tax efficient mortgages for real estate investors

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Tax Efficient Mortgages for Real Estate Investors. Grow | Protect | Optimize. Presented by: Jason Henneberry. Background. Personal RE Investment Portfolio Mortgage Planning for > 10 years Focus on Advanced Mortgage Strategies 2008 VP Sales Tax Deductible Mortgage Plan - PowerPoint PPT Presentation


PowerPoint Presentation

Tax Efficient Mortgages for Real Estate Investors

Presented by:Jason Henneberry

Grow | Protect | Optimize

1BackgroundPersonal RE Investment PortfolioMortgage Planning for > 10 yearsFocus on Advanced Mortgage Strategies2008 VP Sales Tax Deductible Mortgage Plan2011 Launched MORTGAGEPAL.CA

Jason HenneberryFounder, MortgagePal


OverviewOptimize Rental Portfolio Cash FlowsGenerate Tax Refunds via Debt ConversionUse Refunds to Pay off Mortgage FasterReduce Amortization & Save Interest CostsIncrease Rate of Return of RE PortfolioWithout being out of pocket $

3Who is it for?Homeowner (with a mortgage)+Real Estate Investor (eligible expenses)

Optimize for Greater EfficiencySave Tens of thousands of dollarsConvert Primary Mortgage to a deductible Investment LoanCanada Revenue Agencys Cash Damming Guidelines

4Identifying suitable candidates for TDMP goes well beyond mortgage underwriting guidelines. We have to really want to help our clients - I see so many Mortgage Brokers that hold themselves out to be trusted advisors, when all they are really doing is matching credit scores and debt service ratios with lender guidelines and then drilling down to the lender that is going to pay them the most and get the deal done with as little hassle as possible. Dont get me wrong, these things are important, you need lenders that you can rely on and you need to run your business in a profitable manner - or you will be out of business!

The point I am trying to make is that we have an opportunity to elevate our status (as and industry) and take our game to the next level its time for us to truly step into our role as Mortgage Planners. We are so quick to just fund the file and move onto the next deal, that we are often overlooking the most important aspect of our business our clients! In many cases, we fail to provide a level of adequate advice because we are stuck in a trap that has us primarily competing against the banks (and ourselves) on interest rate alone. Right think about how many deals youve lost on rate, either because you were undercut at the last minute or because the client had already been offered a great rate and the best you could do was match it, so the conversation kind of dies before it even begins. We have the tools to go deeper and provide a level of advice that will endear ourselves to our clients and help us build lasting, meaningful & ultimately profitable relationships with them.

So when you think about it, TDMP is really for any homeowner that is also an investor that can benefit from optimizing their mortgage and investment cash flows to generate tax benefits, pay off their mortgage ahead of schedule and build wealth for the future and there is a real opportunity for mortgage professionals that can get their head around this concept and help clients figure it out.

Let me show you what I am talking about: if your client is a homeowner (and they have a mortgage) and they also have investments (outside of their rsps), then they should be thinking of structuring their debt tax efficiently or they could be leaving tens of thousands of dollars on the table over the lifetime their mortgage.

Greater ROIIncreaseReturn on Investment

Without Increasing Investment RiskHigher Rate of Return = Greater Investment Risk

5In the investment world, in order to generate a higher rate of return you typically need to take on a greater level of risk. Some examples are:Canada Gov Bonds or GICs = Low risk/low returnStocks, MFs = higher risk/ higher return (maybe)And if you are really looking to roll the dice, you can lend your money to Greece and theyll pay you upwards of 20% interest. Now you may never see your money and this is an extreme example. But I think we all understand that as investors one of our primary objectives is to maximize the return on our portfolios while balancing out the risk.

What Im going to show you today how to increase the rate of return that you get from your rental portfolio without having to take on any additional investment risk, simply by optimizing the cash flows that you already generate in your portfolio and using them to convert your principal residence mortgage into a tax deductible investment loan.

This is very powerful stuff

Income SourcesEmployment IncomeSelf Employed IncomeReal Estate Portfolio Income

Principal Residence(Mortgage Payments)RE Portfolio ExpensesMortgage Principal & InterestProperty Tax & InsuranceStrata & Property Mgnt FeesMaintenance & Upgrades$Mortgage Payts$Portfolio Expenses$Debt Reduction$RE Portfolio ExpensesDebt ConversionHow it WorksCra Rental Cash damming

Jim is like most realtors and earns a commission every time he sells a home. This is the first time he has worked with a TDMP Certified Mortgage Planner who understands cash flow optimization, and up until now his financial affairs have been rather inefficient from a tax perspective. Every month, Jim uses a portion of the money that he earns from selling real estate and makes regular Principal & Interest payments to his mortgage ($1400 per month) and he also covers his business operating expenses ($2000 per month) from the same account.

