By Ozzie Jurock
"You can tell whether a man is clever by his answers. You can tell whether a man is wise by his questions." - Naguib, Mahfouz.
Thanks for all your questions. I try to answer all personally and directly to you, but most weeks there are just too many. I pick some of the most commonly asked here.
Q: I read that I can make my home mortgage interest tax deductible.
A: Well, it is called the "Smith maneuver" and if you type that into Google you will get a lot of answers. In a nutshell: You use your business or other income to pay the mortgage and borrow the money to pay your staff and other business expenses. That way the interest on the money you borrow becomes tax deductible (over time - usually four to six years) while your mortgage on your home gets paid down.
Major Point: You must be rigorous in keeping documents, bank accounts and payments totally separate. If you pay your gas bill and your hydro bill with the same Visa...you are doomed. You must have the discipline of an army sergeant. Use a smart accountant to set it up.
Q: Our mortgage is coming due in June. We want to renew early. Shall we lock in or go long?
A: Check for the best rate before renewal. The Mortgage Brokers Association of Canada found in a survey that 61 per cent of Canadians renew their mortgage at the same institution even though rates can be up to 1.8 per cent lower elsewhere. For instance, today's best 5 year mortgage rate is 5.1 per cent. The 'bank window rate' is 6.99 per cent! Institutions fight for new customers, but their faithful 'renewal ones' they often zap.
Major Point: Locking in or not is a personal choice. I tell my students: "If you buy investment real estate that you wish to keep and you do not lock in the rates...in today's 45 year low interest rate environment...I will hit you with my laptop. "
Q: My 21 yr old son wants to get in to the market. We live in the Lower Mainland and may be able to help him. Should he buy a condo to live in or should we buy a house and rent all or part of it out?
A: I salute you. We should teach the creation of passive income in school. We all should help our 21 year olds (with caveat below) create self actualized living through investing in real estate.
If he did nothing but buy 5 condos at - say $80,000 each and rented them at $800 he would have $4000 a month when he is 42...even if values and rents never went up! And that is being truly independent. Not having to have a boss, having to go to work.
However, I am going to be a little self serving. If your 21 year old wishes to get into the market and you help him ... he should take a real estate course (like mine ... www.reag.ca) first. Or spend a lot of time at the local library. He has a lot of options, but he should start out right. As for you giving him the money ... I would do it only by way of a family trust (it is in your name for a certain time, you make the decisions) but it will be his -say - when he is 40 or so.
Major Point: Unfortunately, I have seen a lot of families go apart over not properly structured investment real estate ... or even understanding each other's obligations and rights. Some 21 year olds are like 31 others are like 11, better keep making the decisions.
Q: I want to own my own home, but am not sure whether I can afford it. I want to stay within my means. Is there a rule of thumb for a point beyond which I should not make payments?
A: I am with Oscar Wilde who said: "Anyone who lives within their means suffers from a lack of imagination." Kidding aside, your mortgage company has rules. Essentially they will let you pay some 32 per cent of your gross income on mortgage, tax and strata fee payments. Also your total debts cannot exceed 42 per cent (car and other payments). So, if you are looking for a 'rule of thumb' the bank will make the decision on 'means' for you. However there is a problem. In Toronto right now it takes 41 per cent of your income to make the payments on the average home, in Vancouver it takes 73 per cent (Yep).
Major Point: You have a relatively new option to spread your payments over 40 years or you could lean on your parents or other friendlies or be innovative...perhaps get the owner to carry a part for a few years without payments. Alas, you will likely not be within your means - for a while.
Q: I have been told that I can incorporate a Canadian company that will buy and sell real estate. I also have been told that I can invest my RRSP funds into that company without having to pay taxes. What would be the fees?
A: To set up a company would cost you around $1,000. To move funds out of an RRSP you would have to set up a 'self-directed' RRSP and there are (small) set up and ongoing fees.
However, you are assuming the two go together. There are many legal ways to use your self-directed RRSP funds without triggering taxes, this may not be one of them.
- The Home Buyers Plan allows you to withdraw up to $20,000 toward the purchase of your first home (Although you must repay the amount later, or incur taxes).
- You can invest in Real Estate Mutual funds.
- You can invest in shares of a Canadian Corporation.
- You can invest it in mortgages - including a mortgage on your own home.
You cannot buy real estate directly. What you are planning may be circumventing the intent of the law. In any case, it is much easier to grant yourself a mortgage from your RRSP.
Major Point: Talk to a tax lawyer - "Trust in Allah, but tie up your camel"
Remember: There are no stupid questions ... Well, there is this one: "How many ducks would it take to equal the weight of an average human?" See! But you get the idea. Ask away, research, grow a real estate portfolio - look around you - for the last 40 years everyone investing in real estate has done very well - and they likely started by asking questions.
Published The Vancouver Sun, May 15, 2008
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