#Should I borrow on a mortgage or a Line of Credit?

Q: I own a house worth about $830,000.00

I am in the last 2 years of my mortgage and owe about $40,000.00

I owe about $65,000.00 on a secured line of credit and about $20,000.00 on a credit card

I plan on doing about $200,000.00 in renovations this year

I am not sure if I should increase my line of credit to include the credit card and the cost of renovations or

A: Hi Geoffrey,

Usually when borrowing large sums of money and for an extended period of time, it makes more sense to borrow these on a mortgage instead of a Line of Credit. Here are the pro s for each:

Line of Credit:

Interest only payments

Open, so can be paid off at any time

Only pay for the amount you are borrowing at any time

Mortgage:

Lower interest rate

Part of the payments are principal (currently around 50% of your payment will go towards principal!)

A Line of Credit is usually priced at around Prime +.5% (3.35%) and most major banks are Prime -.6% on a mortgage (2.25%) so you would be saving around $2,000 per year in interest costs by putting this on a mortgage. However, you may wish to set it up so that you have a larger line of credit to utilize until you have finished all the work, so you don t pay interest for the entire $200,000 right away (like you would on a mortgage) and just make sure you have the right product that would allow for you to lock in that portion once the renovations have completed.

It definitely makes sense to roll in the credit card debts at this time as well.

Assuming you qualify, you can borrow up to 80% of the property value on mortgage and LoC portions and some lenders allow you to have multiple mortgage+LOC portions inside of the product, so this would probably be our advise.

Thanks!

Start a new company for our property business?

Q: My Dad and I are considering investing in a property together and flipping it after we conduct some improvements. He already has a small renovations business and a few trades people as employees. We plan to use the same trades people for the improvements on our investment (flip) property. We re wondering if we should start a new company for this venture to allocate expenses, track accounting and benefit from potential tax advantages. Would running this flip through a new company make more sense than doing it as individuals?

A: Starting a company can be expensive. You are probably looking at $1,000 or so to set it up and then $1,500-$2,000 per year to maintain it. (Tax returns, annual reports etc.)

If you are pulling out the profits right away there isn’t an advantage to incorporating. If you plan to leave profits in the company, then you benefit from the low tax rates.

I suggest you talk with your accountant before making a final decision.

Tax implications when gifting foreign property

Q: We are Canadian and we own a home in the Arizona and would like to give it to our daughter. What are the tax implications for us?

A. When giving properties to our children we have to keep two things in mind.

The first is that it is a deemed disposition as far as the American and Canadian tax authorities are concerned.  You are responsible for tax due on any gain since you bought it.

The second is that there is a maximum amount per year you can “gift” to someone before it incurs a tax liability to them.  So the person you are giving the property to may have to pay tax unless you gift it in annual increments below the “gift threshold”.

My advice is to contact your accountant in Canada.  They will know the Canadian side of it and usually they will know an accountant that is familiar with US tax law.  If not, contact an accountant in the U.S. too.

Good luck!  Ralph

Manufactured Home Mortgage

Q: I want to buy property and have a manufactured home put on it. What type of mortgage should I be looking for? Genevieve

A: Hi Genevieve,

The best way to get a mortgage for this is to arrange it so that you take title to the land and the manufactured home at the same time and get a mortgage at the time that the manufactured home has been placed on the property. You may be able to get a mortgage up to 95% financing for a manufacture home mortgage if this is the case, minimizing the amount of down payment required.

You can usually arrange with manufactured home companies to pay them once the mortgage funds come in a few days after the home has been set up. The home would be set up and completed a few days before the completion date of the land purchase which will give time for the lender to arrange an appraiser to inspect the building and confirm it is ready to be lived in and confirm the value.

It is even easier if the manufactured home seller owns the land themselves as you only have to deal with one seller instead of organizing both sellers to ensure both of their requested timeframes can be met.

A manufactured home is not to be confused with a trailer as these mortgages can be different. In fact, some lenders still don t lend on manufactured homes at all.

Feel free to contact me if you have any further questions!

What are the implications of holding or selling?

Q: We own our home outright and it is valued around $850,000. We are considering holding our home as a revenue property and have been told it can rent for $3,500-4,000; and buying a new condo around the $1 million mark. We can qualify for the condo value. What are the implications of holding or selling?

A: Good Question! The gain in equity on your personal residence has been tax free and will be until you switch it over to a rental property. If you choose to hang on to it you have to notify Canada Revenue Agency. I would discuss the nuts and bolts with an accountant but basically come up with a value for the property on the date you move into your new condo. Any subsequent gain in value will be subject to capital gains tax after that date.

The main question to ask yourselves will be: “is the $850,000 house a good investment or would it be better to buy a different type of revenue property?”

The tricky part of the transaction if you decide to keep the house is how can you make your new mortgage tax deductible. Talk to your accountant to see if you can borrow money against the revenue property and be able to write off the interest against rental income if you use the funds to buy your new condo. I don’t think you can do this. You may have to sell the house, pay for the condo with cash, and then take out a mortgage for a downpayment on a revenue property. Only then do you have the proper trail to claim the interest as an investment expense.

I think you are on the right track. Good luck!