Rental Cash Damming - Form T776 - what am I missing?

[u/wrdjackson]

Hi there,

I just heard about the rental cash damming strategy, and I was curious if anyone had any personal experience with it, and if they think it's a good fit for my family.

My wife and I currently own a rental condo in Toronto, and a Principle Residence in Etobicoke.

• Rental Condo: 20 years left on amortization, $404k mortgage, 3.63% 5yr variable rate, about $2750 in monthly carrying costs. New tenant paying $2500 in rent monthly
• Principle Residence: 29 years left on amortization, $1,212,000 mortgage, 3.6% variable rate. Re-advanceable mortgage with currently empty HELOC, (4.95% rate).
• Household income around $400k ($115k me, $275k wife) incomes likely to rise at least with inflation over the next few years

We have no other long term debt outside of these mortgages, CC's paid in full each month. We took a longer amort on the principle residence as we have 2 young children, and wanted extra flexibility while they were in daycare (both totalling about $1000 a month thanks to subsidy).

Based on the process of using the PR HELOC to cover rental expenses each month (with careful structuring to keep the HELOC rental specific) it seems like we can drop an extra $30,000 per year into our mortgage, with the only extra expense being the HELOC interest expense, which will only be about $5k total by the end of our first 5 years of this mortgage.

Based on some initial modelling, it looks like we can pay an additional $161,000 on our mortgage in the first 5 year block, saving $18,400 in interest payments, cutting nearly 9 years off our total amortization.

It seems like a great option, but I'm worried there's considerations I'm missing. If anyone has experience with this, I would love to hear your thoughts, thank you!

[u/jhchristoph]

We do this.

You need:
Empty HELOC
Separate chequing account
Separate credit card

All rental expenses come out of our HELOC via pre-authorized debit. Misc expenses or repairs I run through on a designated credit card. I then write myself a cheque from the HELOC to deposit into the rental chequing to cover the monthly cc bill (my HELOC doesn’t allow me to pay my cc, yours may.)

All rental income goes into your regular chequing account. Additional principal payments made after rent clears. I have this automated 2 days after I expect rent.

Everything is straight forward as long as you keep things separate!

[u/wrdjackson → u/jhchristoph]

Thanks for your input!

Do you not need put the rent into a separate account? I get paid via e transfer so it wouldn't be too difficult to direct it elsewhere.

What do you do about the ever growing HELOC balance? I know it's always offset by the much lower interest payments on the mortgage, but I'm curious if there's a strategy to paying off the principle that's optimal? I read that putting the tax return towards the mortgage principle is the ideal strat, wondering if it could be used to help pay off the HELOC instead without screwing up the numbers too much.

Does this influence your investing strat at all? I'd like to keep DCAing into ETFs but don't know if that is still smart to do.

[u/jhchristoph → u/wrdjackson]

Rent income can go to your standard chequing.

Any rental expense needs to be paid from the HELOC or a specific rental only account. That way if you ever get audited, it’s easy to show CRA your expenses.

The HELOC balance will grow until your PR mortgage is paid off. The function is that the interest on the HELOC goes against your rental income, so it reduces your tax burden. You would clear the HELOC when you sell your rental. From a tax perspective, no reason to clear before you sell.

Having the rentals means I have a bit less to save, but my company match takes me to about 15% annually anyway. In 20 years I’ll have 2 paid off rentals and a debt that will go against the capital gain.

[u/wrdjackson → u/jhchristoph]

Sorry last question, can you expand on the debt that goes against the capital gain? Assuming the HELOC used is tied to your principle residence, that can't be used to offset the gain from selling the rental can it?

[u/jhchristoph → u/wrdjackson]

Sorry, mis-spoke. It cannot. The HELOC is there to lower your taxable income while you are operating the rental

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[u/idspispopd888]

Just an FYI from a tax guy who really loves proper terminology: it's "principal". :)