Wealth Building & Tax Strategies For Real Estate Investors

[00:00:12] Welcome back to the Canadian Real Estate Investor Podcast. My name is Nick Hill. I'm joined every Tuesday and Friday by Mr. Daniel Foch, but it's not just the two of us today. We are joined by two other extraordinary gentlemen, John Orr and Kyle Pierce. I don't even know how to introduce you guys as podcasters or investors or consultants or guys that throw events or influencers or all this.

[00:00:37] Why don't I just stop there and turn it over to the two of you and why don't we start the show by telling us a bit about who you are, what you are doing now and what you have been doing and then kind of how we met. And then everyone listening, don't worry, these guys are real estate experts as well. So we're going to get into a whole bunch of cash damming and Smith maneuver type strategies for real estate investors. But before we get to that stuff, over to you, fellas. Awesome. Awesome. Not sure who should go first, but I'm just going to jump in here. Apparently you are. You just took over.

[00:01:05] Gentlemen, thanks for having us on. It's awesome. You folks have been an inspiration to actually what motivated us to start our own podcast in this, we'll call it wealth building world, right? Real estate, the way, you know, and investing and so forth. It's all about trying to, you know, get get better, get better as people, but then also get better along our wealth building journeys.

[00:01:28] So I'm Kyle Pierce and, you know, John's with me. I'll flip it over to him in a second here. But we're really excited to dig in with some, you know, some ideas, some strategies, quick little, you know, backstory about us.

[00:01:42] I'm sure you had mentioned, you know, not sure what to introduce us as well today. We're podcasters with you later today. We had the opportunity that we turned down to become a house inspectors for one of our units where we finally have a tenant that is now finally evicted and gone a year.

[00:02:00] But we said it's Friday. We're going to let it sit so that we can ruin maybe Monday or Tuesday's day and vibe instead of ruining a Friday vibe. So that's it. You know, John, go ahead. Give them a little, a little backstory. Sure. Sure. Like if we start where we are now and reverse, you know, and, and, and reverse the story is that, yeah, like we, we, you know, Kyle just said, we have, you know, real estate properties. We are active investors.

[00:02:27] We host the Canadian wealth secrets podcast, which we talk about wealth creation tools and, and, you know, hidden tax secrets and, and hidden kind of things that we maybe not think about on our wealth building journey on our journey to fire or retirement early. And we didn't start there though. Like we, we came from, you know, a long line of, of, you know, different ventures and different opportunities that kind of got us to, to that point.

[00:02:54] And actually our podcast title was not the Canadian wealth secrets podcast. When we first started, we, we, you know, transitioned to that after kind of digging into the, what do we really want to talk about? But, you know, our story started, we're both high school math teachers. We were in a different world, you know, a different life, high school math teachers for a number of years. I taught math for 19 years. And on that journey, Kyle and I met because we were, you know, doing some, some great things in our classroom and sharing them.

[00:03:21] So we were active bloggers in that, in that, you know, in that world and sharing, and then became presenters and became kind of leaders in the math education and professional development kind of world. We still have an active consulting business in that world where we meet with, you know, math leaders all across North America, partner with them and help them strengthen their math programs. Like we, we still have that arm of, of one of our businesses.

[00:03:45] And from that, you know, in a way, I think our story evolved from there because we had success there and success there that we never really anticipated. You know, we, we were teachers and then we became all of a sudden business owners and entrepreneurs. And because of that success, we started to, you know, gain obviously revenue and, and income that we were like, what do we, what do we do with this? You know, we were teachers. We had this like mindset.

[00:04:10] Now I'll say we, I, I had this mindset of the, you know, if you ever, you know, if you think of rich dad, poor dad, Kyle was like already had the rich dad mindset where I was the poor dad mindset. And that's kind of how a lot of our differences kind of come from there where, you know, I didn't have a lot of thought around what we were doing with money. Kyle has a lot of thoughts around a lot of things and kind of, you know, spearheads where we, where we go on our vision.

[00:04:36] But we, we took, you know, our success there and started, you know, figuring out how do we invest? How do we, how do we become real, you know, real estate investors? You know, what, what are some of the, the assets that we want to be putting our, our money into that created, you know, another kind of flywheel effect that also created revenue streams for us. And it kept building from there. And, and, and that's where we started to share our successes on our own podcast, which was originally called the invested teacher podcast.

[00:05:04] We were, you know, practicing teachers saying, Hey, we want to teach you, but, but also talk about, you know, what it looks like to take say pensioners and become investors. And then it became more than that. And then we talked to, you know, more generalized, rounded individuals and, and kind of like built another business on top of that.

[00:05:26] And, and, you know, so we have multiple businesses as, as entrepreneurs, but really came from, you know, the two of us joining up and figuring out that we're committed to working together because I think we work so well together and, and it just spawned into new opportunities, new businesses. I don't know. I said a lot there, guys. I'll let you stop talking so that you can interject. No, no, no, no. That was, that was fantastic. I think what I'm, what I mean, the first thing I'm hearing is you guys have an always led with value, right?

[00:05:55] You've come from a place of, of teaching and sharing information, which I think in today's world is, is extremely important and really the only way to, to, to do it. But what I'm also hearing is the importance of this partnership between the two, you know, obviously Dan and I are partners on a few different businesses and, and I've been working together for years.

[00:06:13] And within real estate, especially when, for those starting out or for those leveling up, it gets to the point where, whether or not you have a direct partner, such as, you know, our, our two parties here, or you have kind of loose partners that are on your power team. The partnership and working with others is absolutely crucial when it comes to, especially real estate related entrepreneurial ventures. But talk to me a little bit about the, the partnership between the two of you, how important that is, why do you think it works so well?

[00:06:43] And, and I want our listeners to, as they go out and look for their potential next partner or are in an existing partnership to be able to kind of use this to analyze if that partnership is gonna, you know, get them to where they want to be. You know, interestingly enough, you know, when, as John mentioned, I, I sort of picked up that rich dad, poor dad book back, you know, back in probably around 2007, 2008.

[00:07:09] So I was, I was on that journey before I even met John and before we started those business ventures. But I actually have another partner, a real estate partner, his name's Matt Bigley. He's a realtor now, but he also came from the education space. And, you know, while I'm not encouraging people to necessarily have to, you know, go to their office and go like, who in the office is gonna be my partner here?

[00:07:33] You know, it kind of worked out that way for us being from, you know, the same industry and so forth. But really what's, what's really important, I think is connecting and trying to figure out, like, you have to have enough things that are alike about you. Obviously you have to get along, but then you also need to have some differences as well, right? So you need to have some complimentary skills and, you know, something I, you know, interestingly enough, now all three of us are partnered on many deals, right?

[00:08:03] So my, my original real estate partner, Matt is now partnered with this guy, John, that he never knew. Now, why? Because John actually has a lot of skills that me and Matt aren't really great at, right? So John is very great on the operational side of things. I'm more on the, we'll call it, you know, the bigger thinking, the vision planning, the, these numbers pencil, you know, sort of thing.

[00:08:26] And then Matt has kind of, he's kind of in the middle, like he's got, he's got a lot of each side and, you know, and that, and I would argue he, he loves chatting with the actual, you know, the, the actual clients or the, you know, the sellers, right? So that's why he's a realtor. So it's a really great, you know, mix. And I see John's laughing.

[00:08:47] So you probably want to add something in there, but, but ultimately at the end of the day, when you're partnering, I think that's where you gain the confidence. We all have this doubt, you know, self, self doubt in our mind. And I remember when I bought my first property, it was by myself. It took me a very long time to do it. And I'm telling you, it, it was scary. Like it was very, very scary.

[00:09:11] And when I went to go buy more, we, we were looking at a six unit building and I was not going to pull the trigger on this thing by myself. It, it was, you know, it, it, we'll call it, it needed more than lipstick on a pig and the numbers were good. Everything looked good, but it's the unknown. And it was only when I kind of bumped into Matt and we were chatting about real estate just by chance.

[00:09:36] And I mentioned this property and he said the address knew all about it. And he said, he's been watching it too, you know, and that's when we sort of got serious about partnering up. And, you know, so partnering is all about like, what skills can you bring? But then it's also about having accountability partners so that, you know, whatever's going on in your own mind, you can kind of say it out loud.

[00:09:59] Have someone sort of unpack whether yes, that's logical or no, that's like emotional trash, you know, that's going on in your mind. And I think for us, it's, it's really allowed us to, to do a number of things, both in business, but also on the investment side of things in real estate. Right. Well, I was just going to kind of build off what you said there just a minute, Kyle, about, you know, this, this idea of accountability. Like we were even just a conversation with Matt last, last week about, you know, about coaching in general and, and, and business coaching.

[00:10:29] And, and he said, what do you guys do? You know, do you have, do you have a coach? Like I, he had a, he had a real estate coach that he was working with. And we kind of said, you know, we, we don't have a lot of coaches. Like sometimes we've hired coaches for specific outcomes. And then we, you know, we moved on from, from, you know, having coaching in that specific area. And it was, and he kind of was like, he had an ongoing coach. And I said, I said, I think Kyle and I have each other. So we continually talk about, you know, what are our strategies? What are our goals? What are the things that we're working on?

[00:10:58] You know, let's, let's, let's try this. Let's try this. What are you going to be doing this time? And what am I going to be doing? So we, we hold each other accountable. We also are each other's coach. And, and I think that has, you know, projected us to where we are now because we can rely on each other. And, and I think going back to what you said to Kyle, the complimentary skill sets, you know, I think, I think there's, you know, you, you were a big proponent. Kyle's a, one of the, you know, he's a, he's a hole digger or a rabbit hole goer, you

[00:11:25] know, he, he's a fact finder and he'll say that first and foremost, which is, you know, like, you know, the Colby test guy, like it was one of the things that you took the Colby test. And then you're saying, you have to take the Colby test, which is like a personality test. And we were exact opposites in a way that complimented perfectly. And we didn't know at the time, like we were just working together and we both took this test. And we were like, this is the exact perfect mix that you want when you have two partners, because we compliment each other so well. And I think there was another resource that I remember reading way before we did the Colby

