Real Estate

Smith Manoeuvre

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Deal Addict
Sep 1, 2005
2469 posts
4 upvotes
Huestar wrote: Hi,

I've been looking through this thread for a while and I recently decided to take the plunge and make a home purchase.
Since I'm relatively young and my girlfriend and I have outstanding student loans, we are only putting 5% down on the home and then using the remainder of our down payment to pay off our student loans.

So my question to the board is, is it possible to perform the smith manoever right out of the gates such as where I am?
The house is brand new and has yet to be built (closing date is July 2008) it will cost 425000 minus 22000 down payment (5%).

I've seen mention of a min. of 25% but no one has explicitly said that you absolutely need this. I would think that there must be a way start with less equity.

Thanks for all of the advice thus far!
you can have a HELOC for more then 75% of the value but you endup getting hit with CMHC fees on the portion above 75%. So even if you could get the line of credit the gains are quickly wiped out by those fees and higher interest rates.

Have you run the numbers on your plan, if you have enough for 10 or 15% down and keeping the student loans that may make more sense as you'll save a pile of CHMC fees and your student loan's interest is tax deductible. CHMC fees are reduced every 5% more you put down.
Newbie
Mar 1, 2007
2 posts
Newmarket
I also understand that I can't capitalize the interest on the investment LOC in Ontario. Therefore I will have to pay the interest on that portion, which presents a challenge if using Corporate Class funds instead of a Canadian Dividend ETF. I have heard of 'Gorilla Capitalization' but am a little unsure what that entails. RealEstate may be the best cash flow option but then it puts a lot of eggs in one basket. Thoughts?
Banned
Jun 19, 2006
9349 posts
57 upvotes
gwexco wrote: I also understand that I can't capitalize the interest on the investment LOC in Ontario. Therefore I will have to pay the interest on that portion, which presents a challenge if using Corporate Class funds instead of a Canadian Dividend ETF. I have heard of 'Gorilla
But you can use a margin account in addition to the investment LOC, and simply make the payments from the margin account, to the LOC.

Of course, in the margin account, you would need marginable securities, ie: ETFs.
Member
User avatar
Jan 11, 2007
431 posts
142 upvotes
Toronto
Huestar wrote: we are only putting 5% down on the home and then using the remainder of our down payment to pay off our student loans.

So my question to the board is, is it possible to perform the smith manoever right out of the gates such as where I am?
The house is brand new and has yet to be built (closing date is July 2008) it will cost 425000 minus 22000 down payment (5%).

I've seen mention of a min. of 25% but no one has explicitly said that you absolutely need this. I would think that there must be a way start with less equity.

Hi Huestar,

The first step in the SM is to get a readvanceable mortgage. Most financial institutions that have an SM mortgage require 25% down to get it. A couple will do it with only 10% down. None will do it with 5%.

I agree with Dark. Put at least 10% down on your home and keep some of the student loans. Considering how much you will save in CMHC by paying more down, you may be better off paying nothing on the student loans and putting all available cash down on your home. The exception may be if you can pay one student loan off completely, and then use that payment to increase your mortgage payment.






Ed
Member
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Jan 11, 2007
431 posts
142 upvotes
Toronto
gwexco wrote: I also understand that I can't capitalize the interest on the investment LOC in Ontario. Therefore I will have to pay the interest on that portion, which presents a challenge if using Corporate Class funds instead of a Canadian Dividend ETF. I have heard of 'Gorilla Capitalization' but am a little unsure what that entails. RealEstate may be the best cash flow option but then it puts a lot of eggs in one basket. Thoughts?
Hi gwexco,

There is no problem capitalizing interest in Ontario. Who told you that? "Guerilla capitalization" is just capitalizing it manually, since none of the banks will allow a credit line to pay its own interest.





Ed
Deal Fanatic
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Aug 19, 2001
5171 posts
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Vancouver
dark169 wrote: you can have a HELOC for more then 75% of the value but you endup getting hit with CMHC fees on the portion above 75%.
Only mortgages require insurance (eg., CMHC) but many banks are happy to offer a HELOC on top of a 75% mortgage, which does not require any insurance.

For example HSBC gave me a 75% open variable mortgage and then a 10% HELOC in addition. I told my rep i plan to use the 10% as part of my down payment and she shrugged it off.
Jr. Member
Feb 21, 2007
140 posts
KEH wrote: Thanks Bick FT. To add a bit more to my scenario, I do also have exposure to stocks and bonds through my RRSP and through other non-registered investments. I would also gain additional exposure if I used SM on my non-deductible mortage to invest in more stocks. Any more thoughts?
If asset diversification between real estate and stocks/bonds is not an issue then the next consideration could be your expected return and your personal preference. You can buy a rental property with very little money down, but you can also leverage an investment portfolio as well. So from a leverage standpoint the two options will be fairly close. A leveraged investment portfolio in general is more transparent from a transaction cost and return standpoint (at least on the long run). Real estate is more "hands on" unless you outsource the property management and repairs, and in turn incur higher costs. With real estate you really have calculate/estimate your return - income from ppty, expected appreciation less expenses less additional capital investments if required.

