# Smith Manoeuvre & Rent Returns



## amitdi (May 31, 2012)

Hi,
I am thinking of buying an apartment by doing a Smith Manoeuvre for $200K (Winnipeg) and live there. I will pay off the mortgage in 5-6 years. Once the mortgage is done, I will buy a bigger home and shift there. A perfect time as my son will be 6-7 yrs. The plan is to set the apartment on rent.

Questions for our experts
I want to keep the SM loan after I am done with the mortgage. If I want to keep it and avail the attractive interest (prime+1%). Do I have the option to sell the apartment and have the investment portfolio as collateral? Or do I have to keep the property to avail the HELOC and its low interest?

I dont mind keeping the apartment but the rental returns are not that attractive in Winnipeg. I can get 2-3% after cancelling expenses.

What I am trying to ultimately find out is -
Buy home now
OR Buy apartment, sell apartment in 5 yrs and buy home


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## andrewf (Mar 1, 2010)

You won't be able to get an investment loan at the same leverage as a HELOC.


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## Butters (Apr 20, 2012)

I'm from Winnipeg too! Although now I live in Edmonton.

By apartment do you mean Condo?

5 years is a good time frame to buy/sell a house, don't buy the apartment, only to find out 2 years later you want more... if you do something, commit the 5 years

If you have the money, buy the house you want now... make sure mortgage payments arent 50% of your income, try to put 20% down if possible (use RRSP home buyers if possible)

What area do you plan to live in? When I was looking at houses St James was cheap in taxes, and decent value... Riverheights was overpriced, had clunky layouts and water in the basements. Lindedwoods Ft Garry, and Waverly west were super expensive...
I ended up in Charleswood, 3.6k a year in property taxes on my house I bought for 250k (renting now for 1850) after my repairs(30k put in, cheap/free labour[Dad]) its worth 340k
1850 seems like lots, but I end up paying close to 1500 a month on mortgage(200k at 2.99% 476 bi weekly), tax(3600/year), insurance(1700year) and thats if nothing breaks
and, the 1850 I got extremely lucky, because its a business that fosters adults, and my windows are big enough, these guys were looking for 8 months to find a place, and my 4 bedrooms do the trick, other offers were 1600/month these guys knew the interest, and blew the rest out of the water... without them i was looking at 100/month profit, likely breaking even, for a perfect home... Renters could give you tons of problems, I am renting now, and our pipes broke here, plumbers came by 3 times to fix the water pressure, the pipes, leaks, etc... that ought to be a pretty penny for these home owners, and we are just in the basement suite, and what if renters didnt pay you.. lots of possible errors




From what I read Smith Manoeuvre isn't for everyone... taking a loan to pay for something else isn't a great plan unless you know what you are doing

You'll be hard fetched to get a second loan at a decent rate... depending on your income I guess... why dont you tell us a bit more about how much you have saved/make? and if you get raises or bonuses or a new position in the next 5 years


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## amitdi (May 31, 2012)

SheaButters said:


> I'm from Winnipeg too! Although now I live in Edmonton.
> 
> By apartment do you mean Condo?
> 
> ...



Thanks, this is all good information. I was talking abt an apartment in a highrise building. And also FYI, I have not yet started my search (not even met a mortgage broker or realtor). Will do that in next cpl months.

On SM, I think I have the financial acumen and I am a DIY investor. Although there is a lot to learn (especially discipline), I am definitely ON for SM. Personal finance is one of my special interests so I know what I am doing. I have about $40K and I can take that up to about $70K in 1 year from now for 20% down. My income is steady and i can afford upto $1.8-2K per month in mortgage payments. I think I should be qualified for upto $250-300K loan easily so buying a good house if I want to is not a question.