[00:11:55] test, which was called the book called rocket fuel from Gino Wickman. And, and rocket fuel describes that every business, you know, has these two, these two personalities or these two roles. And sometimes, you know, sometimes in entrepreneurship, you're both roles, which is the visionary and the integrator. And, and at the time, I think we both maybe didn't think about ourselves in certain roles, but that was the first time we realized that this book described us, our partnership perfectly

[00:12:23] is that Kyle is very visionary, but doesn't like to work with all the little details. Whereas I don't want the pressure of thinking about being a visionary, but I would love to work with giving the details. Hey, let's agree on a goal. You can figure out the goal. I love to dig into making sure that that goal hits and what are the things that we're going to be doing to hit that goal? So we do that in all aspects of our business and all our businesses. Um, we, we both complimented each other well because of those, those two roles that we

[00:12:50] kind of just come, you know, naturally work well together because of it, but we didn't really know at the time. Do you guys think generally that, um, real estate investing is better with a partner or like given that you've experienced both? Well, it's interesting because I think it depends on what you mean by that. Because if you say returns, I would say, oh, it's better solo, you know, get in there, do it by yourself. You know, when everything works out great, then obviously it's great to do it on your own.

[00:13:17] But I would argue, and based on everything that we do, um, I would argue it's easier to take action when you have partners. Uh, and again, part of it's the trust part, part of it's the accountability part, you know, removing doubt. But then also I would argue that when you're in it and things don't go as planned, you know, you can work through it together and you sort of have each other too, you know?

[00:13:45] So for example, like I said, we, we could, after this recording, we could have booked some time to go and feel really bad about ourselves. When we walked into that property where, you know, we had taken this building on and we inherited a tenant and we got a really good price because of it. Now we're realizing maybe that price wasn't good enough. Hey, I think we're still, I think we're still in the green here. Exactly. But, but at the end of the day, you know, doing that and having to deal with that by myself,

[00:14:15] I don't know if we would be as far ahead. So while there's, you know, we'll call it three of us on most of our deals, right? That means you get a third of the upside and, you know, the third of the benefit, but I would argue we probably scaled much more significantly than I ever would have on my own due to fear, due to, you know, wondering whether I'm doing the right thing. So having that team mentality, I think is, is one of the biggest pieces, especially if

[00:14:44] you're going to do it and you're going to own the real estate yourself. And you're not going to look to, you know, let's say funds or, you know, JV partnerships where it's more or less, I'm a money partner. And, you know, I sit on the outside here. It's like, we're all money partners and we all come together, but we all have different roles at the table as well. Yeah. I think that's, that's a key thing that you just, you just hit on because I think when you have, when you have a partner who has the same goals and you have complimentary

[00:15:13] skill sets, there is almost, it's invaluable at that point because you get the benefit of coaching because you get the benefit of, of someone who's in it with you because you get the benefit of having someone who can do skills that you normally aren't say great at. Because when you, when you reflect, if you did do it solo and you were looking for greatest returns, you could buy all of that. You could hire and contract work out. Like you can design your team to give you what you need.

[00:15:41] Like you could hire a real estate coach to help you through some of those. So you have that confidant, that accountability partner, you can hire someone to kind of do the things that you don't want to do. Like there is, there is that side of things that can say, Hey, I'm going to optimize for my return. But when you have say that invested partner who are you're sharing profits with now, which means like now it's not a contract work and now you have to give up say the equity that you would have had in these properties because you have a direct partner, but you get those

[00:16:07] like, it becomes in a way compounded growth because of the, of the complimentary skill sets that you have, but you get to work together in this. And I think as long as you can find that it's worth it, I think. And for, but also we're biased because this is the, this is where we came from. Yeah. You can't have a couple of business partners on here saying, no, it's better off alone. I wish, I wish I didn't have this guy. I've been trying to cut this guy out for so long, you know, and I just can't seem to do it. I think it really goes back to, you know, if you want to go fast, go alone.

[00:16:36] If you want to go far, go together. Right. Right. Okay. Let's segue over into some of the real questions that we've got for, for you two gentlemen. I see both a big sigh there. Don't worry. This isn't, we're not going to hit you with anything that you guys aren't expecting, but we did want to talk about, again, Smith maneuver, cash jamming, and then some VTB stuff as well. Where do you guys want to start? Is there a place that makes sense to start that would kind of weave into the rest of them? I'll turn that over to you.

[00:17:01] Well, you know, I think Smith maneuver is one of the ones that is, especially for a, an investor who's starting out, oftentimes they're doing the Smith maneuver, whether they maybe recognize it or not, or at least using elements of it. Right. Which is this idea of, you know, borrowing against your primary residence for those who are going into real estate. And I'm sure, you know, guys, you've talked about it and many other shows we've, we've done some analysis on it as well.

[00:17:30] Hey, your primary residence is not an investment. You know, it's like, it's something you like. It will grow in value, of course, but the costs and so forth that you're probably better off renting. However, for those people who are actually looking to become real estate investors, a lot of times they start with their own home, you know, and they start thinking about, Hey, I'm going to, I'm going to pull a primary residence and maybe that's part of their, their lifestyle goals that they have anyway.

[00:17:58] I know it is for myself and my wife and our family. And, you know, you're paying into this home and there's a lot of money going in, in the old school mindset. We'll call it the poor dad mindset. And this is John. This was me before I picked up that book as well. So, you know, full disclosure, I was well on the path to overpaying my mortgage on my home so I could get that mortgage down to zero because that was the goal. You know, like my parents did it.

