The Smith Manoeuvre is a powerful financial strategy that involves using the equity in a homeowner’s property to invest in income producing investment vehicles such as stocks, mutual funds, real estate, or other investment vehicles.
The strategy was first proposed by Fraser Smith in the late 1980s and has gained popularity as a way for Canadian homeowners to access low-cost, tax-deductible financing for investments.
As a certified Smith Manoeuvre Professional and one who has personally benefited from implementing the Smith Manoeuvre strategy, I feel that it is worth sharing that the Smith Manoeuvre has both pros and cons, and it’s important to carefully consider these carefully before acting.
Pros of The Smith Manoeuvre
Tax Deductible Interest
One of the main benefits of the Smith Manoeuvre is that the interest paid on the re-advanceable line of credit is tax deductible, which can result in significant tax savings.
Potential for Higher Returns
By investing the equity in your home in high-return investments, the Smith Manoeuvre has the potential to deliver higher returns than traditional savings or investment strategies.
Leverage Home Equity
The Smith Manoeuvre allows investors to use the equity in their home as collateral, which can provide access to greater amounts of financing than they would be able to obtain through traditional means.
Access to Low-Cost Financing
By using a line of credit instead of a traditional mortgage, the Smith Manoeuvre allows investors to access low-cost financing for their investments.
Versatility
The Smith Manoeuvre can be used in a variety of investment asset classes and scenarios, stocks, mutual funds, exchange-traded funds (ETFs), and other income producing investment vehicles. It also includes real estate types, classes, structures, and locations.
Multiple Accelerators
With the Smith Manoeuvre Strategy, there are several accelerators such as Debt Swap, Cash Flow Diversion, Cash Flow Dam, DRiP, and Prime the Pump that can be employed individually, in series or parallel to: increase returns and net worth, reduce taxes, and shorten debt conversion timelines
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Team of Specialized Professionals
Robinson Smith, the son of Fraser Smith has evolved the original Smith Manoeuvre strategy into an highly organized and systemized online program that also includes certification of industry, financial, and tax professionals who specialize in assisting clients who wish to implement the Smith Manoeuvre
Cons of The Smith Manoeuvre
Complexity
The Smith Manoeuvre can be a complex strategy to implement, and it’s important to have a thorough understanding of the process and its potential risks before getting started.
Risk
The Smith Manoeuvre involves leveraging the equity in your home, which can result in significant financial risk if the investments do not perform as expected. Implementing the Smith Manoeuvre in an unexpected rising interest rate environment can create higher risk and financial strain especially for the unprepared.
Higher Levels of Debt
When converting debt from being non-deductible to deductible, even though the investment debt is deductible, the full debt still exists and is exposed to interest rate fluctuation. Therefore a strategy for reducing or paying off that deductible should be included when considering and implementing the Smith Manoeuvre.
Reduced Liquidity
By using the equity in your home as collateral, the Smith Manoeuvre reduces the liquidity of your assets and can limit your ability to access cash in the short term.
Uncertainty
The performance of the investments made using the Smith Manoeuvre is uncertain, and there is no guarantee of success. This means that investors must be prepared to bear the risk of potential losses.
Cost
Implementing the Smith Manoeuvre can be expensive, and there may be additional costs associated with setting up a line of credit, transferring assets, and managing the investments, and increased interest costs.
Timeline
The Smith Manoeuvre is best considered when there is a long or at least a reasonable timeline for the process to fully implement the strategy, reap the benefits, and reduce the potential and associated risks. A longer timeline will provide for a lower risk when implementing the Smith Manoeuvre.
The Smith Manoeuvre can be a useful and powerful financial strategy for Canadian homeowners who are looking to invest in real estate, stocks, mutual funds, or other income producing investment vehicles. Because the Smith Manoeuvre involves using financial leverage, like any financial leverage strategy it’s important to carefully consider the pros and cons and to thoroughly understand the process and risks before getting started. It can make your financial life rewarding or challenging. It’s always essential to seek the advice of a certified Smith Manoeuvre professional, tax accountant, mortgage broker, financial advisor, and real estate professional before making any investment decisions so that you understand the process, risks, and rewards.
Schedule an appointment with me to discuss how you can implement the power of the Smith Manoeuvre into your real estate portfolio.
