You bought an investment property 5 years ago and it's time to renew the mortgage. Should you renew the mortgage or refinance to pull equity to buy another investment property? This is a common question we get from our investor clients (This question is applicable to your home mortgage as well).
Here is an example to best illustrate the options:
Current Property Value: $720,000
Mortgage Balance: $465,000
Option 1 - Pull Equity to 80%: new mortgage $576,000 amortized over 35 years. Access $111,000 of equity to acquire another investment property (35 year amortization is available for investment properties)
Option 2 - Renew mortgage at current remaining amortization and mortgage balance remains unchanged at $465,000
If the real estate investor is in acquisition phase, it is best to proceed with option 1. This also provides a tax advantage; the interest costs for the additional $111,000 are tax deductible since it is used for investment purposes (disclaimer: consult an accounting professional for tax advice). A key point to consider when deciding how much equity to pull out of the investment property is to stress test the cash flow using higher interest rates to ensure the investment property will not negative cash flow in the future.
If the real estate investor has completed acquiring the number of properties required per the plan, it is best to proceed with option 2 to pay off the investment properties and increase passive income.
Having a plan upfront helps you, the real estate investor, in knowing how many properties are required to achieve your long term financial goals and deciding what to do at mortgage renewal time.