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Darius

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Has anyone used a HELOC to invest in a rental property?

 

Im trying to wrap my head around the concept.  This is what I know

 

1. You can borrow up to 65% of the assessed value of your home (on the portion that is paid off already)

2. Using the HELOC you can invest in a rental property

3. HELOC only requires the interest of the loan to be paid in monthly installments

4. Rent out the rental property to at least cover the interest, property tax, strata fee (if any)

5. You can write off the interest on the HELOC

 

Here is where it gets muddy for me

1. The rent you collect will be taxed as income . Does this offset writing off the interest from the HELOC

2. As you pay down the HELOC does the monthly rate of interest decrease or is this set at intervals (say 5 years).  Say my HELOC is 300k, and i pay down 4k per month, does the interest the bank want decrease monthly.

3. Is this strategy worth it, or is it better to save for a downpayment and just take out a traditional mortgage? 

 

Any thoughts?

 

Edit: yeah I know I should talk to a bank or mortgage broker, but sometimes you get some insight from people that have gone through the process...then I can ask better/different questions...

 

 

 

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4 minutes ago, Darius said:

 

Here is where it gets muddy for me

1. The rent you collect will be taxed as income . Does this offset writing off the interest from the HELOC

Yes, interest will be deducted from rental income to reduce your taxable income.

 

 

4 minutes ago, Darius said:

2. As you pay down the HELOC does the monthly rate of interest decrease or is this set at intervals (say 5 years).  Say my HELOC is 300k, and i pay down 4k per month, does the interest the bank want decrease monthly.

Yes, the interest will decrease given the rate remains the same and you pay down the principal.

 

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Two other notes

 

All related costs to the rental property can be used to reduce taxable income - strata fees, property taxes, general maintenance, advertising to rent, property management firm (in case you don't want to deal with renters directly), tenant insurance.

 

HELOCs are often tied to prime rate. So as prime moves so does your interest rate.

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I have done exactly this last year exactly.

 

as @Shift-4 mentioned the “write offs” help with the tax.

 

so far the investment has been great as obviously the market continues to grow and my rental property has gone up along with the market.  I was able to find a great professional tenant who has a lot of home pride.  I have a positive cash flow every month without having to gouge the renter - something I made a point of from the start.  I charge a comparable rate.

 

i went small, with a duplex - less maintenance overall.

 

imo.  This path to real estate investment is a good one.

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Keep ALL receipts related to the acquisition and maintenance of the rental property.  That includes:  legal fees for registering the mortgage, appraisal fees, BC Property Purchase Tax, annual property tax and utility tax bills, house insurance, legal fees, realtor fees, any repairs and maintenance, etc. etc.  Eventually you will sell it and you will require to pay Capital Gains tax on any profit made net of the expenses I mentioned. (NOTE:  you have the choice to declare either your current residence or the rental property as your principal residence, but one of them will be subject to Capital Gains tax - choose the one which has the lesser gain in value.  Capital Gains tax is based on 50% of any NET profit realized and is taxed at approximately 50%, so in effect you will pay 25% tax on the profit.  A 75% profit is a fantastic return.)

 

Hope this helps. 

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10 minutes ago, riffraff said:

I have done exactly this last year exactly.

 

as @Shift-4 mentioned the “write offs” help with the tax.

 

so far the investment has been great as obviously the market continues to grow and my rental property has gone up along with the market.  I was able to find a great professional tenant who has a lot of home pride.  I have a positive cash flow every month without having to gouge the renter - something I made a point of from the start.  I charge a comparable rate.

 

i went small, with a duplex - less maintenance overall.

 

imo.  This path to real estate investment is a good one.

thanks for the feeback and input (@Shift-4  too)

 

I did not know that you can write off strata fees/property tax on a rental property (ive only started thinking of doing this for the past few days)

 

I have a friend who has used the HELOC / income property strategy.  He doesnt even care to pay down the principle of the HELOC loan.  All he does is collect enough rent to cover the interest/property tax/strata and he is banking on the value of the property to go up in 5-10 years so that he can sell it.

 

I think my end goal is different though. I am more interested in having a place paid off and collecting rent.  Of course it would be nice if the value of the place goes up too.

