# Sell Rental Property to Pay Debt?



## dagman1 (Mar 3, 2010)

How would you proceed?

I will graduate with $30,000 in student loans (non-deductible) at prime + 1%.

I own a rental property with an outstanding mortgage of $150,000 but is probably worth about $165,000. The mortgage payment is about $1100 (locked in for 4 years) but the tenants pay about $1500. I have put some money into the house this past year (vacancy, maintenance, renegotiating mortgage). The house is fairly new and I do not foresee any major expenses in the short term. But I don't see it appreciating much.

I will be working come summer paying the 35% tax bracket.

Would you sell the home and apply the profit to the student loan? I am unsure whether to do this as it seems to make reasonable income for me. Also I have some worries about interest rates moving upwards.

Or is it more advise-able to max out my RRSP and use the refund to pay off my debt? I could probably realistically contribute about $1000 a month to savings, i.e. between an RRSP and/or TFSA. I could also apply any profit form the mortgage (if any).

Thanks for any advice you can provide.


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## FrugalTrader (Oct 13, 2008)

dagman, if it was me, I would simply put the rent profits and savings towards the student loan debt. You have a cash flow positive property, and if you don't mind managing it, then consider keeping it. As well, when you sell, you'll face capital gains tax on the profit.


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## iherald (Apr 18, 2009)

FrugalTrader said:


> dagman, if it was me, I would simply put the rent profits and savings towards the student loan debt. You have a cash flow positive property, and if you don't mind managing it, then consider keeping it. As well, when you sell, you'll face capital gains tax on the profit.


Not only do you pay capital gains, you'll also pay real estate agent fees. What are those, 5%? So when you figure out those fees plus capital gains (25% of the gain) you're breaking even if not losing a little. So why not keep it and use the cash?


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## MoneyGal (Apr 24, 2009)

I don't have an answer. I just have some ideas about how to think through your situation. 

What I can see is that you have different assets and debts against those assets. You are in school, investing in your _human capital_ -- and you've taken out an "investment loan" (a student loan) for that purpose. In the absence of any other plans and options, you would ordinarily pay off the student loan debt with the dividends you earn on your investment in human capital -- that is, your salary. 

You also have an investment in capital assets -- in this case, a property. I'm not sure why in particular you bought this property, but you are faced with the classic "investment triangle" goals question when you consider either keeping it or selling it. 

That is, you can (in an ideal world) fulfill on two of three goals for the property, but not all three: cash flow, tax arbitrage, and long-term capital appreciation. Sounds like you have chosen cash flow and long-term capital appreciation for this property (because you are not running it at a loss) -- so if you sell, you are faced with tax consequences (as noted above). 

Now that I've typed all that out, I'm not sure that it's helpful. But it does seem to me that one way to think through the choices you are faced with is to get clear about your goals for your individual investment and wealth-building choices. If you bought the property for long-term capital appreciation and positive cash flow, and it is fulfilling on those objectives, I'd consider keeping it. And it sounds like you are unlikely to have any gain from the property by selling it in any case. 

If that's what you do, then in your shoes I would focus on paying down the student loan debt quickly and tax-efficiently. It sounds like maxing your RRSP and paying down the loan with tax refunds might be a good balanced strategy for you. If you set up a PAC (pre-authorized chequing) debit for RRSP contributions, you can file a form with CRA which will adjust your taxes paycheque by paycheque, instead of waiting until the end of the year for a refund and paying down the student loan debt that way. Make sense?

I hope this gives you some food for thought. odd as it may sound to say, yours are truly good problems to have!


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## ChrisR (Jul 13, 2009)

Why is your student debt loan not tax deductible? Was the loan packaged with something else?

I'm just wondering, because as a student I thought that my debt was not deductible because it was not an official Canada or provincial student loan, and because I had used it for living expenses. Turns out that is exactly what the official student loans get used for as well, and my loan was also deductible. You might want to look in to it.


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## ashby corner (Jun 15, 2009)

*Don't...sell...it*

I had rental property that I bought in 1996, and sold in 2003.

