Inspired by the Breakthrough real estate investing and financing for investors podcast hosted by Rob Break and Sandy Mackay
If you currently have a mortgage, you will already understand how it feels to carry a large debt load. Most of us, however, are comfortable with mortgage debt because it happens to some of the best debt you can have, but what if you could re-invest every dollar that you put into your mortgage? With this model, you can begin to regain control of your finances by leveraging tax-deductible debt.
The Smith Maneuver – A mortgage conversion strategy
The Smith Maneuver is a tax strategy taught by the experts at https://smithmanoeuvre.com/. We are providing a simplified introduction to the concept, however, if you would like to pursue this strategy, please consult a tax expert.
Essentially the Smith Maneuver is restructuring your debt so that you can reinvest it. This form of financing for investors converts non-deductible debt into a deductible investment loan. Non-deductible debt is money that you cannot claim on your taxes. Traditional mortgage interest falls into this category.
However, if you strategically borrow from the equity in your home, you can reinvest that money in income-producing assets and qualify for a tax refund. If you are committed to long term wealth accumulation, you can then take that tax refund and pay down your mortgage. The Globe and Mail further simplified this concept HERE.
Since homeowners typically focus on paying down their mortgage, they often overlook opportunities to invest and pay off their mortgage sooner. The longer you forgo long term growth, the more likely you are to take equity out of your home later in life. This is popularly known as a reverse mortgage, which can be problematic for older home owners who were hoping to be mortgage free in retirement.
The Smith Maneuver can be nerve wrecking because it means tackling multiple debt loads at the same time, but, if done correctly, it can vastly increase the speed at which your mortgage can be paid off.
Generally in order for this to work, your investments will have to perform and be greater than the total debt against your house. We’ve all been told that debt is bad, but if the people teaching us about debt are not wealthy, we can no longer afford to listen to them.
If you are considering embracing deductible debt and using the Smith Maneuver, it is important to understand that there is a big difference between tax evasion and tax avoidance. We Canadians have the legal right to structure our affairs to our best advantage.
Is creative financing an attraction option for you? We would love to read your thoughts in the comments below.
Look out for more of our blogs about financing for investors and investing in Hamilton real estate.
At the Mackay Realty Network, we specialize in building generational wealth and would be happy to help you take the next step. Meet our founders: