How Many Investment Properties Do You Need?

Over the years working with real estate investors, I have come across very interesting answers when I ask "How many investment properties do you need to buy?" I have heard from 1 property to 40 properties, 1 every year for the next 5 years, don't know... Most stumble when I ask why? It starts with why. Simon Sinek explains the importance of starting with why in his TED Talk

There are many reasons for buying investment properties, here are some:

• Retirement income
• Fund children's post secondary education
• Job replacement (one spouse might be considering leaving their job)
• Supplemental income
• Family legacy
• Full time real estate investor
• Investment diversification (real estate and stock market)

Once a reason or multiple reasons are chosen, determining how much monthly income the investment properties are to generate is the next step.  This goal can be achieved via different investment properties options (single family, duplex, multi-family, commercial....) and various geographic locations.

To complete "why invest in real estate" analysis, reverse Engineer the number of properties you need and have your personalized "how and where" plan developed, click here.

Investment Property Mortgage Qualifications Don't Make Sense!

There have been many changes with respect to mortgage qualifications in Canada. Above and beyond the 4 major changes announced by the Minister of Finance over 4 years, there have been changes on the backend on how lenders qualify applicants.  The most recent one is mind boggling!

Investment Property Mortgage Qualification

For an applicant reporting a surplus on their T1 general (line 126), the surplus (line 126)  is added to their income.

Example: Applicant's income is $100,000 and line 126 is showing $5,000, total applicant's income is $105,000. If the applicant owns other investment properties, here is the part that makes no sense: The principal portion off the annual mortgage statement is deducted from applicant's income!

Example: Applicant has paid down $10,000 of mortgage principal in the previous year, total income: $100,000 plus $5,000 less $10,000 = $95,000.  This rule effectively penalizes real estate investors who build equity in their investment properties.  Last time I checked statements made by Minister of Finance, Bank of Canada, Bankers..... they all advocate paying down debt and building equity now while interest rates are low (Canadians are at record high debt to income ratio).

This rule effectively encourages not paying down mortgage principal. Had the applicant paid more interest than principal in the previous year, the mortgage principal deduction would have been less and therefore their net income higher!

If you are thinking of showing a loss on line 126, it's even worse: Income less loss on line 126 less mortgage principal.

Are you confused and frustrated with all these guidelines? Rest assured this is what I do on a daily basis and I am here to help you navigate through the mortgage qualification  land mines to build your real estate investment portfolio. It's all in the setup.....Happy Investing!

How To Mortgage 8 Investment Condos

There is no denial it is more challenging today to mortgage investment condos in Toronto.  Some of the changes over the recent years are:

• The days of 5% downpayment and 40 years amortization are long gone
• Some lenders have a minimum square footage requirement
• Some lenders require more than 20% downpayment
• Some lenders require borrower pay for insurance premium above 65% loan to value

and the list goes on.  But don't be discouraged. Here is mortgage underwriting 101 and a road map to help the investor mortgage 8 Toronto investment condos:

1. Start With The End Goal

The mortgage setup of each investment condo plays a critical role in helping or hindering the qualification of the next investment condo. Knowing what the investor's ultimate goal (8 condos or 3 condos) requires a different mortgage financing strategy. Some investors approach investment properties with "I'll buy another one" which is a problem in today's financing world. Over the years, I  have come across many situations where the mortgage was setup with a short amortization period or the wrong mortgage product which restricted qualifying for another property.

2. Focus On Cash Flow

Setting up each condo to positive cash flow helps to qualify the next investment condo.  There are 4 methods of cash flow analysis lenders would consider in mortgage qualification:

T776 Statement of Real Estate Rentals

Some lenders would use line 9946 to add to investor's income if the figure is positive.  This is where many investors go wrong. They try to show a loss which reduces taxable income however it hinders qualifying for the next investment condo since the negative figure translates into a liability on the mortgage application.  Showing a positive figure and paying some taxes is not a bad thing!

50% of Rental Income

This method is a deal killer.  For example, assuming the investment condo is rented for $1600 per month, the lender would only use $800 as revenue then deduct 50% of condo fees and mortgage payment.  Good luck getting a positive number without a large downpayment.

