Is it better to have a longer amortization?

[RArora]

Hi!

We are closing end of june on a freehold townhome for $240k with 25% down. We also have a 2 yr lease signed by prospective tenants for $1500/mnth

Monthly break up:
Taxes $225
Insurance $50
Mortgage on 30 yr amortization at 4.25% variable 5 yr rate $881; or mortgage fixed rate 5 yrs 5.25% $987
int only pymnts on secured LOC for downpymnt $235

Cash flow of $109 if go with variable rate right now rates will increase in next few yrs so this will decrease
with fixed rate it drop down to $7 in the first yr but subsequent 4 yrs there will be rent increases so cash flow increases

or wud it be better to take a 35 or 40 yr mortgage with the variable or fixed rate?
what would be the better option to take in the opinion of experienced RE investors?
Thanks

 

[jarrettvaughan]

Of course, it depends on your strategy. If you are looking for cashflow, then the best option is to amortize for 40 years as this reduces your payments. Also, most investors are choosing to go a variable rate with the option to lock in at the fixed rate in the future. This could really increase your cashflow.

If your goal is to pay down the debt, you are best to select the 25 year amort. with a variable rate.


QUOTE (RArora @ May 22 2008, 09:56 AM) Hi!

We are closing end of june on a freehold townhome for $240k with 25% down. We also have a 2 yr lease signed by prospective tenants for $1500/mnth

Monthly break up:
Taxes $225
Insurance $50
Mortgage on 30 yr amortization at 4.25% variable 5 yr rate $881; or mortgage fixed rate 5 yrs 5.25% $987
int only pymnts on secured LOC for downpymnt $235

Cash flow of $109 if go with variable rate right now rates will increase in next few yrs so this will decrease
with fixed rate it drop down to $7 in the first yr but subsequent 4 yrs there will be rent increases so cash flow increases

or wud it be better to take a 35 or 40 yr mortgage with the variable or fixed rate?
what would be the better option to take in the opinion of experienced RE investors?
Thanks

 

[MikeMcCrae]

What I recommend to my clients is usually the 40 year. It improves cash flow and you have an agreement with the lender to the lower payment. This helps with qualifying on the next deal.

Most mortgages now offer the option to pay 15 or 20 percent more per month. If pay down is a goal for you you can pay the mortgage down quicker and still only be on contract for the lower amount. Also you can lower your payment back to the lower amount if cash flow does become an issue.

Historically the floating rates have proven better than fixed, but now days there is more room to go up than down. How much volitility can you handle and still sleep well?

 

[RArora]

thanks Jarrett and Mike. That makes me think in the 25 yr mortg direction now though that was what i wanted to do in the beginning i wondered if its better to have some cash flow rather than more equity but i think the more equity is a better option now that i redid my calculations as the equity is not taxable -till he house is sold of course-but the cash flow is as income...

though the point you make, Mike, about having a lower payment commitment with a longer amortization to qualify for the next deal is something I should consider as well...

still wondering what to do

 

[Merriora]

QUOTE (RArora @ May 22 2008, 09:56 AM) int only pymnts on secured LOC for downpymnt $235

WARNING: Novice Investor Advice...

I noticed that you are putting 25% DownPayment, but paying interest on a LOC for the DownPayment. In BC, you now only need 20% DownPayment to eliminate any CMHC fee`s. I am not sure if the 20% is Canada wide. As I am sure you LOC is at a higher interest rate then your mortgage, you may be able to reduce you downpayment by 5% and therefore create a little extra cashflow.

Just a thought

Rob

 

[RArora]

Thanks Rob. When we spoke to the bank (TD) we were told that for an investment property usually u need to have 35% down but they`ll take 25% down as an exception as the credit is good (im sure that`s a negotiation tool) but in Ontario I think its still 25% - maybe at closing we can ask them again. The loc is secured so its at prime.

 

[HeatherBrandt]

It sounds like your best case scenario for cash flow is $1200 per year. Will this make much difference to your income (especially once you take off expenses?) Unless you have other highly cash flowing properties, you might even take a loss and end up reducing your personal taxable income. I think Don is right that properties don't really cash flow for 3 years.



I vote for the longer amortization and variable (all else being equal). You will have more reserves for surprises.



Regards,



Heather












QUOTE (RArora @ May 22 2008, 11:21 AM)
thanks Jarrett and Mike. That makes me think in the 25 yr mortg direction now though that was what i wanted to do in the beginning i wondered if its better to have some cash flow rather than more equity but i think the more equity is a better option now that i redid my calculations as the equity is not taxable -till he house is sold of course-but the cash flow is as income...



though the point you make, Mike, about having a lower payment commitment with a longer amortization to qualify for the next deal is something I should consider as well...



still wondering what to do

 

[invst4profit]

I do not know what numbers you are using to calculate your cash flow but, based on your debt service numbers, I calculate your monthly cash flow at about -$365 per month. Based on monthly expences being in the standard 50% range.

 

[RobMacdonald]

Hi,

You really need to make sure that your current financing is going to be in line with your long term goals. No offense, but I think you`re getting some misleading information from TD Bank. TD offers 75% LTV on rental properties regularly. Most lenders will offer up to 80% LTV and 40 year amortizations are common place.