[00:18:27] Everyone else that I knew that had, you know, quote unquote, some success. Now we're not talking about like very, very wealthy people, but people that were seemingly successful, had a home, eventually retired, you know, seemed to have enough money where, you know, they, they weren't, you know, penny pinching. And ultimately after some time I picked up that book and went, Holy smokes, I got a lot of money stuck in the walls of this home.

[00:18:53] And it was only then when I recognized that, you know, I could pay this mortgage off to zero, but the value of the home is going to appreciate at whatever rate it was going to appreciate at anyway. And when I started to recognize that if I had investments, I would be able to potentially put myself in a much better spot. I could actually create income. Now, whether I borrowed against my home in order to buy stocks and bonds, or whether I

[00:19:23] borrowed against my home to buy real estate, the reality is, is that, you know, that interest on your primary mortgage is not tax deductible. Whereas if I do borrow against the home for investment purposes, be it in, you know, be it into real estate, be it into the stock market or any other type of investment, I can write off that interest against income, which is a really fascinating play.

[00:19:50] And you start to think to yourself, wait a second, I can keep this asset. I could borrow against it to buy another asset, which ultimately we hope over the long term, I say, we hope historically over the long term should outpace whatever I'm paying in interest, not to mention that with the actual tax deduction that we get on that interest, you know, that interest rate doesn't look as maybe scary as it might be.

[00:20:17] You know, we use the example of a, you know, high income earner. Of course, that's where you're going to see a lot of benefit where they might be in a 50% tax bracket, their marginal rates over 50%. You get half of the interest back on that loan. That's a massive, massive benefit, especially when you're looking at inflation rates like we've been dealing with over, you know, the last 18, 24 months or so. The way I think one of the benefits, I think about the Smith maneuver, it's like a baby,

[00:20:45] a baby step to more, you know, more advanced, you know, strategies for wealth creation. So like the idea of using other people's money or it's just your money. It's just you're, you're born against the equity in your home, but you're still the part, the part that I think is, is the baby step to the, say the next level of going like, how can I acquire more capital to make moves with? So if I have the deals that are coming in place, can I access, like I need capital to make

[00:21:11] those deals. And if you know that that flywheel needs to move, acquiring capital is, is that necessary move to have so that you can move when you're ready to move. The Smith maneuver obviously gives you access to that capital. But what I like about it as a beginner or a baby step is, is helping you with your mindset around debt. Because in order for us to say, make those moves on, on using other people's money or, or acquiring capital in, in different situations or alternate in alternate places,

[00:21:41] you have to be okay with, with the idea that you're going to borrow money to make some money or to invest. And sometimes that's a really hard idea for people to kind of grasp their mind around, you know, even though you can, you can articulate with data and spreadsheets, the show of the art, you know, the arbitrage between the two rates. But still it's like, I have this interest that I have to pay if I borrow against the value of my home on my home equity line of credit.

[00:22:06] And, and this is producing cashflow, or maybe it's not producing cashflow, but this idea of like, if I can do that with this relatively safe asset that I currently live in, then if I can do that consistently and get my mind around that, then when I have say opportunities to find alternate places for capital, it's easier for us to like go grasp that. So it's like, if I'm starting,

[00:22:31] it's a really great starting position to say, borrow against the value of your home or, or put value, you know, put money onto your mortgage so that you can borrow more so that you can then make the deal. It's just a great starting place for people who are like, I'm, I want to do this, but I just don't know where to get my, my capital from. So you mentioned, um, it kind of being like the gateway drug, let's call it. I think you used a much better term, but, um, you know, the stepping stone to

[00:22:57] getting to another, um, more kind of advanced tax policies. I'm, I'm hoping you were setting yourself up for a good segue because I'm curious to know, like, what are those more advanced tax policies that, that one might, might want to use and, and kind of what, what's like the, the, the package that you're offering to yourselves or to real estate investors that you would recommend that they kind of, um, use to really, to maximize. It's the most common question that we get on the show. How do we tax structure well to, to be real estate investors?

[00:23:26] Well, yeah, actually there's, there's three common questions we've got on the show. One, I have no idea which market it's either analysis or, or, or it comes down to what, what Dan just said. And the third one is where do I find the capital? And I think you guys just, just answered that as well. Like you might already have, but you just don't know how to access it. Exactly. Exactly. So it's definitely a great place to start. It's, it's where I began, you know, my journey was when I, I recognized I was taking all this extra money instead of putting it

[00:23:53] somewhere else. I was putting it in the home. Well, I could take that money. I could redirect extra money directly into an investment such as real estate, or like John, you, you just briefly mentioned the actual Smith maneuvers, the idea that any money I'm putting into the home, whether I'm paying the exact mortgage amount, or if I'm paying over the mortgage amount, so I can open up additional equity that I can then borrow and put somewhere else. It's like, it's like a process.

[00:24:19] So while the first time I did, it wasn't quite the Smith maneuver. I basically just took a home equity line of credit, took this big chunk and put it on my first property as the down payment. The Smith maneuver is the process of actually trying to take any dollars you put into the home as principal, paying down this mortgage and actually keeping the debt number the same, and then getting to write off that interest. And here's what I think John was getting at.

