# Increasing mortgage on Rental Property



## Lemonade (Dec 7, 2009)

Hi,

I have owned a rental property for more than one year now, and have sat down and worked out the current financial situation of the investment.

The income I am getting more than covers my outgoings, so basically I am in profit. What I would like to do is increase my mortgage on the property, so that my incoming and outgoing expenses just about balance.

As you deduct the mortgage interest from your personal tax. What I am wondering is is there anything that stops me from doing this?

Thanks in advance for your assistance,
L


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## Rickson9 (Apr 9, 2009)

You could also shorten the amortization or increase the term.


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## Potato (Apr 3, 2009)

There are two issues here. The first is the question of what you'll be using the extra money for if you borrow more against your rental: what determines the deductibility of interest is what it's borrowed _for_, not what it's secured _against _(IIRC). Unless you're somehow ploughing the money back into the rental (or buying another investment vehicle like stocks), simply borrowing more against the rental isn't enough.

The other issue is of letting the tax tail wag the dog - if you're making $100 profit and paying $30 tax, you're still keeping $70 for yourself. If by refinancing so you make no profit, then you're paying no tax, but also not keeping any money for yourself. If you need to borrow money, then yes, it's good to try to structure things so that the interest is deductible, but don't borrow just _because _it's deductible -- that really only helps your bank.


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## stardancer (Apr 26, 2009)

Agree with Potato. Don't take a mortgage just to balance income/expenses. You have only been a landlord for just over a year; wait. One bad tenant can cause a lot of damage; if you use up your cushion in the mortgage now, then you have no place to go. You may have a couple of months with no tenants; that will change the balance on income/expenses soon enough.

CRA also expects you to make a profit or it will eventually question the validity of the rental. As long as you show some profit, they generally leave you alone.


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## FrugalTrader (Oct 13, 2008)

I'm not sure what the problem is, isn't the goal of a rental property to be cash flow positive?


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## leslie (May 25, 2009)

*"incoming and outgoing expenses just about balance"*. You cannot zero out your profits by equating cash flows. 
1) A big part of your cash outflows will be toward the mortgage. The mortgage payments are a blend of principal and interest. Only the interest portion is an expense. So a zero-sum cash flow will leave you with income.
2) You had to put down a downpayment on the purchase. People who use cash flow flow to evaluate profitability implicitly assume that a 0% return on that down payment is OK, or that there will eventually be sufficient capital gains on the property to give a good return on the principal. How much capital gains you must realize depends on the size of the downpayment.

Learn how to do a proper evaluation of the profitability of real estate here.

I agree with the comments above - leave a cushion in your cash flows to allow for the unexpected. 


I don't know if this idea is kosher. I have never heard it discussed by tax people. It is to create additional deductible debt by depositing all your rent incomes into one account and paying all the bills from another account with a line of credit. You purposely take this account into the red.


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## msj (May 3, 2009)

Check out this interpretation bulletin on interest deductibility: 

IT533

When/if you understand that, then ask yourself if it makes sense to spend $1 to save 30 cents.

Then learn about using leverage in a rational manner.....


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## DavidJD (Sep 27, 2009)

I would re-work your operating budget with a capital reserve fund in mind. How old is your roof? Are there any major upgrades required soon? 

If you refinance the revenue property to take out some equity some LLords transfer equity on to their personal home where the interest cannot be written off like the revenue property. I am unsure if CanRev likes this but I suspect not. In any case paying down a mortgage with interest charges that cannot be written off is better than aggressively paying down your revenue property mortgage.


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## risirsis (Jan 5, 2010)

I'm pretty sure that's wrong -- the superficial loss should only be for when you continue to hold some of the security after the sale. In this case since all the shares were sold, as long as you don't re-buy before Dec 2, you should be fine.
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