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Purchased an investment property, best way to fund it?

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  • May 7th, 2019 10:17 am
[OP]
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Nov 23, 2004
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Edmonton

Purchased an investment property, best way to fund it?

Hoping to get some help figuring out the best way to fund the property we just purchased. Financing it isn't a problem. Our issue is figuring out the _best_ way to fund it. I'm rounding the numbers for ease of math. We are a common-law couple but keep our finances 100% separate.



We are debt free and have access to 140k HELOC at 4.5%.

Property purchase price: 200k

One of us can afford to pay their half (100k) from their savings account.



What we're trying to figure out is the best way for the other partner to fund their half.



Scenario 1: Take out 50k out of TFSA(TFSA Savings account paying 3% interest), 20k from non registered savings and 30k from HELOC. This was going to be our original plan.



Scenario 2: 20k from non registered savings, 80k from HELOC.



Schenario 3: 20k from non registered savings, 60k loan from life partner and 20k from HELOC.



What we're having a hard time figuring out is which way is going to be the best tax advantageous. Money invested in TFSA provides a net return of posted rate. Meanwhile borrowing money to invest in rental property allows for the write off of interest expenses, effectively making the net borrowing interest rate closer to 3% than the original 4.5% charged by the bank. By leaving the money in the TFSA, the money will keep compounding too.



If there are alternative scenarios or if someone is able to identify which one is the best way to go, help would be greatly appreciated.



Thanks in advance! (Also cross posted on reddit)
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6 replies
Sr. Member
Jun 28, 2018
857 posts
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Toronto
wilbrod wrote: What we're having a hard time figuring out is which way is going to be the best tax advantageous. Money invested in TFSA provides a net return of posted rate. Meanwhile borrowing money to invest in rental property allows for the write off of interest expenses, effectively making the net borrowing interest rate closer to 3% than the original 4.5% charged by the bank. By leaving the money in the TFSA, the money will keep compounding too.
Investment property for 200k? Around where is this?
What kind of property, I assume for that price it is residential and not commercial.

What are the expectations from this property? I think that's the larger concern. Goals and expectations. What is the market like in the area? What is the rent increase potential?


I assume if there's concern over a 3% TFSA savings account "guaranteed" return (how long will 3% rates last? What if it starts going down?) it sounds like the investment property is netting less than 3% after all expenses? (Scenario #1)

I guess you're trying to keep the ownership balanced 50/50? Maybe possible to be loan the balance to the other at a low interest rate and slowly pay it off? (Scenario #3)
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Jan 3, 2013
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Sidney
Why is your TFSA simply earning savings/GIC type returns? That seems like a complete waste.
[OP]
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Nov 23, 2004
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Edmonton
johnnychi wrote: Investment property for 200k? Around where is this?

Welcome to Edmonton! Where real estate investments are returning negative rates on equity! Thankfully the rental rates are still hanging in there.
What kind of property, I assume for that price it is residential and not commercial.
Yes, a condo.
What are the expectations from this property? I think that's the larger concern. Goals and expectations. What is the market like in the area? What is the rent increase potential?
Not sure answering any of these questions is going to help our tax situation. The deal is done and we're closing in 3 weeks. We just have the great problem of having to figure out the most tax advantageous way to finance it.
I assume if there's concern over a 3% TFSA savings account "guaranteed" return (how long will 3% rates last? What if it starts going down?) it sounds like the investment property is netting less than 3% after all expenses? (Scenario #1)
The 3% guaranteed is indeed only a promotional rate and I think it's going to weight in the decision. There is a possibility to lock it in at that rate or close to that.
I guess you're trying to keep the ownership balanced 50/50? Maybe possible to be loan the balance to the other at a low interest rate and slowly pay it off? (Scenario #3)
Yes trying to keep it 50/50. Thinking of lending some of the money to other partner at low rate.

Just trying to see if there's any merit to the idea of borrowing to invest and writing off the interest vs using savings.
Previous wins:
2007
-Fujifilm Finepix Z10FD 7.2mp (Green) 210$
-2x Xbox 360 (Oct 29 & Nov 1) 300$
-2x EA SPORTS
Deal Addict
Nov 9, 2013
4023 posts
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Edmonton, AB
wilbrod wrote: Just trying to see if there's any merit to the idea of borrowing to invest and writing off the interest vs using savings.
I would say you should leverage as much as possible and keep your savings, assuming you have the debt servicing capabilities. The best thing about real estate investing is that you get access to cheap and plentiful leverage which can really help juice returns.
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Member
May 2, 2019
429 posts
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Vancouver
I vote Scenario 2. Lot of flexibility to change it later, so don't sweat it. 3% in TFSA savings is pretty good while you can keep it, so is the loan of (4.5% - deduction). A personal loan can complicate things with no clear financial benefit.

This is not an extra leverage as long as TFSA stays intact. You seem to be quite conservative financially, and that's just fine in the current economic conditions. It's not wrong to borrow when it costs essentially nothing and not increasing your risks.
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Aug 2, 2010
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wilbrod wrote: Yes, a condo.



Not sure answering any of these questions is going to help our tax situation. The deal is done and we're closing in 3 weeks. We just have the great problem of having to figure out the most tax advantageous way to finance it.


The 3% guaranteed is indeed only a promotional rate and I think it's going to weight in the decision. There is a possibility to lock it in at that rate or close to that.



Yes trying to keep it 50/50. Thinking of lending some of the money to other partner at low rate.

Just trying to see if there's any merit to the idea of borrowing to invest and writing off the interest vs using savings.
This is easy-peasy. What is giving you the higher return after tax? The savings or loan payment?

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