For this reason im looking to get more bang for my buck and invest outside the lower mainland...place can be paid off quicker, but the value of the place probably wont go up as quick.

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I was considering doing the same, as I have one rental property (the home I own is rented up and down, and I rent a separate home to live in from a family member). The house across the street from the home I own went on sale, for a reasonable price. I figured having the two homes in close proximity would make monitoring them and dealing with tenants less hassle. But in the end, I decided against it...for a couple reasons:

 

  1. Recently I had to find new tenants for the basement at my home. In the past, here in Calgary, that was no issue at all. But this time it was quite difficult to find renters in my area, without a severe discount on the rent. All your calculations for a rental property go out the window if you can't find good renters (and bad renters can be even worse). A weaker rental market is probably not the case in Vancouver though.
  2. You are effectively doubling-down on the real estate market, which is historically high. This is partially due to interest rates, which are historically low. Even just a 1% increase in interest will hit you hard, as it will increase your payments while at the same time almost certainly dropping the value of your real estate investments. Make sure it makes sense for you, even if the interest rate were to double. (By "make sense", I mean the rent will more than cover the interest and additional costs even under that scenario.)
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6 minutes ago, singing chef said:

Keep ALL receipts related to the acquisition and maintenance of the rental property.  That includes:  legal fees for registering the mortgage, appraisal fees, BC Property Purchase Tax, annual property tax and utility tax bills, house insurance, legal fees, realtor fees, any repairs and maintenance, etc. etc.  Eventually you will sell it and you will require to pay Capital Gains tax on any profit made net of the expenses I mentioned. (NOTE:  you have the choice to declare either your current residence or the rental property as your principal residence, but one of them will be subject to Capital Gains tax - choose the one which has the lesser gain in value.  Capital Gains tax is based on 50% of any NET profit realized and is taxed at approximately 50%, so in effect you will pay 25% tax on the profit.  A 75% profit is a fantastic return.)

 

Hope this helps. 

Thanks for this info.  I always thought that the capital gains tax was tied to my income...knowing that its about 25% - and based on net profit- is a good piece of info...(and wow the government sure rakes it in eh? between capital gains, property transfer tax, gst etc....)

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26 minutes ago, Darius said:

thanks for the feeback and input (@Shift-4  too)

 

I did not know that you can write off strata fees/property tax on a rental property (ive only started thinking of doing this for the past few days)

 

I have a friend who has used the HELOC / income property strategy.  He doesnt even care to pay down the principle of the HELOC loan.  All he does is collect enough rent to cover the interest/property tax/strata and he is banking on the value of the property to go up in 5-10 years so that he can sell it.

 

I think my end goal is different though. I am more interested in having a place paid off and collecting rent.  Of course it would be nice if the value of the place goes up too.

For this reason im looking to get more bang for my buck and invest outside the lower mainland...place can be paid off quicker, but the value of the place probably wont go up as quick.

Your last two paragraphs are parallel to my line of thought.  I went into this with long term in my mind.  Keep as rental income once it’s paid off and give to one of my children.  Or sell and use the money to help out one of the kids with a down payment in the future.

 

my goal is to have at least one more rental property and in a perfect world - three, one for each kid.

 

my down sizing will be a lifestyle property purchase with a mobile home and then travel.

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32 minutes ago, Darius said:

I have a friend who has used the HELOC / income property strategy.  He doesnt even care to pay down the principle of the HELOC loan.  All he does is collect enough rent to cover the interest/property tax/strata and he is banking on the value of the property to go up in 5-10 years so that he can sell it.

He's doing it the right way then, although I would want to generate at least a little positive cash flow each month.  Plus, you might want to set a bit aside for maintenance expenses.

 

Because you can write off the HELOC interest against the revenue from the rental home, the best strategy is to take any profits from the rental home and apply them against your own mortgage (if you have one), other debts, or even invest it elsewhere.

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5 minutes ago, goalie13 said:

He's doing it the right way then, although I would want to generate at least a little positive cash flow each month.  Plus, you might want to set a bit aside for maintenance expenses.