Rental Surplus Calculator

Lenders use the rental income generated by the condo and deduct mortgage payment, condo fees and 15% of the rental income figure.

The Wash Method

This is where the lender would look at the rental income being generated and as long as the rental income covers mortgage payment, condo fees and property taxes, the investment condo would not help or hinder in qualifying for a mortgage.

Stretching the amortization to 30 or 35 years and getting a variable mortgage would increase cash flow and help qualify the next investment condo.  In real estate it is location, location, location and in the investment property mortgage world it is cash flow, cash flow, cash flow which sometimes means a greater than 20% downpayment.

Keep in mind today's qualification guidelines could be different next month. The mortgage financing landscape changes frequently based on government requirements and lenders' risk analysis. So what works today, might not work tomorrow!

Mortgage Broker or Bank 

Most, not all, lenders have a cap of 4 investment properties per borrower. Understanding where the investor wants to be long term helps in structuring the mortgages appropriately and placing them with lenders who accept a portfolio of more than 4 investment condos. Choosing an experienced mortgage professional who knows where and how to place these mortgages can save the investor tens of thousands of dollars. No investor wants to be in a situation where they walk into the bank to finance their 5th investment condo and get "sorry, we can't help you since you are capped". Then what?

Looking to invest in Toronto condos or have an existing portfolio? Please contact Nawar to help you achieve your long term goals.

Legalizing Basement Rental Apartments

Basement rental apartments are popular in Toronto and make homes affordable for many in the city since they have the potential of generating $1000-$1500 per month in rental income. Legalizing a basement apartment requires meeting electrical, fire and building codes. It seems daunting initially but working with a knowledgeable architect can alleviate lots of headaches.  As a real estate investor, I have viewed many properties and found the most challenging part of legalizing a basement apartment to be the ceiling height requirement. There are 2 building code requirements; one for existing basement units and one for new basement units. If the basement rental apartment is existing, the code requires at least 50% of the floor area to be 6'5" high.  If the basement rental apartment is new, the code requires at least 50% of the floor area to be 6'8" high.  The majority of homes' basements built in the city of Toronto were used as utility /storage areas and not as living space.  Nowadays, basements are considered part of the living space for in-home offices, guest bedrooms, children's play area and entertainment space. Lowering the flooring to achieve legal height can be accomplished through underpinning or benching. Both methods can be costly depending on the house foundation conditions, soil conditions and existing interior walls.  In cases where the basement ceiling height is 4"-6" below the required height, there is a third more cost effective option: lowering concrete slab (see image below).

Underpinning Cross Section

A bonus of this option is installing new PVC drains since the old ones are made out of clay and over the years have deteriorated in condition. This method requires drilling holes into the existing concrete slab to locate it relative to the wall footing.  In my experience, I had to underpin one property and managed to lower the concrete slab on another to achieve required legal basement height.  The cost of underpinning can range between $50-70,000 where as concrete slab lowering $15-20,000.

References For Adding A Secondary Unit in Toronto

• Carson Dunlop Basement Apartments Untangling the Web
• Second Suites
• Basement Accessory Apartment Specifications

If you are looking for an experienced mortgage broker to help you navigate through adding a basement rental apartment and analyze the investment property, please contact me.

**Disclaimer: The above information is for reference only and it is best to consult with a professional architect and a licensed basement lowering company as part of your due diligence**

2014 Ontario Rent Increase...The Good, The Bad & The Ugly

Quietly during the dog days of summer, the Ministry of Municipal Affairs and Housing released its allowable rent increase for the period between January 1, 2014 to December 31, 2014.  The rent increase for 2014 is capped at a maximum of 0.8%, yes zero point 8 of a percentage point. Click here for the Ministry of Municipal Affairs and Housing news release.

