceable mortgages.
Step 2) Use the funds in the HELOC to invest: Withdraw the HELOC portion of your mortgage to invest in investment properties, or any type of investments like stocks or bonds. If you already own investment property(s) in your personal name (not in a corporation), the HELOC would be used each month to pay all your monthly expenses while all rental income is applied towards the principal pay-down each month on your principle residence mortgage. Be careful here, as you must pay dollar for dollar for your expenses. Talk to your accountant to help you with this as if it’s not done correctly here, you may disqualify your ability to claim expenses on your HELOC. Remember again that your HELOC limit will increase with each regular mortgage payment paid, which in turn allows you to invest the newly available money in your HELOC. This in accounting terms is called “Cash-damming”.
Step 3) Deduct interest paid on your HELOC when filing your taxes: When you are filing your tax return every year in March, deduct the annual paid interest amount from your HELOC. This should result in a tax refund based on your marginal tax rate.
Step 4) Re-invest the interest from the tax refund: Apply the tax return and the investment income (dividends, interests, etc.) against your non tax-deductible mortgage and invest the new HELOC money available.
Step 5) Repeat Steps 2 to 4 until your non tax-deductible mortgage is paid off!
This doesn’t sound super-complicated, right? Keep in mind that the Smith Manoeuvre does not happen overnight; it requires years to achieve.
I strongly recommend you read the Smith Manoeuvre so that you too can learn how to pay your mortgage off much much faster, AND be able to claim tax deductions. And don’t forget to run everything pass your accountant first, or talk to a financial planner who is familiar with this strategy to assist you 🙂
“Teresa, why would I ever want to partner in a Joint Venture real estate deal and give up 50% of my equity, mortgage pay down and cashflow, when I can invest on my own and make 100% of the profits?”
Before I answer this question, let me explain what real estate joint ventures (JV’s) are.
In a nutshell, there are usually two parties in a JV – the Money Partner and the Working Partner.
The Money Partner is responsible for providing the capital which includes the down payment, qualifying for the mortgage, all closing costs, two months of reserve funds, money to purchase furniture (if it’s a furnished rental), and money to do renovations (if it’s a fixing and flipping type of property).
The Working Partner on the other hand provides the sweat equity and is usually responsible for finding the deal, negotiating on the deal, furnishing the property, overseeing the renovations, finding tenants and all property management duties. The Working Partner has often invested thousands of dollars and hours in real estate investment training, and should have a good track record.
The property is usually held for a set number of years or until the value goes up a certain percentage, or when the partners mutually agree to sell the property.
During the holding period, the monthly cashflow (money left over after all expenses and mortgage payments) are split 50%/50%.
At disposition, the mortgage gets repaid and the Money Partner gets reimbursed their entire capital contribution (down payment, closing costs, furniture, renovations, reserve funds, etc.). After that, any profits (or losses) are split 50%/50% as per the ownership.
So back to the question, why would anyone want to do such a thing? Typically, the Money Partner is a busy individual usually with successful businesses or careers they want to focus on. They want to be in real estate but they don’t have the time or inclination to become experts.
That’s where the Working Partner comes in. They have spent thousands of hours to become experts. They know how to find the deal, have the expertise to maximize rental income (sometimes even double of what someone inexperienced can achieve on their own!), and they know what to do to minimize risks. They deal with all tenant relations and provide monthly or annual financial statements to the Money Partner.
Word of caution: Whether you are the Money Partner or the Working Partner, it’s always important to do your due diligence on your partner as real estate investing is a long-term game, because at the end of the day both partners share the same investment.
What does each party gain from a Real Estate JV partnership?
For the Working Partner, they are losing time, but gaining the capital to grow their real estate portfolio using other people’s money.
For the Money Partner, they are putting in the money and they sit on their behinds and make money in their sleep, so they gain time.
Each party brings something to the table that the other doesn’t have. In other words, a JV partnership is a win-win!
With a new year comes an opportunity to reflect the past year’s successes and lessons learned, and set goals for the upcoming year. As a Real Estate Investor, I reviewed my life priorities, added goals associated with each of them, and defined a plan of action to achieve what I want for 2016.
Here are the 7 life priorities that I have identified for myself for 2016:
- Health and Fitness
- Real Estate Investing
- Hobbies & Recreation
What priorities have you set for your life? Perhaps you have identified some that are similar to my list?
Identifying your priorities is a great first step, because it gives you an overall picture of what’s important to you in your life right now. The next step is to be clear about the goals associated with each, because that’s what gives you a sense of direction.