One of the very VERY few things in life that I regret: selling it.

You're cash flow positive which is very rare these days. Being a slumlord is a lot of work, but it is worth it. Once you get a few more properties, hire a management company, and away you go.

Keep 'er!


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## MGL (Apr 6, 2009)

dagman1, as long as the property is cash-flow positive (factoring in all expenses), I don't see a huge benefit to selling it. 



ChrisR said:


> Why is your student debt loan not tax deductible? Was the loan packaged with something else?
> 
> I'm just wondering, because as a student I thought that my debt was not deductible because it was not an official Canada or provincial student loan, and because I had used it for living expenses. Turns out that is exactly what the official student loans get used for as well, and my loan was also deductible. You might want to look in to it.


ChrisR, you might want to check into this again- non-government "student" loans, regardless of what they were used for, don't qualify for the interest deduction. See http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns300-350/319-eng.html for more information.


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## Dr_V (Oct 27, 2009)

dagman1 said:


> I own a rental property with an outstanding mortgage of $150,000 but is probably worth about $165,000. The mortgage payment is about $1100 (locked in for 4 years) but the tenants pay about $1500.


So, after rent and mortgage, you've got $400 left. What about property taxes, maintenance costs (e.g., clearing snow from driveway), insurance, etc.? It sounds like you might be losing quite a bit of money on this venture ...


K.


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## MoneyGal (Apr 24, 2009)

Losing money on a property venture is not necessarily a bad thing: it provides tax write-offs reducing current tax payable. 

That's why I suggested the OP get clear about what his goals are for the property. I know that there's a mantra (if that isn't too strong a word choice) for cash-flow-positive properties here - but a cash-flow-negative property can have a place in your portfolio too, depending on your goals, risk tolerance and horizon.


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## RichardCooper (Mar 3, 2010)

*Some really good advice here*

Really pleased with the advice I am reading here on this post, seems like a good chat forum, I also agree with the posters talking about holding onto that property. Much better move based on the info you posted.


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## OhGreatGuru (May 24, 2009)

With real estate fees, legal fees, and capital gains tax you aren't likely to see any profit on seling the property. So it won't help you to pay down your other debt. So ignore that possibility.

What you need to look a then is:
- Is it really a positive cash flow, after considering possible hidden costs as other have suggested: and,
- Could you be earning other income if you did not have to spend time managing this property?

_Or is it more advise-able to max out my RRSP and use the refund to pay off my debt? I could probably realistically contribute about $1000 a month to savings, i.e. between an RRSP and/or TFSA. I could also apply any profit form the mortgage (if any)._

There are numerous threads on this topic. If you have $1000/mo. excess cash flow, you can make a sizable dent in your debt from that without selling your property. Opinions vary on which you should do - pay debt or RRSP. The majority seem to favour maximizing debt payment first. But depending on specific circumstances a business case can be made for contributing to both.

PS. Since you ask how "I" would proceed, I would pay down the loan with your $1000/mo. excess cash flow. Your cash flow will go up after every debt payment; and you lower your risk. Save the RRSP room to use next year, when you will be taxed on a full year's salary.


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## dagman1 (Mar 3, 2010)

Hi all,

Thanks for the replies.

As for the property, I don't see much going on in terms of capital appreciation. It's located in a pretty static market. All I have going on is the positive cash flow (as well as the money going towards principle). The property taxes are part of the mortgage payment. I've definitely lost money on it this year - which was a problem because I had to finance it with about $3000 of my line-of-credit - but some of that included renegotiating the mortgage to lock in at a lower rate. However, I don't foresee future expenses, although there is some worry about the tenants' abilities to pay (both have been in and out of layoff but have been paying rent--it seems to be a priority). As well, it's possible, if anything, that I have a capital loss on the property. I don't know if it's possible to utilize this in some way when I eventually sell.

I also though of just holding onto the property until I'm ready to buy my own place, at which point I could possibly use any equity in the home to make my down-payment.