I am living in Ft Garry in a 1 bd (rent: 800) and kinda new to Winnipeg (1.5 yrs). Its just that I am not ready to buy a house yet. 
- it involves a lot of work (cleaning, mowing, snow, technicalities).
- I dont need a big house now, so dont want to spend on maintainence and taxes

Regarding selling apt, even I am not planning to flip an apartment. The plan was to keep it on rent once I am ready to move to a house and use the SM HELOC money to remain invested. The aggregate return (investment+rent) is good enough, comes out to 10% using conservative estimates.

I also want to give a thought to condo townhouses. Best of both worlds, its good enough to be like a house but does not involve all the work.


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## Butters (Apr 20, 2012)

Ill put a disclaimer that im no expert. I am interested in doing this too but a few things are stopping me. 

I went to rbc they set me up with homeline plan at prime +.5
The mortgage rate they had was like 5% I showed them a local credit union 2.99 at 4 years fixed they immediately matched that rate. Paula Westwood at the pembina location will do the same for you or anyone. Her future plan is to set up all your banking there, because if you have a mortgage you get a multi discount account and would also get free chequing. But you can stick with whatever bank you're at. Still get their rate. 

So check 1 growing heloc
Now you need over 20% to get this from rbc other companies CU might give you more room. But rbc has a great deal. 

I have paid 1 year. I have about 9k in my heloc I can use now, which will go up. Rbc also has good options to pay mortgage faster. 

Why the heloc makes Zero sense for me right now, I have 15k contribution space left in my TFSA. So why would I take out a loan when I can save tax free anyways?

With SM you can borrow like 60% of your house I'm sure they put a new limit on it. 

Will your stock make over 3%? Many gic are 3% for 4 years right now. You can save yourself 3 % just by doubling your mortgage payment. It's faster and risk free and it's not really locked in (heloc) it just helps pay stuff of faster. 

SM would be for someone who has maxed out their TFSA maybe even rrsp. owns like 30% or more of their house. And plans to make 4% or more on their new investments with their borrowed money. 


Imagine your beautiful home of 500k was completely paid off. Would you borrow 300k against it to invest into stock? Knowing that if you lose money you won't get it back. 
And the only advantage is to save on some taxes if you happen to gain a nice return?



You keep saying buy an apartment. Apartment to own would have a number of units you would rent and probably cost over a million bucks. 

Condo is a space in a building for sale. 
So in a high rise it sounds like you looking to get a space. A condo. 
Apartments are renting(unless you own the whole building) Condo is buying. 

Fort Garry is excellent and they are building some new ones there across from the university near bison drive. You'd be able to find student renters for a year or 2 at a time.


My thoughts would be. 
Buy condo with heloc. 

Pay off condo. 

Use 65% of condo to buy house (large down payment) 

Rent condo. Live in house. 





Tell us how you plan to do this all?

Buy condo, 
Borrow against the condo to put in nonregistered stocks earning you 5% or more. 

Get that house on a second mortgage at a much higher/risky rate rent out your condo. 

Keep playing the stocks?




Mind I ask you how much investments you have had to pay taxes on already?


If you are extremely confident in making at least 5% a year. I would go ahead and try the SM. There are going to be lots of extra risks once you buy a second house and are borrowing like 600k with 200k of investments. To me that sounds scary. 400k in debt for 20+ years if the stocks fail. You can't get out of that hole. And your borrowing rate will get higher on your second mortgage. Renters could ditch out on you leaving you short on income. 

I will let a more experience forum member help answer your questions now. 

But I would also recommend you to look for a younger realtor, he has more time to answer your questions, help and when you are buying an experienced vs young guy won't make difference. Old guys just want your money, don't have time for you. 

To sell go with the experience though.


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## amitdi (May 31, 2012)

I looked at a cpl apartment condo open houses over the weekend. The list price was ~180-200K. I dont think they would fetch anything over 1000-1100 in rent. So I am going to take some more of my time to do some thinking.

Regarding stock returns (say index),
5% annually in next 10-15-25 years -> most probably yes. Going by the past and present, I think it should be somewhat more than that.


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