[00:24:48] When we're talking about tax, a lot of times people think they have a tax problem well before they really have a tax problem. However, if you're on a wealth building journey, it's certainly not a bad thing to start thinking about what is it going to look like when you get closer to those wealth building goals? Because if you get closer to your wealth building goals, it's probably not just to have a bunch of equity. We know there's a lot of real estate investors out there that are like

[00:25:16] very equity rich cashflow poor. But the ultimate goal at some point in your journey is going to actually flip that table around to go, I'm actually cashflow rich. And I don't want to say equity poor. We of course want to keep equity as well. There's equity rich as well, but ultimately it's going to be a cashflow play. And when that cashflow starts, and as the cashflow starts compounding, John used the word flywheel. We love thinking about everything in this idea of like, you know,

[00:25:46] when you're starting the investment journey, you're like trying to get the flywheel going. It's like, you don't have a tax problem yet. Even once that flywheel starts going, you might still not have a tax problem yet. Cause why you might've borrowed the equity from that first investment property to put into the next property. So you're getting the flywheel going, but you still don't necessarily have a huge tax issue. The issue starts when your actual income, especially passive income,

[00:26:11] either personally or corporately starts to become significant. And at that point, the more cashflow you have, you want the cashflow, but you also don't want the cashflow because if you have too much cashflow and you don't have anything to write off against that cashflow, you're now taking a large chunk of money and you're getting this opportunity. I always say it's a good problem to have when the government

[00:26:36] wants to take half of it. It means it's a lot. That's good. But what's bad is you just lost half. So when we start the wheel and this flywheel starting, we're starting our investments, we're starting our wealth building journey, but at the same time, you're kind of thinking ahead to go. Most people want to pay off debt, but in a way, when you get to these wealth building goals and these cashflow goals in particular, you actually want debt, debt that actually can be written off.

[00:27:06] So it can't be a big mortgage against the primary residence that you used. And you just personally use this money. It's got to be debt against investment income or debt against investments, I should say. So that we can write off some of this cashflow against the debt. We still get to keep a lot of it, but we get to write off a lot of it as well. So we're trying to really gauge and minimize

[00:27:33] the amount of tax that we're going to pay specifically in the later part of the journey. And a lot of times upfront, people might go like, it doesn't feel like a lot or their mindset holds them back from the idea of having debt. But remember, if you have a lot of equity and a lot of cashflow, this is actually going to be really helpful for you so that you're not showing a massive income on your actual tax returns. You're actually able to keep it in check, growing your net worth while

[00:28:02] still having those cashflow numbers that you're after. So like Kyle was saying, the Smith maneuver allows you to structure that to say right off against your investments, which will save you that tax. But eventually what happens is that either you don't want to go against your primary residence, or you've maxed it out and you're looking for, I want, I want the, you know, where else do I get

[00:28:27] capital? Do I have to partner with someone to get that capital? Do I got a, do I got a, I got a JV, JV with someone? Like what does that look like? And, and the way that we're been structuring our deals in the last number of years is we can create capital for ourselves, you know, and, and one of those, one of those techniques Kyle's been taking deep dives on is, is how do we use certain cash, you know,

[00:28:51] basically cashflow structures or cash cash pass-through structures to be able to put investment dollars into just like, just like basically recreating your Smith maneuver, but not using your primary residence. So you put your money in, into the, into the mortgage, pay down the mortgage, opens up capital, take that capital, invest to it. All of a sudden you got a tax write-off. We can be using other structures to be able to do that same thing. It's like,

[00:29:18] let's put money into the structure. Let's borrow against that structure. Let's use that to invest in by the, by the income producing asset. We write off that, that debt as against that. All of a sudden I got a, I got a tax, I got a tax credit there to be able to kind of reduce that, which is the cycle that you want to create when you're investing is like, make sure like, let's optimize to get that tax credit so that we can write off the income. And we get, there are, you know, there are different things you can do. Like you can, you can borrow against your home, you know, like you buy a

[00:29:46] rental property and you want to say, refinance that, take the equity out. All of a sudden you now, you could, you really just created that to do that. Like people are using that structure already. You could be loaning against values in homes to do, to do that work. Or you, what you could be doing is you could be buying other assets and other asset classes that allow you to do that same thing at a, a safer level. And, and one of those asset classes that I think sometimes people shy away from,

[00:30:12] which is, which is whole life insurance in, in, but a whole life, a carefully structured whole life insurance policy against your life actually is a safer and better asset to borrow against than say your primary residence or your residence or, or your, or your real estate property that you have against. It's, it's something there that you can structure and use in exactly the same way as, as, as the other ones and actually give you even better tax, tax efficiency strategies for

[00:30:39] the longterm for yourself now, but also for your, for your estate later. Yeah. I don't know if you want to give me any specifics or Nick, you want to ask a question? I just want to, I just want to pause there because I'm listening and there's just, just an enormous amount of very valuable information being thrown around, but I want to put my, put myself in, in the position of it. Sure. I'm a listener to the show. I've got maybe one investment property. I'm, I'm working my way up.