There are a lot of factors that could make real estate better in certain times and a long term portfolio better in other times. I like investment portfolios better because they are liquid and require little on-going management, but there are people who enjoy real estate - it is a very tangible asset class.
Arpad Komjathy, MBA, FSU
Financial Advisor
Mortgage Broker
Sr. Member
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Aug 29, 2002
558 posts
19 upvotes
I just want to clarify this with you guys:

I'm looking at the RBC Homeline Plan for the SM. I read about 4 posts above that its fine with the SM.

Because the big banks will not allow the credit line to pay its own interest (capitalization) I'll have to set up the Guerrilla Capitalization as described on page 77 of the SM book. I'll just have to move the money between the secured credit line which is part of the RBC Homeline Plan to the smaller unsecured credit line and back as needed.

Is that right ?

I'm getting set to do this just after April 4th 2007.

The Smithman Calculator was an excellent purchase with the book. Well worth the $58 in total for both.
Member
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Jan 11, 2007
431 posts
142 upvotes
Toronto
Spazmogen wrote: I just want to clarify this with you guys:

I'm looking at the RBC Homeline Plan for the SM. I read about 4 posts above that its fine with the SM.

Because the big banks will not allow the credit line to pay its own interest (capitalization) I'll have to set up the Guerrilla Capitalization as described on page 77 of the SM book. I'll just have to move the money between the secured credit line which is part of the RBC Homeline Plan to the smaller unsecured credit line and back as needed.

Is that right ?

Hi Spaz,

Right on. The RBC Homeline is one of the better SM mortgages available. The main shortcoming is that it does not allow investing directly from the credit line with each mortgage payment. This just means a manual transaction every 2 weeks or monthly, though.

Not all banks will allow you to pay the interest from another credit line. However, if they charge it to your chequing, then you can do your Guerilla capitalizing by just withdrawing the exact amount from the SM credit line and putting it back into your chequing, so your cash flow won't be affected.





Ed
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Oct 25, 2001
3289 posts
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Toronto
edrempel wrote: Hi Spaz,

Right on. The RBC Homeline is one of the better SM mortgages available. The main shortcoming is that it does not allow investing directly from the credit line with each mortgage payment.

Ed
Ed,

Do you have a list of questions/criteria that you would use to evaluate the various SM mortgages? If so, is this something you would be willing to share?
Member
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Jan 11, 2007
431 posts
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Toronto
cannon_fodder wrote: Ed,

Do you have a list of questions/criteria that you would use to evaluate the various SM mortgages? If so, is this something you would be willing to share?
Hi Cannon fodder,

Sure. I provided this list earlier in this blog, but I'll add a bit of info. We prefer to use a readvanceable mortgage that has the following:

1. Variable rate between prime -.8% to prime -.9%.
2. Allows multiple credit lines (add one for emergencies or for the Cash Dam).
3. Readvances automatically.
4. Allows automatic investing directly from the credit line.
5. Is fully open - no penalties to break the mortgage or refinance under any conditions.
6. No fees at all - no legal, appraisal, broker, or administration fee.
7. Can go in 2nd position if your current mortgage is not due yet and worth keeping.
8. No legal or appraisal fees to have the home reappraised every year or 2 and the credit line limit increased, so we can increase the SM as the home value rises.

None of the mortgages available to mortgage brokers have more than 4 of these 8 features. You can get most or all of these from several of the major banks.





Ed
Sr. Member
User avatar
Aug 29, 2002
558 posts
19 upvotes
Quick question about the SM & your credit rating.

I checked my credit rating, and its fine, I did not do my wifes, but she'll be in a better position than I am. She makes more than I, and most of the credit cards are in my name :lol:

Being that mortgages do NOT appear on your credit rating report, but your line of credit DOES, does the SM kill your credit rating, even though its a very smart thing to be doing with the mortgage ?

I'd hate to run into trouble qualifing for vehicle financing because of "too much debt". Dodge has 0% financing on 1500 series quad cab trucks, and Spaz wants a Hemi !
Deal Addict
Feb 18, 2003
1578 posts
55 upvotes
Scarborough
anyone here buy the Calculator from
the smithman.net website.
I'd like to know how detailed is it maybe someone could post a picture of it.
thanks
Sr. Member
User avatar
Aug 29, 2002
558 posts
19 upvotes
vr6man25 wrote: anyone here buy the Calculator from
the smithman.net website.
I'd like to know how detailed is it maybe someone could post a picture of it.
thanks
I bought both the book and calculator software.