As for the student loan, my biggest worry is rising interest rates. I'm inclined to make maximum RRSP contributions using the full of the return to pay debt, plus make additional debt payment on top, but I would hate to get into a situation where interest rates rise and my money is locked up in an RRSP. This is not a government loan - I am not eligible - so it is not possible to write it off.

FYI - I was not going to make any RRSP contributions in this year because my tax rate will be low and I will have plenty of scholarly deductions.


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## Berubeland (Sep 6, 2009)

I would keep the property. No big surprise here 

Here's the deal though, almost all small properties bought by private people in the GTA are cash flow negative once you calculate the vacancy loss/property management and maintenance. Condos are the worst possible deal because maintenance fees can go up significantly at almost any time. 

Still in spite of that real estate can be a good investment for small property owners because it supplies the opportunity to leverage other knowledge/skills that you might have. Renovations skills, area appreciation selection skills, negotiating skills and more are brought into play. 

Furthermore real estate is the ultimate longer term investment because once the mortgage does get paid off you can basically draw a pension from it. Imagine a guy that instead of investing in RRSP's instead uses that money to buy a property every year. The bulk of the mortgage get paid down by the tenants. After 25 years he starts getting his rent amounts in full to supplement his income. Seems pretty sweet to me. Not only that but his "pension" is indexed to inflation. 

Yes it is a pain to manage property and there are significant risks but there are also rewards.


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## dagman1 (Mar 3, 2010)

I posted a reply earlier this afternoon and it doesn't seem to be showing up. Any ideas? Same happened with the initial thread - it seemed to disappear to nowhere only to reappear about a day later.


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## real_money (Feb 16, 2010)

Sell your property and pay off your student loan. Do not put any money in RRSP’s.

Okay, now I have to tell you why. I am personally baking on interest rates hitting the double digits with in the next 2 years. This will cause your property to deprecate. As well it will in increase your mortgage payment significantly. I am also banking on the stock market taking a big hit just like it did last year. 

I am assuming you are in Canada. There is no way the bank of Canada can keep interest at .25% for much longer. The government well soon stop "bailouts". This is when the $hit will hit the fan. I think that the economy is artificially stable because of the bailouts. 

Where do you think all the bailout money is going to come from? When you and I have to pay it back people will be hurting. Mark my words 2 years.

My bother the "investment broker" calls me the pessimisms. Am I, or am I a realest?

I personally am waiting for the "right time" to jump into the market and or real-estate. 

It is easy for us to criticize the US housing situation but are we that different? I have friends that bought houses I feel they can not afford. Sure then can afford them at 1.5%, but they can not afford them at 10% let alone 5%. They will be in trouble and there are many people in their shoes. 

good luck.


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## real_money (Feb 16, 2010)

I for got to add a disclaimer in the even that I am wrong. 
These are the opinions of Real_money and only Real_money. Real_money can not be held accountable for anything!!! 

I hope this is law binding.


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## Racer (Feb 3, 2010)

One more (tiny?) reason to wait is that realtor's fees may be coming down in the next couple of years. The competition bureau has recently started an action against the MLS website service for its monopoly on the real estate market (after negotiations with the big real estate houses fell apart). The fall-out may be a massive increase in the number of ways that you can list your house on the MLS.

Rather than promising a 5% commission (varies between provinces I think, but YKWIM) to a realtor if your house sells, then you could choose to pay a bare-bones fee of $1k for listing it for 2 months, or some other kind of variation.

Here's a story from the FP on it: http://www.financialpost.com/story.html?id=2538911


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## dagman1 (Mar 3, 2010)

I've been following the realtor story so that is for sure one reason. I would probably try to do a private sale anyway though. Re interest rates, I am locked in for the next 4 years at a sub-4% interest rate, so I'm not concerned about what they do in the near future.

What does everyone think about cash damming instead? Perhaps I could get another LOC, finance expenses for the house on that LOC, then use the extra cash flow to pay down the student LOC, quickly, thereby converting it to a tax deductible LOC. 

Do you think the bank would let me get yet another LOC, perhaps one that is taken against my rental property? What do you think of this strategy generally?


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