2014 Ontario Rent Increase: The Good

There are a few exemptions to rent control if one of the following conditions is met:

1. If you are real estate investor who owns a condo that was built after June 17, 1998, then it is not subject to rent control which means the real estate investor/landlord can increase rent to an amount the market can bare without the tenant moving out.
2. If the rental unit has not been rented since July 29, 1975. A good example if one decides to convert their basement into a separate rental apartment. Again in this case, the rental unit is exempt from rent control.

2014 Ontario Rent Increase: The Bad

When was the last time property taxes, hydro rates, heating prices, water & sewers and insurance costs all went up by a total of 0.8%? It is important as a real estate investor to have utility costs (heat, hydro, water & sewers) paid for by the tenant.  Having the tenants pay for utilities puts the responsibility on the tenants' shoulders to conserve energy and pay for what they use.

Controlling rental increase at 0.8% reduces the real estate investor's cash flow as expenses rise. No business owner (real estate investor) would be happy with less cash flow from their business venture.

2014 Ontario Rent Increase: The Ugly

One phrase caught my attention in the news release: "This year’s rate will be the second lowest in history". Is this something to be proud of? I will leave that for you to decide.

Keep in mind, if your tenant moves out, you are allowed to increase the rent to what the market can bare. However, if the tenant is staying, an N1 or N2 must be provided with 90 days notice of the rental increase per the Ministry's guidelines.

If you are looking to start investing  in real estate and not sure where to start or an existing real estate investor looking to grow your positive cash flow portfolio, please contact Nawar.

How To Qualify For Investment Property Mortgage

The mortgage lending landscape has changed considerably in the last few years and investment properties qualification is more stringent nowadays.  A few years ago, one can qualify for an investment property mortgage with less than 20% downpayment. Nowadays, 20% is the minimum downpayment not to mention the amortization has been reduced to 30 years (Note 35 years amortization is available but at a rate premium). Understanding how investment properties are qualified with various lenders can sometimes be complex, however here is an explanation to help the first time real estate investor what they are up against.  The examples below are based on the following:

• Purchase price: $625,000 (duplex)
• Mortgage: $500,000 (80% LTV)
• Monthly mortgage payment: $2,127 (based on 3.09% amortized over 30 years)
• Monthly rental income: $3800
• Monthly property tax: $275

50% Rule

This is the most penalizing rule used by lenders where it only accounts for 50% of the rental income. Based on the above numbers, the net monthly result is a shortfall of $502 (50% * $3800 - $2127 - $275 = -$502). This figure is added to the liability section of the mortgage application hence reducing applicant's qualification amount.

70% Rule

This is more favourable method, where 70% of the rental income is accounted for.  The above example would net in a surplus of $258 which is added to the applicant's income which strengths the mortgage application. At the time of writing this blog post, this method will be scrapped in a few days.

T1 General Line 126

Some lenders allow the applicant to use line 126 in the T1 general for existing investment properties when qualifying for a new property.  Typically, real estate investors maximize capital cost allowance (CCA) depreciation and expense deduction to show a loss.  This might be advantageous from a taxation perspective, however the negative figure on line 126 would be added to the liability section of the mortgage application. Having a positive line 126 figure would strengthen the application since it is added as income (Disclaimer: Please consult a professional accountant to provide tax advice as I am licensed a mortgage broker only).

Rental Surplus/Shortfall

A calculator is used with set figures for vacancy, repairs & maintenance, insurance and management. This is the most favourable method as it nets $638 monthly which is added to the applicant's income.

If a real estate investor is buying a home to for personal occupancy, the above methods are used by lenders in assessing the the applicant's qualification. Qualifying for a mortgage when one owns an investment property can be a daunting task and stressful.  It is important to work with a mortgage professional who is well versed in investment property qualification guidelines to avoid future disappointments. How would one feel if they can't buy their dream family home because they own one or two investment properties?

To avoid disappointment in buying your family home or investment property, please contact Nawar.

