I regularly have landlords and real estate investors call or email me for advice on lowering their mortgage payments to either increase their monthly cashflow or cover increasing costs managing the property. In business and investing, sometimes it’s about increasing profits, not just cutting costs.
A fantastic investment strategy that many sophisticated investors have been using for years is to investing equity. The idea is pretty simple – borrow funds at a lower interest rate and shift them into an investment that generates higher returns than what you’re paying.
It sounds simple enough, but the challenge becomes accessing the funds at a low enough rate and finding a solid investment that will generate predictable returns. Many of my clients turn to investing equity back into mortgages to find the good returns on something that they understand and trust.
It does sound rather odd, take out a mortgage to invest in a mortgage, however there are many types of mortgages and many possible rates. For an investor with good credit, excellent payment history and decent assets they find they can access funds as low as 2-3% and are able to lend out at 9-12% interest.
Here’s how that could look:
A landlord owns a duplex worth $400,000 and has a mortgage of $80,000. They cashflow $350 each month from the tenants. The investor borrows $200,000 against the duplex at 2.65% interest ($441.67 monthly payments). The landlord invests in second mortgages paying 9.5% interest earning $1,583.33 monthly. That’s a net income of $1,141.66 on top of the $350 rental cashflow.
Who pays 12% interest on a mortgage? Well, many investors need to access funds to complete projects and there are hundreds of thousands of homeowners paying over 20% interest on credit cards who would be happy cutting their interest payments in half.
Most often these investment and debt consolidation loans are short term, as low as a couple months to a year or two, to line up with the renewal date on their existing mortgage. The higher interest is lower than they’re paying and lower than the cost to break their current mortgage. Once their current mortgage is up for renewal they refinance and the investor gets their principal investment. The investor can re-lend the money or pay it back on their own loan, depending on their strategy at the time.
That’s the good news – it’s possible to significantly increase your monthly cashflow on each property you own – including your personal residence. The bad news is it isn’t always easy.
Depending on the number of properties you have an the type of income you have, accessing the equity in a rental property can be a bit of a challenge. Also, you need to find the people who are looking to borrow at 9-12%. That’s why working with an experienced mortgage broker who works with investors is vital to both ensure you’re accessing funds as low as possible and you’re investing your equity in properly screened and safe mortgages.
Want to know more about investing equity or discuss how to get started? Contact me at 905.903.4799 or email at SWhite@MortgagesAlliance.com