[00:31:03] What I'm hearing is, is very enticing to me, right? I can save money. I can, I can access more capital, but I don't, I'm, I'm listening to this and I have no idea how to execute this. Do I just go walk into my accountant's office and say, Smith maneuver me or what, you know, what, what is the actual process for implementing some of the strategies that you guys are talking about here? Yeah. It's definitely something that, you know, if you're using an accountant, which most real estate investors, you know, bring an accountant in.

[00:31:30] You should always a good, yeah. Always a good idea. Having that discussion to make sure that, you know, they're on board, you're on board, like everyone's clear on what that looks like and sounds like. Now that said, full disclosure, you could, and we're not recommending it, but you could, if you have a home equity line of credit, so it's secured against your primary mortgage, whether it's re-advanceable or not, meaning

[00:31:57] whether the actual credit limit goes up as you pay down the mortgage or not, if you're using those dollars and you're borrowing those dollars in order to put it into an investment, right? And you can go look up the definitions, you know, it doesn't have to pay a dividend, but there has to be a goal of profit. This is true for business as well. You borrow against your home to start a

[00:32:22] business because there's an anticipation of profit there, right? That you're actually going to earn income on that investment. You can write off that interest. So that interest becomes a tax deduction. So that part, it's fairly easy. Now there's nuances to it. And of course, you don't want to just borrow against it and throw it into anything. For example, for a very long time, I didn't like the idea of

[00:32:47] borrowing against my home in order to put it into the market. I know a lot about the stock market. I know, and I see the historical returns, but you know, emotionally, are you okay to see that you owe X number and the market's down and now you owe, you know, like now you owe X, but you only have X minus 20%. I don't know. Like, I don't know how that sits. Right. So that can be a little bit different. So you obviously want to be very cautious and careful when you're utilizing leverage, but that,

[00:33:17] that typically is how a lot of real estate investors get started. Cause as we all know, especially in Canada, especially in Ontario and BC, where, you know, we know a lot of, of listeners of your show are likely from, or, or looking, you know, those properties are so high that down payments are of an, of a number that it's not realistic for the average Canadian to just sort of save up the seed fund. Right. So you usually do have to use some leverage in order to

[00:33:47] make that happen. So there's, there's nuance to actually doing the Smith maneuver and performing it, but then, you know, having people reach out to folks like you, Nick, to be able to go, okay, listen, even if I have equity against my home, like what are the debt, you know, the debt service ratios look like? So that will a lender actually give me a 80% loan to value mortgage? If my down

[00:34:11] payment is coming from my line of credit, right? Am I going to be able to make this work? And of course there's so many rabbit holes we can go there. So debt is, it's a massive, massive and important tool, but it is complex as well, which is, you know, to our points earlier, like you want to make sure you have a good team around you, whether it's team of partners like we have, but also the

[00:34:37] people you're working with, like your accountant, your mortgage broker, your realtor, these are all really important pieces of the puzzle to make sure that, Hey, you don't have this idea. And then you go to, you know, get it done. And then you, you don't recognize that. Oh, shoot. You know, Nick could have told you that. Guess what? You know, your numbers are a little too tight. We might have to, you know, get rid of that car payment, for example, in order for, you know, the numbers to float. You're just being nice, Kyle. Cause you got a, you got a mortgage agent, a realtor right here. We appreciate it.

[00:35:09] So you, you mentioned a couple of things in regards to like starting a business, having a business, the rental property being a business in some cases. And I know like a couple of the things that you alluded to would be one of these like mystified topics that we tried to do an episode on with our limited, not, not even just knowledge, but like the scope of things that we're allowed to discuss. But cash damming is a big question that we get. And I think a lot of the things that you just mentioned were, were kind of had fallen into there, into that. But

[00:35:37] this is something where I think people would kind of take out more leverage in, in a different category, like separate from their, their sort of, sort of personal life to kind of apply it to the business to, to maximize that tax strategy. Can you just broadly like tie everything that you just said into sort of the umbrella of cash damming and sort of what that is and why people might use it and when people might use it? Yeah, absolutely. So, you know, cash damming and Smithman, we'll call like cash damming is sort of like a, an extension of, you know, the Smithmaneuver. So,

[00:36:07] you know, if everyone's got this visual of like any dollars that I put into my primary residence, and then I borrow back for investment, I can write off that interest as a tax deduction. That's the goal there. Well, with cash damming, this can work for real estate investors who own property personally, or maybe they're sole proprietors. So I'm talking about business owners out there who

[00:36:33] run a business, they have cashflow coming in from the business, and then there's probably expenses in the business, right? So it doesn't matter if it's a real estate business, and I'm using my little bunny ears for rental properties that you own personally, or any other type of business that you might be running where you're personally receiving income. So there's no corporation involved here. Because with cash damming, basically what you're going to do is you go, okay, let's say I have, you know,

[00:37:01] $1,000 coming in every single month from my business, rental property, consulting, whatever it might be. I have this extra, this $1,000. But I know that I have about $500 of expenses every month, except those expenses don't come in on the same day that I get paid, or that I receive this income. If it's a regular business, you might get that $1,000 scattered throughout the month. And of course,

[00:37:28] this is scalable, right? $1,000, $10,000, $100, doesn't matter what the number is, same concept. That as the income comes in, your expenses don't come in the same day. So it's not like the money's coming in, and then the expenses are going out. The same is true if it's a rental property, although your rent's likely coming in, hopefully on the first of the month, right? Unlike our case with this one unit where it was never coming in. Cash damming didn't work for us here. You got to have the cash coming in for it to dam it.