Mortgage Fine Print: Collateral Mortgage

There are 2 types of mortgage registration in Canada: standard charge and collateral charge.  Homeowners usually don't inquire about the type of mortgage registration due to lack of knowledge or lack of disclosure by the lender/broker arranging the mortgage.  Mortgage registration is an important fine print detail. There are pros and cons associated with collateral mortgages:

Collateral Mortgage Pros

1. It allows the homeowner to access equity as they pay down the mortgage
2. Legal fees are not required (saving of approximately $1,000) to access further equity
3. Good product if homeowner intends to refinance/access equity prior to mortgage maturity

Collateral Mortgage Cons

1. Due to registration, homeowner will incur legal fees (approximately $1,000) to move the mortgage to another lender at renewal
2. Homeowner loses negotiation advantage if they need to access additional equity since they can't leave the current lender without paying a penalty (3 month interest or IRD) plus legal fees
3. Homeowner might not qualify with existing lender leaving no options to access needed funds
4. Some lenders register the collateral at 125% or 100% of home value, effectively blocking the total amount and restricting the homeowner from accessing equity

Collateral mortgage registration is designed to retain clients at renewal.  With slowing real estate market, less sales therefore less new mortgage originations, lenders want retain more clients.  Homeowners will be faced with a decision to renew at a less competitive rate or pay legal fees to move their mortgage to another lender at renewal.  CBC marketplace did a show on collateral mortgages where they focused on one banking institution. Be aware that other lenders employ similar strategy as well.

Understanding the costs of getting into a mortgage and out of the mortgage at renewal, is important in deciding which mortgage product makes financial sense.  There is more to mortgages than just rates.

3 Things You Need To Know When Selling An Investment Property

As many of you know, I got into mortgage brokering after I purchased my first investment property (triplex) in Hamilton in July 2006.  I recently exited the business venture and sold the property. Overall, the investment was a great one; it appreciated by approximately 50% over 6.5 years, generated strong cash flow from day 1, had great tenants and it provided capital for more investments.  You might be wondering why I sold if it was such a great investment property.  The reality is I live and conduct my business in Toronto, I have 2 young children and I want to focus on buying more properties in Toronto's east end (Leslieville, Upper Beach, The Beach, East York...) where I have a duplex. Selling an investment property can be a tricky ordeal especially when all 3 units are tenanted. Here are 3 things you need to know when selling an investment property:

1. Tenants

You might ask why would the seller care about the tenants if the property is for sale.  What if the property doesn't sell or the deal falls apart at the last minute, then how will the relationship with the tenants be repaired?  As much as investing in real estate is about numbers, it is also about the people. If the landlord takes care of the tenants who are paying customers, they will take care of the property like it is their own home.  The tip here is to speak to the tenants in person to let them know your intentions of selling the property and understand their working hours (you don't want to show the property at 10am if the tenant is a night shift nurse).  Giving the tenants a Starbucks or Tim Horton's gift card is a nice gesture.

2. Period Between Sale Going Firm And Closing

The period when the sale goes firm to closing day is a transitional period where the property has to be kept up and all issues have to be addressed by the landlord such as furnace malfunction and electrical repairs. The property has to be in "working condition" when the ownership is transfered to the buyers. Otherwise, the buyers can come back and request reimbursement.

3. Closing Day

I found closing day to be the busiest day of all due to 2 tenants moving out.  The property had to be handed over in clean condition and free of debris. Having many tenants over the years, certain items were left in the storage area which took 2 trips to the city dump to discard of.  I am lucky to have my realtor who has a pick up truck (he is a real estate investor as well) who helped me purge the garbage.

Everyone's experience will be different depending on the property owned: condo apartment in Toronto, multiplex building or duplex.  Falling in love with the numbers is one aspect of real estate investing, but getting your hands dirty is another part of the business that many don't talk about. Happy investing!

Variable Mortgage Holders Celebrate!

The US Federal Reserve announced on September 13, 2012 that it will embark on a third round of stimulus (QE3) to improve the employment numbers in the US.  What does this announcement have to do with Canadian mortgage rates? Mr. Carney, the governor of the Bank of Canada, has to keep the benchmark rate which sets prime rate relatively close the US Federal Reserve benchmark rate, otherwise the Canadian dollar would appreciate and have downward pressure on Canadian exports due to the higher cost of Canadian goods.  This would be bad for the Canadian economy and force the Bank of Canada to hold its benchmark rate at or close to its current level to late 2015 along with its US counterpart.

