Have you been wondering how to use the Smith Manoeuvre to invest in real estate?
Before we dive into that, I first want to explain what the Smith Manoeuvre is for anyone who may not be familiar with it. In a nutshell, the Smith Manoeuvre is an investment strategy primarily used in Canada to convert mortgage interest into tax-deductible debt when the borrowed funds are invested into a income producing assets such as real estate.
If you want to use the Smith Manoeuvre to invest in real estate, here is a general overview of how you can use this method:
The concept of the Smith Manoeuvre is based on the principle that the mortgage interest on your primary residence is not tax-deductible, while interest on loans used for investments is typically tax-deductible. The strategy involves converting your non-deductible mortgage into deductible debt.
To establish a re-advanceable mortgage, to implement the Smith Manoeuvre, this product is also known as an “all-in-one” mortgage. This type of mortgage allows you to access the equity in your home as you pay down the principal.
An important tool to leverage to use the Smith Manoeuvre to invest in real estate is obtaining a HELOC (home equity line of credit). With a re-advanceable mortgage, you’ll have a regular mortgage portion and a revolving line of credit (HELOC) portion. The HELOC represents the available equity in your home that you can borrow against and in this instance, leverage for investment purposed.
Perhaps one of the most important facets of using the Smith Manoeuvre for real estate investing is that it allows you to turn your mortgage into a tax-deductible product. You can increase your mortgage payments to pay off your mortgage as quickly as possible, and then use the HELOC to borrow back the amount you’ve paid down. This borrowed amount is considered an investment loan. As a result, the interest on it becomes tax-deductible.
It’s EXTREMELY important to know that just because you have a HELOC, this isn’t a green light to go on a holiday or shopping spree. The interest created by your HELOC is only tax deductible if you are investing in income-producing activities, much like a regular business would.
By investing in income generating assets, such as real estate, you would use the borrowed funds (investment loan) to invest in properties that generate rental income. You can purchase rental properties, commercial real estate, or even real estate investment trusts (REITs) to diversify your holdings. You can also invest in other products such as land development, syndicated mortgages or even private loans – as long as they are producing income for you, the interest is tax-deductible.
It’s essential to manage your cash flow. The income you receive from the real estate investments should cover the interest payments on the investment loan and ideally, also provide you with some (or a lot) of cash flow). Depending on your personal circumstances, any remaining income can be used to further reduce your non-deductible mortgage, reinvest in more income-producing assets, or give you some extra money to live on.
When it comes to how to use the Smith Manoeuvre to invest in real estate, tracking your expenses is another important part of the equation. It’s crucial to maintain accurate records of your investment-related expenses, including interest payments, property management fees, repairs, and maintenance. These expenses can be deducted from your rental income, and in turn will reduce your taxable income.
Of course, before you make ANY big financial decisions, such as this, you should be consulting with professionals. Investing in real estate with the Smith Manoeuvre involves complex financial and tax considerations. I would strongly advise that you speak to a qualified financial advisor, tax professional, or accountant who is familiar with the strategy. You want to ensure it aligns with your financial goals and complies with relevant tax laws.
Fun fact! I have been using the Smith Manoeuvre to invest with long before I even knew that was the concept. If you’ve been following along with my articles, posts and/or podcast interviews, you may know that I forced appreciation on my primary residence with a renovation. I had my home re-appraised following the renovation which opened up equity on my HELOC, which I used to purchase a short term rental in Fort Myers, Florida.
I paid off the property in four years and doubled my investment. I used the proceeds to pay off my mortgage, which meant I was mortgage free in ten years, from the time I bought my first home to the time that it was paid off (freedom 35 baby!!!). After the market went crazy in 2017, I had my home re-appraised again. It more than doubled in value since I bought it, which in turn, quadrupled my HELOC. I have been investing with the funds I freed up ever since. And, in fact, I have been able to set up so many passive income streams, that I’ve been able to live off of them for close to four years.
I don’t share any of this to impress you, rather to impress upon you, just how powerful it can be to use the Smith Manoeuvre to invest in real estate, to take charge of your financial future and take your time back.
I have to remind you however – the Smith Manoeuvre involves leveraging your home equity and investing borrowed funds, which carries risks. It’s important to thoroughly evaluate your financial situation, investment opportunities, and market conditions before proceeding with this strategy. The very last thing you’d want to do is find yourself in a situation when you can’t carry the debt incurred by your investment or worse, that jeopardizes the funds you have invested, and in turn end up with bad debt, instead of good debt.
If you’re interested in learning more about how YOU can use the Smith Manoeuvre to invest in real estate, you’re in luck. The Vine Group is hosting a webinar on Tues., May 23 so you can learn more about this strategy and how you can benefit from it, just like I have. To sign up, click here. For additional information on this great strategy, check out this blog from the Vine Group.
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