 

Because you can write off the HELOC interest against the revenue from the rental home, the best strategy is to take any profits from the rental home and apply them against your own mortgage (if you have one), other debts, or even invest it elsewhere.

Its an interesting strategy.  I never thought about it before because im so adverse to having any sort of debt. In my mind I should be paying down the principle asap. But it does make sense...hold on for several years, just pay the interest using someone elses money (in the form of rent), and hope the place goes up in value (i always think prices will crash, and they never do!)

 

The other foggy part of this whole process for me is the rental income.  Rental income  is taxed, but at what rate?  I know, its probably a dumb question, but im a buffoon when it comes to accounting/tax related stuff like this.  So the rental income is taxed, but at the same time I can write off the montly HELOC interest....im thinking these two just cancel each other out...have to get a better grasp of that.

 

Thanks for the suggestions though goalie..

 

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7 minutes ago, Darius said:

 

The other foggy part of this whole process for me is the rental income.  Rental income  is taxed, but at what rate?  I know, its probably a dumb question, but im a buffoon when it comes to accounting/tax related stuff like this.  So the rental income is taxed, but at the same time I can write off the montly HELOC interest....im thinking these two just cancel each other out...have to get a better grasp of that.

 

Thanks for the suggestions though goalie..

 

Your personal marginal rate unless you incorporate a business specifically for your rental income. I don't recommend the corporation route for what you are describing.

 

As for personal income if you make $100k/year now you will be paying tax at the incremental amount. At the rate of $100k+.

It sounds like it sucks but it really doesn't. Paying more income tax is a good thing. It means you are making more money.  :)

Just make sure you are taking all the deductions you can.

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This has been a goal of mine for some time, but with the spike in real estate, I think the market is over valued, and buying now before a correction could be costly.  Anyone else watching and waiting?

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24 minutes ago, Shift-4 said:

Now if only I could go back in time to do it  lol

lol, exactly what i was thinking...should have got in several years ago.  there is this one development around the corner from where i live.  They were selling units 2 years ago and they still have not finished building yet.  The places have gone up 200k in the meantime.  And here I am, oblivious, throwing extra money i had into ETFs and funds.  Id be further ahead taking out a HELOC, putting it down as a downpayment, and paying the interest for 2 years...but its all in hindsight..

 

 

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16 minutes ago, Darius said:

lol, exactly what i was thinking...should have got in several years ago.  there is this one development around the corner from where i live.  They were selling units 2 years ago and they still have not finished building yet.  The places have gone up 200k in the meantime.  And here I am, oblivious, throwing extra money i had into ETFs and funds.  Id be further ahead taking out a HELOC, putting it down as a downpayment, and paying the interest for 2 years...but its all in hindsight..

 

 

At least you are still doing something  :)

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26 minutes ago, Type R said:

This has been a goal of mine for some time, but with the spike in real estate, I think the market is over valued, and buying now before a correction could be costly.  Anyone else watching and waiting?

It's something I would like to do. But would be hesitant for that reason. An associate talks about wanting to do it all the time so that's where I've developed the interest. Also, as a young person who doesn't have a house yet for a couple glaringly obvious reasons, I don't even think something like this is feasible, practical to do. 

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1 hour ago, Shift-4 said:

Now if only I could go back in time to do it  lol

I bought a dumpster fire almost two years ago for $425k - before the market really went nuts in Victoria. I have been renovating since and am going to chop it up into a 1 bed suite for myself in the short term and a two bed suite to rent to students and maybe airbnb in the summers. Once I build some equity this HELOC idea sounds like a good option.I am also looking at subdividing but there are a lot of obstacles to do that where I am.

 

Maybe there will be some foreclosures soon that will provide some opportunities!

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2 hours ago, Shift-4 said:

Now if only I could go back in time to do it  lol

I hear ya there.

 

I remember when I first moved to the Okanagan and got married.  We could have purchased a condo for under $70K.  To us, that seemed like a million dollars.  Today, a condo in that same building is over $300K.  But instead I have a $400K mortgage on a house in Victoria.  Had I bought that condo in Kelowna, I would probably be mortgage free by now.

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