If you are variable mortgage holder who has a prime minus mortgage, this announcement is great news since prime would probably not move dramatically in the next while.  However, the risk is as central bankers "print" money to stimulate the economy, inflation will become an issue sometime in the future.  The message here is to take advantage of your current variable mortgage but plan and prepare for the future.

To discuss how you can shave 3 years off your mortgage amortization, please click here. To contact me, please click here.

Downpayment Requirement For Investment Properties

Depending on owner's intentions, there are 2 downpayment requirements for investment properties depending on whether the owner intends to live int the investment property (duplex, triplex, fourplex) or not:

1. 5% downpayment if owner is planning to live in one of the units in the duplex, triplex or fourplex with maximum amortization of 25 years
2. 20% dowpayment if the investment property will not be occupied by the owner and maximum amortization of 30 years

However, it is important to review one's goals over 5-7 years and understand the downpayment requirement if planning to buy additional properties.  The number one challenge for real estate investors is running out of capital (downpayment). It is important to plan ahead and divide the monies accordingly to achieve the long term goals. I have met with too many investors who had the need to restructure their mortgages since the focus was on the next deal and not the long term plan.

To discuss your investment property plans, contact me.

Apple, RIM And Your Mortgage Freedom

June 29th is a special day for the following reasons:

• 5 years ago, Apple's iPhone was launched. It was the birth of Blackberry's nemesis
• Today is the first day after RIM announced major losses, delays in launching Blackberry 10 operating system and 5000 additional layoffs
• It is also the busiest day for lenders in Canada as the highest number of mortgages close today

You might be wondering what's the connection between the above 3 points.  Last year, I was meeting with a few investment banker friends who, at that time, said RIM's stock was a buy since it's price of $16 was undervalued and the company had lots of cash.  Fast forward 9 months, RIM's stock is at $7.4 (June 29, 2012 stock price). It has lost half of its value.  It is important when buying a stock, mutual fund or investment property to buy based on economics: how much revenue is generated (sales of company, rental income a property demands), profits (net profit, cash flow after all expenses are taken into account) and potential appreciation (R&D and innovation for a company, solid area that will experience growth due to jobs, infrastructure or immigration).  Buying (stock or investment property) because someone said it is good to buy is speculation and could result in disaster. Do your own due diligence.

As for the Apple connection, emulating their drive to innovate and improve by continuously reviewing the mortgage, adjusting it and understanding the opportunities leads to financial freedom. Being complacent by getting a mortgage, setting a payment and forgetting about it would be following RIM's path.  There is more to mortgage than rates.

Having a vision (building a portfolio of positive cash flow properties or being mortgage free) and executing a plan would result in financial freedom and not arranging a mortgage on the busiest day for lenders.

To discuss how to achieve mortgage freedom or build your real estate investment portfolio, please contact me.

Numbers Tell The Truth!

There is never a dull moment in the Canadian mortgage landscape with new rules introduced by the Minister of Finance and OSFI, Office of Superintendent of Financial Institutions.  I want to state upfront that I support these changes with the exception of reducing secured lines of credit (HELOCs) from 80% to 65% of home values.  Canada's housing market has been very hot since the credit crunch of late 2008 and the house prices to income ratio gap has grown significantly due to stimulus low mortgage rates. I want to clarify what families will be facing in 2016, 2017 and beyond.  Today's 5 year fixed rates are in the low 3's (3.09%-3.19%) which are fantastic.  However, the extended period of low interest rates will be followed by periods of high interest rates due to the following:

• Focus will turn from stimulus in the global economy to combating inflation due to excessive stimulus (money printing and quantitative easing) since 2008
• Cost of borrowing will increase due the European credit crisis which will only intensify as Italy & Spain (3rd & 4th largest economies in Europe) deal with their debt issues. As you recall, in late 2008 when Lehman Brothers collapsed, money (capital) disappeared from the market, creating a supply issue and variable mortgages went from primes less 0.75% to prime plus 1% in a short period of time