I'm @ work. I'll post it in the morning when I get home. I already have a screen capture of it.
Sr. Member
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Aug 29, 2002
558 posts
19 upvotes
As promised. I highly recommend you buy the calculator software. You can tweak your numbers in many possibly ways and see the results in 2 seconds!

Yes, the numbers input really are my family's situation.
I opted to not include the $400/month RRSP contribution ($200 each) that we do each month. So I could shorten this by 2 more years...but I prefer to have 3 income streams going into retirement: pension via work, RRSP & SM. I am not counting on Canada Pension Plan at all. Spazette and I are both civil servants, so the pensions are excellent as well as the health benefits for life with our plan. I am 39 and she is 36. I should have this completed when I am 52. I retire at 58.

[IMG]http://www.geocities.com/brad.ormsby@ro ... m/153k.jpg[/IMG]

and the graph for that:

[IMG]http://www.geocities.com/brad.ormsby@ro ... thman1.jpg[/IMG]


The horizontal black dotted line is total debt. Its flat, and remains flat.

The black line going from $153K down to the 15 year is the normal mortgage.

The blue line right beside the normal mortgage is the SM in action. It shaves years off the normal mortgage.

The bright red line going up like a rocket over 15 years is the investments that were bought and earning 8% in my case.

The purple line that goes up with the investments is your new line of credit, and it flat lines at $153K in my case. It will only ever go as high as the original mortgage.
Newbie
Mar 23, 2007
1 posts
When utilizing this approach on a jointly held house and mortgage how do you determine which spouse claims the interest expense? I would think the higher income spouse gains the greatest benefit by claiming all of the interest but I suspect our friends at CRA would not agree with this approach. Is the deduction split 50%/50% or "x"% based on income or ?? Great thread!
Member
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Jan 11, 2007
431 posts
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Toronto
vr6man25 wrote: anyone here buy the Calculator from
the smithman.net website.
I'd like to know how detailed is it maybe someone could post a picture of it.
thanks
Hi Gary,

The calculator is quite detailed and accurate for the "Plain Jane" Smith Manouevre. It is also accurate for versions of the "Flintone Flip", in which you pay down non-registered investments or monthly purchases into non-registered investments onto your mortgage and reborrow the same amounts to invest.

It also compares the SM to David Chilton's method (the "Wealthy Barber"), which is regular investing without leverage, and with Garth Turner's method (pay off the mortgage, and then borrow to 75% to invest).

I've verified the numbers and they are accurate. It does not work for any of the enhancements to the SM, which would involve additional leverage. It doesn't work for topping up your mortgage to 75%, the Smith/Snyder or the Rempel Maximum. Fraser is apparently coming out with a new version that should work with some of these enhancements. He sent me a Beta version, but it still did not have these. It only had the "Cash Dam" added.

If you are working with a financial advisor, you don't really need to buy it, since the advisor should be able to run it for you. For your situation, you will probably only need to run one or 2 scenarios with it.






Ed
Deal Addict
User avatar
Dec 27, 2006
1913 posts
436 upvotes
Toronto
Guest8223 wrote: When utilizing this approach on a jointly held house and mortgage how do you determine which spouse claims the interest expense? I would think the higher income spouse gains the greatest benefit by claiming all of the interest but I suspect our friends at CRA would not agree with this approach. Is the deduction split 50%/50% or "x"% based on income or ?? Great thread!
Interest expense is claimed by the spouse who has taken the loan to invest and will claim gain/loss from the investment. Income percentage does not matter in this case. (Though the conventional income splitting strategy is that lower income spouse invest most if not all income, while higher income spouse takes care of all expenses including mortgage and possibly borrow to invest if leverage is desired.)
Sr. Member
User avatar
Aug 29, 2002
558 posts
19 upvotes
max88 wrote: Interest expense is claimed by the spouse who has taken the loan to invest and will claim gain/loss from the investment. Income percentage does not matter in this case. (Though the conventional income splitting strategy is that lower income spouse invest most if not all income, while higher income spouse takes care of all expenses including mortgage and possibly borrow to invest if leverage is desired.)
I was wondering that too.

Everything we have is joint. Lines of credit, mortgage etc. Everything.

Spazette lets me do the finances because she finds it confusing, yet she makes $80K and I make $62K. I assumed she would be getting the best tax reduction by claiming the investment loan interest. I believe we're both in the top tax bracket now.
Deal Addict
User avatar
Dec 27, 2006
1913 posts
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Toronto
Investment gain/loss and loan interest will be split 50/50 if held in joint investment account. You cannot arbitrarily claim gain/loss or loan interest by one spouse over the other.

Individually you are not in top tax bracket... but a combined $140K income should provide comfortable living. And with some planning, you should be able to achieve optimal income splitting for 80K+62K.

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