How Every Real Estate Investor Should Structure Their Mortgage

There are three phases in real estate investing: Acquisition, operation/management, exit strategy.  I believe, prior to acquisition, there is another very important phase; the mortgage setup.

Real Estate Investor: The Mortgage Setup

Investment Property

Investment Property

Whether the real estate investor intends to buy one or five investment properties, setting up the primary residence mortgage appropriately is key for future needs or moves. Setting up a re-advanceable mortgage is something every real estate investor or homeowner should have as long as they have a minimum of 20% equity in their home. Here is an example of a mortgage structure: In this case the real estate investor has a mortgage for 65% of their home value and the remaining available equity they can access (15%) is setup as a HELOC.

How Do Re-Advanceable Mortgages Work?

As the real estate investor pays down their mortgage via regular mortgage payments or increased payments or pre-payments, the built up equity is added to the HELOC portion. Over time, the 15% HELOC increases as the mortgage portion (65%) decreases for a total debt amount of 80%. Here is an example of how the real estate investor’s home mortgage would look like after a while:

Investment Property

Investment Property

3 Reasons Why The Real Estate Investor Should Use This Setup?

  1. Access to capital: If the real estate investor decides to buy another investment property, need the funds for rainy days or emergency repairs, they can access their home equity easily via HELOC

  2. Tax efficient: Using borrowed funds for investment purposes provides a tax benefit as the interest portion is a tax deduction (DISCLAIMER: Consult a professional accountant for tax advice)

  3. Savings: Having the ability to access equity in the future, eliminates the need to refinance the mortgage and incur mortgage penalties and legal fees

Caution: Borrowing from a HELOC for downpayment purposes will put the investment property into negative cash flow territory since the investment is technically 100% financed (20% borrowed from HELOC + 80% conventional mortgage from a bank or a lending institution).  Although, there are tax benefits to borrowing the 20% from a HELOC, it is imperative the real estate investor understands the cash flow implications and can cover the monthly shortfall. Advanced Real Estate Investor Tips 1. Some banks will offer a re-advanceable mortgages on investment properties. It’s good to ask since it’s another way to access future equity if needed 2. Whenever the mortgage comes up for renewal, restructure the re-advanceable mortgage to reflect the new property value. This move will provide access to additional equity via HELOC You probably can see the real estate investor can quickly get underwater from the negative cash flow if leveraged 100%. In acquisition phase, this might be expected, as the real estate investor builds their portfolio of investment properties (two, three or five). However, once the acquisition/expansion phase is complete, it is important to quickly shift focus on debt elimination to produce positive cash flow. Sounds overwhelming? Want to invest in real estate? Let’s chat.


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