I want to share the following numbers to help you see where I am going:

Family household income (pre-tax): $100,000 Income tax bracket: 45% Mortgage amount: $400,000 Interest rate: 3.09% Mortgage amortization: 30 years Monthly payment: $1912 Renewal Rate in 2017: 5.5% (an increase of 2-2.5% over 5 years is very reasonable based on historical data and the above stated issues) Mortgage payment at renewal: $2103 (increase of $416 per month)

Some would assume taking on an additional $416 per month in 5 years is doable.  Let's dissect a little further:

In order to absorb $416 of additional mortgage payment, the family's pre-tax income has to increase by $9,000.  That might sound reasonable , however, it's equivalent to getting 2.5% raise every year for the next 5 years.  The economy is not in the greatest condition: not many companies are hiring, some are cutting back and the reality is keeping a job nowadays is great news. Furthermore, the increased cost of living (property taxes as municipalities deal with their debt and deficit issues, gasoline which affects goods prices, higher hydro rates....) will eat away into a family's affordability. I didn't mention that children cost more as they grow up!

This blog post is a reality check.  We have been drunk for too long on cheap money.  Plan for the long term and understand how future events should play into your decisions today.  This is a golden opportunity to consider long term mortgages such as a 10 year fixed.

To get more information please visit: www.10YearFixedMortgages.com

Whether you agree or disagree with me, I would love to hear from you.

What You Need To Know About The New Mortgage Rules

The Minister of Finance, Mr. Flaherty, announced today the following regarding insured mortgages which will take effect on July 9, 2012:

• Refinances will be limited to 80% of home value from 85%
• Maximum amortization will be lowered to 25 years from 30 years
• GDS limited to 39% (currently no GDS requirement for 680+ credit scores) and TDS to 44%
• Mortgages over $1 million will no longer be insured

Here is how these changes will impact the following groups:

First Time Buyers

• They will be squeezed out of the market if they don't have the 20% downpayment.  Qualifying at 25 years, especially in Toronto, is difficult due to home prices in the city (condo fees are taken into account when qualifying for a mortgage as well)
• More potential first time home buyers will turn into longer term tenants which is good news for real estate investors
• Parents, get ready to co-sign for your children if they want to buy their first home

Real Estate Investors

• Since more first time buyers will have to wait for their first home, the tenant pool will increase.  This is good news since more demand results in higher rental income
• Qualifying for additional investment properties should not change since government requires minimum 20% downpayment. This is pending conventional mortgage amortization is not lowered to 25 years.  Please note there are lenders offering 35 year amortization for investment properties.

 Homeowners

• If one has 20% equity or more in their home, 30 & 35 year amortized mortgages are available for now.  The changes are not impacting this group, but we will have to wait and see if lenders will reduce mortgage amortization to 25 years

This announcement came out of nowhere and it surprised many.  If this announcement is intended to cool off investors buying condos in downtown Toronto, I'm not sure it will achieve that since the changes are targeted towards insured mortgages only.  Furthermore, this change gives the Bank of Canada room to hold its benchmark rate steady for a longer period of time due to a slowing global economy.  I believe since the Bank of Canada's hands were tied, Minister of Finance came in to help control the high household debt level.

There will be more clarifications coming out in the next few days from the lenders which I will elaborate on. To discuss how these changes will impact your mortgage financing, please contact me.

Bad News If You Are A Real Estate Investor Or Self Employed

OSFI, Office of the Superintendent of Financial Institutions, which regulates the banking system in Canada is proposing to limit the home equity lines of credit (HELOCs) to 65% of home value from the current 80%.  This is a significant change for the following reasons:

• Real estate investors access their home equity to finance investment properties (downpayment for buying an investment property, renovating an investment property until the property is refinanced and emergency funds if required)
• Self employed Canadians access their home equity to fund business capital requirements, cash flow requirements, as well as safety net if urgent matters arise

Canadians have taken on significant amounts of debt over the last few years (debt to income ratio is at all time highs around 1.5:1 ratio), however the mortgage delinquency rate in Canada is less than 1%.  The new HELOC change will have a significant impact not only on self employed Canadians and real estate investors but also other Canadians who use their HELOCs to invest into the stock market to create a tax deductible loan and be tax efficient.