On the advice of his Mortgage Planner, Jim decides to setup TDMP and optimize his mortgage and business cash flows to accelerate the conversion of his mortgage to a tax deductible business loan. Instead of making his mortgage payments and servicing his operating expenses from the same account, Jim puts the entire amount ($3400) on his mortgage and then lends himself the $2000 he needs to cover his operating expenses from the line of credit.


Principal Residence

Bad DebtMortgageGood DebtInvest LocSTEP II: MORTGAGE RESTRUCTUREProperly structured multi-component mortgageTrack tax deductible interest accuratelySTEP III: DEBT CONVERSIONImplement CRA Cash Damming techniqueAccelerated debt conversion

ImplementationSTEP I: PORTFOLIO REVIEW / ANALYSISIdentify eligible rental expenses &Evaluate strategy financial benefits7 $350K Mortgage 25 Year Amortization $1937 Monthly Payment at 4.5% 39% Marginal Tax Bracket

Case StudyPrincipal Residence SIR 6 Unit Strategy Annual Expenses: $25,000 Annual P&I Payts: $43,000 Total Eligible Expenses: $68,000

Rental PortfolioFree Tax Refunds (used to pay down mortgage): $59,571Interest Savings (Primary Residence Mortgage): $41,199Total Savings (Tax Refunds + Interest): $100,770

Pre Tax Income (39% Marginal Tax Rate): $165,196

Debt Conversion Primary Residence = 4.2 years

8Here is a simple case study to illustrate my point:

Lets pretend Jim and Lisa Smith own their home worth $500,000. They are in a 39% marginal tax bracket and they have a mortgage of $250,000 which they will pay off in 25 years at an average rate of 4.5%. On the advice of their TDMP Certified Mortgage Planner, they decide optimize their mortgage & investment cash flows and implement TDMP in order to achieve the following benefits (are you ready!):

Their mortgage will be paid off 10.5 years sooner and they will generate $96,000 in FREE Tax Refunds (this is found money) which they then use to pay down the mortgage faster. This has the effect of reducing their long term interest costs on the mortgage which will save them an additional $56,000 in Mortgage Interest. And by reinvesting the tax refunds and mortgage interest savings at a 6% annual rate of return, they will be $383,000 wealthier over the lifetime of their mortgage. And the kicker, is that they will be able to achieve these benefits without any additional cash from their own pocket remember, TDMP is entirely Self Funding, all they have to do is make their mortgage payments, which they are committed to for the next 25 years anyway.

These financial benefits are so substantial that you should never have to compete on rate again! I mean how solid do you think your relationship with your clients would be if you could show them how to generate hundreds of thousands of dollars in financial benefits without any change to their monthly cash flow.

Do you think you might stand a better chance of beating the bank that is undercutting your rate by 10 bps? Would you be able to build lasting, meaningful and profitable relationships with your clients? Would they be willing to introduce you to their family and their friends? The answer is of course And in the process you could build a better, stronger mortgage business and become their trusted mortgage advisor for life!


9Strategy II

Fixed RateVariable RatePayment Shock Protection

10Take Advantage of Low Rates They have never been lowerGreat time to buy rental property and lock in your cash flowsGreat time to refinance & restructure your portfolio

But there is an elephant in the room that no one wants to talk aboutWhat happens when rates return to more normal levelsAnd Im not talking about sky rocketing rates a modest increase of 2%.

Are Your Ready?What Are The Experts Saying?

What if your mortgage rate went up by 2 points? Garry Marr, Financial Post

Interest rates have nowhere to go but up- Jim Flaherty, Canada Finance Minister

11The reality is that Most Canadians are not prepared and to be honest what I have found is that most people dont even want to have the conversation.

I often bring this topic up and I am continually amazed at how many people brush it under the carpet. They will say things like I read in the paper that rates are going to stay low, they wont go back up and I dont need to worry about that.

Fair enough I think there but I also think it is prudent planning to have a strategy in place to deal with rising ju


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