[00:37:57] You need to have the cash coming in. Now, here's the nuance. So it's not like, you know, you have to make a commitment to it. And it's like, if the cash didn't come in, then all of a sudden the plan blows up and, you know, you're done. When the cash does come in, the idea is that you take that cash and instead of just letting it sit there in the bank account, waiting for those expenses to come before, you know, it eats down and then you get your $500 of profit. And then, oh, there's going to be a tax bill on that $500, right? I'm going to have to pay

[00:38:26] it at some point, right? Probably at the end of the year, instead of waiting to that point before you decide what to do with this 500, you know that $500 is going to be profit. $500 is going to be expense. We take the full thousand and we actually pay it down on the primary mortgage. And what that does is that opens up on that re-advanceable home equity line of credit. It

[00:38:50] opens up a thousand dollars of borrowable cash on the home equity line of credit. So what you've done is you've knocked down your principal by a thousand bucks. And over the rest of the month, when these expenses are going to come out, you slowly borrow those expenses to pay them. And we've now created a higher balance. Now, the nuance here in this example, it doesn't matter if

[00:39:16] it was a thousand and 500 in profit or whether it was a thousand coming in and a thousand going out, it really doesn't matter. But what we've done is, is we've taken a thousand dollars of principal that was requiring non-tax deductible interest to be paid to now become tax deductible. So even if I had to borrow the full 1000 to pay for the expenses of the business, this is not expenses for you

[00:39:42] personally, you know, you went out to dinner and you know, whatever it is, we're talking about expenses for the business, the rental business, or your consulting or whatever business it is, you now have a thousand dollars of principal on a tax deductible account where now the interest I'm paying on that will be tax deductible. Okay. Did you want to add something there before we? Yeah, I can add, I'll add one specific thing because I think when we think about either the

[00:40:11] Smith maneuver or this kind of advanced spinoff for sole proprietors and entrepreneurs as the cash damning strategy, sometimes some of the barriers folks have when they think about this is, is that arbitrage between my mortgage rate and my line of credit rate. And am I really just transferring, because all I'm doing is transferring debt from one space to another. And I'm really, am I,

[00:40:36] what am I doing? Am I adding more liability in, in, in interest liability if I have a higher rate on my, my line of credit versus my, my mortgage. And while, while it seems like that might be true, when you transfer from one to the other, you know, we did a, we did a full episode on this idea of like using the Smith maneuver in high interest rate environments. And we did, we took a deep dive and looked at historical data. We looked at different scenarios and we basically, you know,

[00:41:03] mapped out different amortization tables. And we, we took, you know, this case in this case, and in the long run, it didn't matter. It didn't matter. Right. Kyle. Like it was like, it was still a better move to do that in the long run, whether your interest rate on your home equity line of credit was higher than your mortgage. Cause that was, that's the case for a lot of us right now. Right. We've got, we've got mortgages that were locked in for, you know, three, four years ago, five years ago. And now all of a sudden, you know, we are, you know, we had a high interest rate

[00:41:30] environment for a number of time, but we, we, in a way proved through that experiment that it didn't matter. And it was like, it shouldn't be a factor in your decision-making that that if that's, if that was like holding you back. Yeah. And, and the nuance with the cash damming worth noting is that the number of days that you're saving to not pay interest on say that thousand dollars. So if let's say all your expenses were just trickling in throughout the month, you've got like a 30, 31 day

[00:41:58] window where there's a lot of dollars that are not going to pay any interest that month. So that's really helpful. That's a bonus of course, with cash damming, but ultimately at the end, it really comes back to, again, do I have a tax problem or not? If I'm in one of the really low tax brackets, then this arbitrage might not be as attractive. Right. But as we have more income coming in, when people start, they usually have a full-time job and then they have this extra rental

[00:42:28] income coming in, for example, like as you have more and more income, as you start to move up the brackets. Now the interest rate arbitrage is going to matter less, not to mention that once your traditional mortgage term ends, you sort of have to renew, as you know, Nick, you know, we're renewing now at higher rates that are going to be a whole lot closer to what you're going to be paying on your

[00:42:54] home equity line of credit anyway. So even in the short term, if let's say you had a really low rate, you know, I'm going to, I'm going to like brag a little bit and say like mine's still at one, eight, four fixed on my home mortgage, but it's coming due, right. Which is going to be, you know, a big shock and a big punch in the face. Once that happens now, all of a sudden my fixed mortgage, if let's say I go with a five-year fixed is probably going to be a whole lot closer to that home equity line of

[00:43:21] credit rate. And therefore it doesn't take much in terms of the number in my tax bracket to sort of make that arbitrage definitely makes sense and be a long-term payoff. I feel like we're, we're pretty much at almost at our limit here on time, but I want to quickly use this to kind of mention the things because we're doing this almost as like a two-part episode. So if anybody's interested in learning a little bit more about the last thing that I think we'll try and