In my opinion, OSFI is overreacting by reducing HELOCs to 65%.  75% of home values would be a reasonable change. Afterall, Canada is known for moderate changes.  Time will tell if this move is a good one for the economy and protects the housing market from a real estate bubble.

To discuss how these changes will impact your mortgage financing needs and options to address your capital requirements, please contact me.

Is It Time To For 10 Year Mortgages?

As a mortgage professional who enjoys numerical analyses and economic discussions, I have had numerous conversations with financial planners, colleagues and clients of mine regarding the direction of interest rates in the future. What's happening in Europe? What if Greece pulls out of the Euro zone? Impact of US dollar on Canadian dollar? Inflation? Mr. Carney and Mr. Flaherty warnings regarding increased household debt?

The above video captures the compelling argument that now more then ever is a golden opportunity to lock into a 10 year fixed mortgage.

I really hope that as many people as possible see this post. I think there is a small window of opportunity since rates may rise at anytime.  Please share this post via social media. Afterall knowledge is power and making decisions based on data is powerful.

Please feel free to contact me to discuss your questions or comments regarding the 10 year mortgage.

Double Your Money By Renting Your Home

Lately, I have been dealing with an increasing number of clients who are deciding not to sell their home.  They are choosing to keep their existing property by turning in it into an investment property and using the proceeds of the refinance to buy a home.  Since the financial credit crunch in late 2008, more Canadians are skeptical about the markets, are worried about having enough to retire and are looking for alternative ways to diversify their investments. A greater number of homeowners, after reviewing the numbers, are deciding to refinance their existing home up to 80% of its current market value, take advantage of today's historic low interest rates and rent the property.  Here is real example that I did for a client who owns a condo in downtown Toronto.

Condo value: $350,000 Mortgage amount: $280,000 (80% loan to value) Mortgage amortization: 30 years Mortgage interest rate: 3.29% Mortgage term: 5 years Annual appreciation: 2%

There are two items to pay attention to in the above chart: 1/ initial equity is $70,000 and after 5 years based on 2% capital appreciation and utilizing the inflation hedge mortgage strategy, 2/home equity is at $135,771.  By having the tenant paydown the mortgage and adjusting the mortgage payment gradually for higher interest rate environment, the home owner almost doubles their money in 5 years.  Imagine the financial freedom a fully paid off investment property would create.

If you are interested in finding out how to turn your current home into an investment property and use your home equity to buy a home, please contact me.

Don't Buy An Investment Property For Cashflow!

You are probably thinking "What is he saying, especially since he always talks about buying an investment property is buying a business". You are correct, buying an investment property is buying a business. Here is what I mean: A property is purchased at $625,000 with a mortgage of $500,000 (80% loan to value), borrowed at 3.99% for a 10 year term amortized over 35 years.  Rental income for the duplex is $3800 per month, which nets $800 after taking into account 10% safety (for repairs & maintenance as well as vacancy).

There are 2 options when it comes to using the surplus:

1. Increase the mortgage payment by $800 per month
2. Use the lump sum feature to pay down the mortgage $800 every month or at a set frequency (quarterly or semi-annually)

If the real estate investor is planning to acquire more properties, option 2 is best, since increasing the mortgage payment would hinder qualification of further properties.  The pre-payment feature would accomplish the same result without sacrificing the ability to qualify for more investment properties.

Let's dig deeper into the numbers:

If the mortgage is pre-paid by $800 every month, the mortgage amortization would drop from 35 years to 20.25 years! Imagine what would it feel like if you owned your investment property free and clear 15 years ahead of schedule and what that additional income would do to your lifestyle.

The next time you are buying an investment property, don't buy it to use the cashflow for personal expenditure, rather use it to payoff the mortgage.

Every real estate investor has unique goals, to discuss your personal real estate investment portfolio and goals, please contact me.