# 2nd Rental Property! Cash flow question



## sharp21 (Aug 6, 2009)

We now have 2, both with good tenants & cash flow positive.

For the last 3 years with the first property we have been banking the excess for a rainy day & just paid the tax on it every year. We now have a bit of a float & would like to start putting the excess onto the principle.

My question is can I put all of the excess for the year onto one property & NOT pay taxes on that money, because it is going on to the mortgage? Or will I need to pay tax on that money anyway as it is money earned? I would like to pay enough to have no profit/loss for the year, or very minimal profit.

The long term plan is to put the excess from both properties onto one of them until it is paid off, then use its mortgage payment to pay down the next, etc.

Thanks
S.


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## Sampson (Apr 3, 2009)

You pay tax on all the income.
What you do with that income (paying down the loan) does not make it free of taxation (unless it goes into an RRSP or something)


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## sharp21 (Aug 6, 2009)

So what if I restructure the mortgage so that the excess is now needed to service the loan? Ie the mortgage eats up any excess? Payments up profits down
S.


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## Spudd (Oct 11, 2011)

Mortgage payments that go to principle aren't deductible. The only way you could restructure your mortgage to make the payments deductible would be to raise the interest rate which would be stupid.


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## sharp21 (Aug 6, 2009)

What about a shorter amortization period?
S.


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## Quotealex (Aug 1, 2010)

Only the interest portion of the mortgage is tax deductable.


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## mrcheap (Apr 4, 2009)

You could do this with cash damming (http://www.milliondollarjourney.com/the-cash-flow-dam-explained-cash-damming.htm). Not that it's necessarily a good idea to do so, but you could.


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## sharp21 (Aug 6, 2009)

I've looked into cash damming but still have over a year before refinancing my home mortgage...

Basically I'm looking at something to do before years end to reduce my money earned on the place. Maybe some maintenance then...

S.


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## colossk (May 11, 2011)

Unless you have a 6-plex or something along those lines the interest you are paying from your positive cash flow is going to be pretty minimal even at the highest tax bracket. Even if your cash flowing $400/month, it's not that much. Not enough that your going to want to avoid paying taxes on it by spending the excess on uneeded maintanence. Don't forget you are going to have to eventually get a new furnace/roof, repaint, have vacancies etc.


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## Sampson (Apr 3, 2009)

Shorter amortization will only make it worse since the amount of interest you pay will be reduced, more goes towards the principle (and will further reduce the deductability)


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## sharp21 (Aug 6, 2009)

Okay that all makes good sense. I appreciate the input.

Still nothing wrong with putting the extra onto the principle though right? I am trying to build more equity in one of the units so that I can show it to the bank when I go for number 3!

S.


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## Sampson (Apr 3, 2009)

Nothing wrong with earning cash from your investments. Maximize deductions through the normal means (expenses associated with the rental) and enjoy.

Congrats on the success. Most real estate investors are not so lucky.


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## Berubeland (Sep 6, 2009)

Hi Sharpe, 

If your intention is to buy a thrid property just keep it liquid in the bank. It may well come in useful for emergencies, but it looks just as good there as in the equity and you don't have to refinance/pay fees to get it out to buy the third property.


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## sharp21 (Aug 6, 2009)

That was actually my other option/train of thought.

What about incorporation? The next property is going to be an apartment building. My wife already does the property management & we would like to pay her a wage, pay dividends to investors & limit liability. Good idea or keep it sole proprietorship for now?


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## Berubeland (Sep 6, 2009)

It depends on the size of the building in question...


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## sharp21 (Aug 6, 2009)

Well we are looking at something between 6-12 units. So nothing massive. But this will just be out first multi-family, with plans for future expansion
S>


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## Quotealex (Aug 1, 2010)

Incorporating just to own a 6-12 units building, may not be a good idea!


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## iherald (Apr 18, 2009)

Quotealex said:


> Incorporating just to own a 6-12 units building, may not be a good idea!


I feel the opposite. First off to start a corporation is cheap, but it's good protection. lets say something happens at one of your current rentals, they can come after your personal residence, your other rental and now your apartment building. Even if you ensure it, why allow any risk? 

I would certainly incorporate for that reason alone, for tax purposes it might not help much but you can do dividends and the like.


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## Quotealex (Aug 1, 2010)

@iherald. I'm not sure incorporating will help in your example if you are the director in your company. You are better off getting a good liability insurance coverage for such a case IMO....


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## Cal (Jun 17, 2009)

sharp21 said:


> What about incorporation? The next property is going to be an apartment building. My wife already does the property management & we would like to pay her a wage, pay dividends to investors & limit liability. Good idea or keep it sole proprietorship for now?


I would ask these questions to your accountant, I am sure that they will be able to provide you with the information you need.


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## Just a Guy (Mar 27, 2012)

Most banks will charge you corporate lending rates if the building is owned by a corporation, that will add at least 1% to your mortgage. I think TD is about the only bank that will lend a corporation at personal rates (and you'll still need a personal guarantee). Then you need to factor I the accounting fees (average $1500/year to file). Plus your personal income won't benefit from the deductions...oh yeah, and if you transfer your first two to the corporation you'll trigger a capital gain.


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## Rusty O'Toole (Feb 1, 2012)

Incorporating cost in various ways and does not always protect from loss. Most lenders require the borrower to take personal liability even if the property is owned by a corporation.

Best use of the money is to pay off other debts like credit card debts and car loans. Lenders are leery of that kind of debt, they do not care much about mortgage debt because it is secured, and because the mortgage is on property that produces an income.

If you are debt free except for the mortgage, congratulations. Start an investment account of some kind and include it in your financial statements as an asset.


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## Quotealex (Aug 1, 2010)

@Just a Guy. I once had a conversation with a fiscalist lawyer who told me that there was a method of transfering real estate properties under your personal name into a company that you owned without triggering any capital gain....


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## Chris L (Nov 16, 2011)

Okay, now I've heard it all! You want to minimize your earnings for your rental property so you don't have to pay taxes?!?

Are ya nuts?

Seriously, backwards thinking my friend.

I try to squeeze all the earnings I can out of my rentals. I enjoy paying taxes, it means I'm getting money for ME.

Nothing wrong with paying down your mortgage or pocketing profits. Nothing. Pay the taxes, save, spend the rest, who cares.

But seriously, if you want to reduce taxes owing...hire me as a consultant. I charge no more or no less than exactly what you earn cashflow positive reducing the taxes you owe to zero. Deal?

Has this conversation far too many times with my Mom, and she's over 60 and still doesn't get it. But funny enough, she still wont hire me as a consultant


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## Chris L (Nov 16, 2011)

Okay, now I've heard it all! You want to minimize your earnings for your rental property so you don't have to pay taxes?!?

Are ya nuts?

Seriously, backwards thinking my friend.

I try to squeeze all the earnings I can out of my rentals. I enjoy paying taxes, it means I'm getting money for ME.

Nothing wrong with paying down your mortgage or pocketing profits. Nothing. Pay the taxes, save, spend the rest, who cares.

But seriously, if you want to reduce taxes owing...hire me as a consultant. I charge no more or no less than exactly what you earn cashflow positive reducing the taxes you owe to zero. Deal?

Has this conversation far too many times with my Mom, and she's over 60 and still doesn't get it. But funny enough, she still wont hire me as a consultant


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## Taraz (Nov 24, 2013)

One thought: You probably want to make sure you take the max allowable building depreciation each year for your properties (assuming you're planning to hang onto them for the long term). It will decrease your annual income taxes, but increase the size of your eventual capital gain. (Assuming, of course, that you're making enough income that the depreciation is useful.)


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