- Real Estate Investing – increase # of doors to 18 by end of 2016
- Finances – maintain same level of income in 2016 as in 2015
- Self-Development – finish commercial real estate program and one public speaking course
- Relationships – have #1 relationship with my teenager
- Health and Fitness – go on low carb diet and remember to take my Usana vitamins daily
- Spirituality – continue to attend church on Sundays and donate monthly
- Hobbies & Recreation – learn how to use my Sony camera and make an album of my favorite photos for Christmas 2016
When creating my goals, I purposely set out to make sure they are realistic for me. I didn’t want to make them too aggressive because I don’t want to stress myself out when trying to achieve them.
Most people stop here. But the key to achieving your goals is to have a plan of action. Below are the actions steps I have taken, or will take, to achieve the first 2 goals just to give you an idea of how it’s done.
- Real Estate Investing – increase # of doors to 18 by end of 2016
- Host Cashflow 101 evenings with fellow investors and network
- Research JV-worthy projects to promote to other investors and clients
- Finances: Maintain same level of income in 2016 as in 2015
- set lunch & dinner dates with all past & current clients
- exhibit and speak at minimum 7 Keyspire events
- contributing author in new book, “Tax Savings Bible” – done!
- Become Finalist for Realtor of the Year 2016 with Canadian Real Estate Wealth Magazine
- Continue writing for Canadian Real Estate Wealth Magazine
- Continue blogging and updating business website
You’ll notice that some goals don’t need any additional action, because I’m just maintaining what I’m already doing. For some of your goals, it’s ok to just maintain. For the goals that make you stretch outside of your comfort zone, you will need to add many action items and review daily, weekly and monthly and adjust accordingly.
Also, it’s best to tell others about your goals to make yourself accountable. You said it, so you MUST do it.
More importantly, I’ve share my goals and the process I go through because I hope you find this helpful as you define your own life priorities, set your goals, and start making your 2016 dreams a reality!
Did you know that the average family has over $16,000 in credit card debt, and that over 50% of families live paycheck to pay check? And did you know that the average college graduate has over $23,000 in debt?
If you have a good grasp on your own finance and you can teach your kids the keys to successful money management, than pat yourself on the back! But if you know that you need to brush up on solid money management, then consider the EnRICHed Academy!
EnRICHed Academy, an entertaining and informative DVD series created by Kevin Cochran and Jay Seabrook designed to teach youth and young adults about financial literacy, was featured on Season 7 of Dragon’s Den. The Dragons were impressed with the program and Cochran and Seabrook were able to get the support of Jim Treliving and (by the looks of their Facebook page) Bruce Croxon.
While the program was initially geared at youth and young adults, I also found this program eye opening in solidifying my own money management. I highly recommend this to anyone who wants to take real action towards establishing their basic financial well-being so that they can take the next step towards their dreams of financial freedom. I also recommend this to anyone who wants to ensure their own kids are on the right path towards personal financial responsibility.
Never too young to invest. Never too late to invest.
One of my youngest clients, Emily Ellison, says that she’s grateful to her parents for teaching her about financial literacy and real estate investing, and she was able to buy her first investment property at age 20. By starting at such a young age, she’s setting herself up for financial freedom for life!
(You can read more about Emily here, and click on the button at the top left corner of the newsletter to Subscribe).
But if you didn’t have parents like Emily’s to help guide you towards real estate investments and setting up your dreams of financial freedom, it’s never too late to get started!
To purchase EnRICHed Academy at Amazon.com, click here.
Many people may feel that using a Property Manager to take care of their investment property is an unnecessary added expense. Some may even want to manage their property themselves if it is in the same town they are living in. And with so many Property Management options, it can be quite confusing. Therefore, from a presentation presented by Alture Properties’ Property Manager, Rinco Chan, I’ve compiled a list of the most common property management myths to help you determine if using one is right for you.
MYTH 1 – Only if you have many properties do you need to consider the need to have your properties professionally managed.
FACT – Even one investment property can take up lots of your time (and cost you lots of money), especially if you don’t know what you are doing. Property managers are trained to pre-screen for potential problem tenants, reducing future headaches and tenant evictions.
MYTH 2 – Anyone can manage a property, you don’t need to outsource to get the job done.
FACTS – Even if you have the time, do you have the knowledge of how to deal with tenant issues? If you have the knowledge, do you have the time to manage yourself?
Can you deal with the issues impartially and not let emotions get in your way? Most owners will get emotional when tenants tell them their sob story on why they can’t pay the rent on time. Owners then allow tenants to pay late and the next thing you know, a month or two has passed with no rent collected and then the owners start to feel the need to evict the tenant. With property managers, they are non-emotional with these types of stories as they hear it all the time. As they have owners to answer to, they take on eviction procedures according to tenant relation laws rather than waiting longer than necessary. This prevents months with no money collected for owners.