[00:43:48] touch on, if we can do it quickly in like a couple of minutes here is we, you know, we talked about a lot of strategies for people who are acquiring or owning, but one of the things that is very common in real estate today, and especially with, with baby boomers and a lot of people right now, we're going to talk a little bit about this on your show, selling properties in the U S for example, we're hearing about a lot of people selling their homes in Florida, et cetera. And moving cash back to Canada, the VTB and the VTB capital gains deferral. I guess that's maybe the, is that what it's

[00:44:16] called capital gains deferral. Do you want to talk a little bit about that? Cause I know you guys are going to mention how you love buying VTB deals. And we'll talk about that on your show, but, but what about, what about selling? What's the advantage of someone selling a property? Cal, I'm going to defer to you, but you being the VTB master. There you go. I, you know what, in during times, especially like we've seen over the past couple of years, especially here in, in Canada, but really across North America, the real estate market has

[00:44:42] softened. And, you know, we know that that means there's going to be some opportunities coming. It really puts people in a position where, you know, you kind of have like, and it's still happening. You have a lot of sellers out there that sort of kind of are like, oh, they're like, I wish I would have sold and, you know, end of 2021, beginning of 2022, you know, they're like, wish I would have, could have, but they're still like unwilling to bring their price point down to a point where it can actually sell. Like that's basically where we're at in the market

[00:45:11] cycle, right? Where sellers want too much buyers. It's not that buyers don't want to buy at all. It's that they're not willing to buy at that price. Why interest rates are high and, you know, it may be the market, you know, will soften some more. So there's just like this middle ground. And with a VTB, like a vendor take back or seller finance scenario, what it allows you to do, why I like them so much is that first of all, during these, we'll call them soft times for sellers,

[00:45:41] it, it kind of puts me in a position where we're not going out and just trying to buy any old deal. We're really having to sort of overturn some stones. And really the idea is that if that seller has a significant amount of equity, it's even better if they own, you know, the property outright, they might consider holding the mortgage for the buyer. And that would be in our case, that would be us, right? And what that allows us to do is a number of things. First of all,

[00:46:08] it allows us to potentially get them the number that they want on paper, right? So, you know, a lot of times sellers are like, they're less interested in say what interest rate they would earn if they're holding paper, but more on the actual number on the sale. Now, from a, you know, tax perspective, that's actually not a logical move, right? But it's, it's psychological. People want to know. It's like, we, we got our price, you know, like we won and that's fine. And we can help

[00:46:38] so we can be creative with the terms, not only making it easier in terms of underwriting and so forth. You get to work with them on the terms in order to make sure that the property is going to pencil for you as the investor, right? Because I mean, it's got a pencil for me, it's got to work for you. And one of these bonuses that sellers get is they get essentially a five-year period to,

[00:47:03] to pay some of the capital gains on that property instead of having to take them all at once, which is a nice thing to be able to offer to sellers as well. So it really does allow them to have some tax savings along the way as well. It also, in many cases, satisfies what they were going to do anyway. So quick story, nine unit building sat on the market in our area for quite some time. This particular

[00:47:29] seller wanted a price. We couldn't make that price work, took us over a year. Finally, we offered a seller finance opportunity because I asked the seller, like, what do you plan to do with the money once you sell the building? And his plan was like very, very conservative, you know, very conservative fixed income type investments. He had hidden his financial freedom numbers and he was retiring and he just wanted it to be easy. We said, imagine if you could have that by

[00:47:59] keeping security against the building that you know and love and that you've had for 25 years, imagine if you could do that and achieve the same goal that you were after anyway. And we were able to come up with a pretty creative deal that made him a winner, allowed him to defer some of those capital gains as well, and gave him that monthly income that he was after with a reasonable interest rate in a slightly unreasonable interest rate market environment for investors.

[00:48:30] Yeah, yeah, love that. Okay, well, let's, let's wrap it here. We will continue this conversation for everyone listening that wants to hear more. We're going to continue this on another podcast because yes, John and Kyle, you do have your own podcast. If people wanted to reach out to you, or maybe go listen to that the kind of part two of this episode, where is the best place that people can find out more about the two of you. So we're going to continue this over on the Canadian Wealth Secrets podcast. So in any podcast

[00:48:58] platform, you're listening to one right now, go to your search, go to your search fields, you know, and type in Canadian Wealth Secrets, and it's going to pop up and find the episode that you want, or, or scroll, you know, scroll through the episodes and find a topic that you think is, is going to be relevant to you. There's, there's a, there's a bunch there. So Canadian Wealth Secrets, we'll meet you over there. Amazing. Thanks so much, gentlemen. The content of this podcast is for educational and informational purposes only. It is not intended

[00:49:26] as financial, legal, or investment advice. Always consult a qualified professional for advice tailored to your unique circumstances. The views expressed are those of the hosts and guests and do not necessarily reflect the opinions of affiliated organizations. Daniel Foch is a real estate broker licensed with Valerie Real Estate Inc. Website is Valerie.ca, V-A-L-E-R-Y.ca, and a member of the Canadian Real Estate Association, the Ontario Real Estate Association,

[00:49:54] and the Toronto Real Estate Board. Nick Hill is a mortgage agent and partner at OWL. Mortgage license number 10317, agent license M21004037.