I would recommend taking as long an amortization as possible, and if you want to increase the monthly payments because of excess cashflow, you can. If things tighten up, you can reduce the payments and effectively increase your amortization. It is much easier to decrease your amortization than it is to increase it.

Also, don`t forget one more key feature. Is the mortgage re-advancable? If not, you may regret it in the future.

Take the time and make sure you are dealing with a mortgage broker or lender that understands investment property strategies.

 

[invst4profit]

I have re-read your post since I posted and now see you have neglected to include a whole bunch of expences that could potentially be disasterous.
Vacancies, maintance, repairs, advertising, evictions etc.
This will be potentially very heavy on the negative cash flow side.

 

[TerryF]

QUOTE (RobMacdonaldCMT @ May 22 2008, 01:59 PM) Hi,

You really need to make sure that your current financing is going to be in line with your long term goals. No offense, but I think you`re getting some misleading information from TD Bank. TD offers 75% LTV on rental properties regularly. Most lenders will offer up to 80% LTV and 40 year amortizations are common place.

I would recommend taking as long an amortization as possible, and if you want to increase the monthly payments because of excess cashflow, you can. If things tighten up, you can reduce the payments and effectively increase your amortization. It is much easier to decrease your amortization than it is to increase it.

Also, don`t forget one more key feature. Is the mortgage re-advancable? If not, you may regret it in the future.

Take the time and make sure you are dealing with a mortgage broker or lender that understands investment property strategies.

Rob,

Can you explain what a re-advanceable mortgage is, please? Thanks!

 

[MikeMcCrae]

There are some banks you can not acces thru a broker, but if you like TD brokers do have acces to them. I agree with Rob, it sounds like you are getting incorrect advise. Find a good broker in your area that can talk to you about your options and if TD does offer the best product for you your broker can set it up. But there are many lenders and many different products that might fit you better.

 

[PLam]

QUOTE (RArora @ May 22 2008, 09:56 AM) Hi!

We are closing end of june on a freehold townhome for $240k with 25% down. We also have a 2 yr lease signed by prospective tenants for $1500/mnth

Monthly break up:
Taxes $225
Insurance $50
Mortgage on 30 yr amortization at 4.25% variable 5 yr rate $881; or mortgage fixed rate 5 yrs 5.25% $987
int only pymnts on secured LOC for downpymnt $235

Cash flow of $109 if go with variable rate right now rates will increase in next few yrs so this will decrease
with fixed rate it drop down to $7 in the first yr but subsequent 4 yrs there will be rent increases so cash flow increases

or wud it be better to take a 35 or 40 yr mortgage with the variable or fixed rate?
what would be the better option to take in the opinion of experienced RE investors?
Thanks

I would get the maximum cashflow with the variable rate 40 year. If you have surplus cash at the end of each year, you can then pay down the mortgage. It is always nice to have surplus cash just in case of unexpected repairs. Regards.

 

[RArora]

Thanks for all the advice! I will ask TD about all these options.
Its a well maintained townhome in a very good neighborhood, so i dont foresee any major repairs-but then anythings possible in life-so will be prepared!

 

[kboughen]

QUOTE (RArora @ May 23 2008, 11:55 AM) Thanks for all the advice! I will ask TD about all these options.
I suggest that you interview some independent Mortgage Brokers with Real Estate Investment experience. Why limit yourself to what one Lender has available.

 

[RArora]

Does any REIN member know of any good independent mortgage broker in Ottawa, ON?

Thanks

 

[GarthChapman]

Your Mortgage Broker does NOT need to be located where you are. It is FAR more important that they understand Investment Real Estate and that they will work to understand your goals and get you the best financing based on those goals. And in this digital age distance is no barrier.

I deal exclusively with the top two Brokers in all of Canada. I live in southern Alberta and my Brokers are located in Leduc Alberta and Port Coquitlam BC. They have handled mortgages for me and my family in BC, Alberta, Ontario and Quebec.

And one of them is a REIN member and Educator to boot. He is Peter Kinch of the Canadian Mortgage Team. You can find him at REIN meetings and on his website at http://www.peterkinch.com/

Hope that helps,

 

[realfortin]

So I could use a broker that I never see in person?

 

[MonteDobson]

For sure,

to be honest, I haven`t ever personally met (face to face) my mortgage broker in Vancouver yet and all deals are done via fax and email. The key is to find a mortgage broker that specializes in rental properties and has your long term investment goals in mind. You have to forward plan your mortgages in advance so that each mortgage you take will get you closer to your investment goals and not farther away.

 

[MONEY]

QUOTE (GarthChapman @ May 24 2008, 02:06 PM) Your Mortgage Broker does NOT need to be located where you are. It is FAR more important that they understand Investment Real Estate and that they will work to understand your goals and get you the best financing based on those goals. And in this digital age distance is no barrier.
While it is correct that the Mortgage Broker need not be located in your area, They would still need to be `licensed` to operate as a mortgage broker for your area.