MYTH 3 – Managing a property is simply a case of managing tenants
FACT – Property Managers attract better tenants and will qualify those using credit, background and eviction checks.
FACT – Ownership of rental property is governed by many landlord tenant laws and regulations.
Learning all these rules and applying them properly is very time consuming, not knowing them can put you at great personal financial risk.
MYTH 4 – Only local properties can be managed effectively, not out of town properties
FACT – The systems put in place can be duplicated anywhere.
MYTH 5 – Property managers are not worth the costs involved
FACT – Using a property manager actually increases NET rental income because they charge “market rent” and leave nothing on the table.
FACT – Management fees are tax deductible but a landlord’s time when self-managing their own property is not.
FACT- When it comes to repairs/renovations, trades companies give larger discounts/higher priority when working with trusted PM companies.
MYTH 6 – I’ll lose control of my property.
FACT – Experienced property managers have handled many tenant issues before and can work with owners and tenants to resolve difficulties.
FACT – The property management agreement clearly states the responsibilities of the PM and the owner, everything is transparent and legal.
MYTH 7 – Managing my own investment property is easy.
FACT – Property Managers are able to anticipate the potential for many rental property problems, thereby mitigating impact from the start.
FACT – Property Managers are much more aggressive in rent collection; owners are more sympathetic to a tenant’s monthly excuse.
MYTH 8 – Property managers just accept anyone who wants to rent your property.
FACT – Property managers have more tools than the average landlord to screen and qualify tenants – they don’t want the headaches any more than you do.
MYTH 9 -Property managers are all the same, get me the cheapest one!
FACT – As an owner, you should communicate your goals clearly and interview PM companies to make sure they meet your needs. There are good managers, and there are extremely bad ones, therefore, it’s ok to ask lots of questions and to ask for current and past clients references.
MYTH 10 – Tenants don’t like to deal with Professional Property Managers and will seek out private landlords
FACT – Visit a few tenant “gripe” sites on the web and you will read what tenants really think about non-professional property managers.
FACT – Professional property managers have resources and systems in place to deal with tenant issues quickly and keep them happy.
MYTH 11 – Property management companies will care about my properties as much as I do.
FACT – Rarely will Property Managers care about your properties like it’s their own. It’s just a fact of life, it’s not their property, and they will treat it as their job.
In order to determine if you are suited to manage your own investment properties, ask yourself the following questions?
1) How much time do I have to oversee repairs and maintenance?
2) What if I am away for a week?
3) Would I know how to handle a problem tenant/eviction?
4) Why am I losing sleep over this?
5) Do I want that 3am phone call?
6) Why am I spending the whole day showing tenants the wrong property?
7) Why am I attracting the worse tenants?
8) What do you mean I have to pay to unplug your toilet?
9) How do I deal with bed bugs?
10) Why am I still doing this by myself?
If you don’t know the answer to even one of the questions above, it’s probably a good idea to hire a Property Manager.
Using a property manager saves time and worry over marketing rentals, collecting rent, maintenance, and repairs. It helps avoid the headaches of being a landlord but allows you to continue to reap all the benefits of an investment property. By having a trusted property manager, you can avoid tenant nightmares and any 2am maintenance issue calls will be directed to them, and not you.
Teresa Leung is an active Investor and Investment Realtor® (Keyspire™ Preferred Realtor®) specializing in helping people grow their wealth exponentially through the acquisition of strategic real estate investments. She is also CREW’s 2015 Finalist for Realtor® of the Year. www.pointBinvestment.ca.
My first year as a Realtor was a huge success!
April 30th marked my one year anniversary as a licensed BC REALTOR, and it’s been a great year!
I became a Finalist for Realtor of the Year with Canadian Real Estate Magazine, I was featured in the REIN Real Estate Report’s December issue, I am co-author with Best-Selling Author and Business Mentor Colin Sprake for his new book “Entrepreneur Success Stories”, and I will be launching the Vancouver chapter of Synergy Real Estate Investment Network with Best-selling author and Commercial Mortgage Broker, Sua Truong in May.
But that didn’t happen without taking daily action.
When I became a licensed BC Realtor last April, I had a slow 6 weeks to start and didn’t make my first sale until June. Then in September, I decided to really focus on my business and take massive action. I communicated my sacrifice plan with my daughters and also put romantic relationships aside. That’s when I started to really see the results which led to a great year that I can feel proud of.
What was my success formula?
- I got myself some great mentors: one for my business, one for investing in Canada, and one for Investing in the US.
- I ensured a forward momentum in my life by taking daily action.
There’s nothing like learning from people who have already done what you want to accomplish, but it takes action on your part to make it happen.
What have you really desired in your life? If you really want it, and if you take action every single day, that’s when magic happens…