A similar way to do the same thing would be with a rental property (which is NOT the Smith Maneuver). Say I had a mortgage on my principle residence, and bought an investment property that was breaking even (lets say it cost me $1300 / month and I collected $1300 / month in rent). Let’s say I have a $100,000 4% interest-only mortgage and I’m paying $334 / month on it (the interest) and I can afford to pay this every month.

First I get a HELOC on my principle residence (I could get it on the investment property, but if the expense equals the income it probably doesn’t have the equity, plus it’s easier to get a HELOC on a principle residence). Say the HELOC is 6%.

Each month I pay my principle residence mortgage payment from my income and that’s taken care of. Then I also put down an extra payment of $1300 (from the rental income) of the mortgage on my principle residence. Doing so creates $1300 of extra room in the HELOC. I pay for the $1300 in rental expenses from the HELOC, and the interest on this $1300 debt is now tax deductible, since I borrowed it to pay for investment expenses. (along with any amount on the HELOC which was used to make the down payment on the property and to pay for transactions fees, such as a lawyer, RELATED TO THE PURCHASE OF THAT PROPERTY).

I still have to pay tax on the $1300 in rent (it’s income). I’m also converting a 4% loan into a 6% loan. Even if it’s tax deductible, that doesn’t seem like the smartest idea in the world. Additionally, if my mortgage in fixed rate, I’m trading the certainty of my payments for the variable rate of a HELOC.

Ultimately, once my mortgage on my principle residence is paid off (after 76 months, or 6.5 years if we ignore the increasing interest on the HELOC and the decreasing interest on the principle residence mortgage) I can, of course, get a new, tax deductible mortgage to replace the HELOC. This process would be accelerated if there was more than one investment property (or if the income / expenses of the rental property was higher).

Ben

That being said, I certainly shouldn’t use my own definitions of terms without clarifying, thanks for catching me!

THAT being said, I *THINK* I’m still cash flow positive. At the beginning of my investment (when I wrote this), most of my mortgage payments were going to interest. I was paying about $500 / month, 400 going to interest, 100 going to principle, so I’d still be $150 cash flow positive.

To be TOTALLY FAIR, I now agree with the Canadian Capitalist that vacancies and maintenance should be included with the calculations, which would make me about break even.

To be even MORE FAIR, I put a larger than standard down payment. For a cash flow positive property to be at all impressive, it should be purchased with a standard down payment (20%). Anyone can just pour more money into a property until it’s cash flow positive (I did it to get a loan when I was self-employed).

Thanks for a comment on an older post, your kind words and for clarifying cash flow!

Given your numbers, I suspect you’re cash flow is negative as cash flow should include all cash outflows (i.e. mortgage interest AND principal, condo fees, property taxes, etc.) and all inflows (i.e. rent). I think you left out the mortage principal from your calculations.

In the end…as long as you’re showing a positive net income , you’re doing well and building wealth though (assuming property values aren’t depreciating dramatically).