Should I pay the interest only on PLC

[martinmeb]

Hi all,

I bought a house in Edmonton in Jan/07 for $405,000, had it appraised in June/07 for $473,000.
I than took out a Secured Personal Line of Credit from the equity for $83,000 and bought a revenue condo
in Edmonton for $230,000 using the PLC for the down payment.

My question is should I pay the interest and as much principle as I can (which I`ve been doing) on the PLC or
should I just pay the interest only for as long as I choose?

The condo is slightly negitive cash flowing but my job pays well and I`m okay with it.

Both mortgages and PLC interest rates are all under 6%.

I will be needing to get money out of these properties to buy a third property.

Thanks to all that respond.

P.S. Great Quickstart this weekend.

Martin

 

[FayWong]

QUOTE (martinmeb @ Oct 22 2007, 10:36 PM) Wow 72 views but no opinion or advice. Interesting.When I first viewed this I didn`t venture an opinion as there are so many ways to look at this. But since you want an opinion here goes. If you have a negative cash flow I would be inclined to pay down the principle until you get to a point where the property is self supporting. If all your properties pay for themselves (the 1.1 ratio) the banks are more inclined to finance the next property. Negative cash flow is not a good thing even if you can cover it. Once you are no longer negative then I would pay interest only and put my money into another investment. Hope that helps.

 

[SamEfford]

The way I am paying my PLC is if the debt is "good" debt (interest is tax deductible), then make interest only payments and pay down or convert as much "bad" debt (non-deductible) as possible.

 

[martinmeb]

Thank you very much for your advice.

That is why I posted this as I am new to real estate investing and I now know I didn`t buy the best property that I could have. I learned alot at this weekends Quickstart in Edmonton ( Thank you Don ) but this is my first investment property and I`ll learn as I go.

Thanks again for your reply.

Martin

 

[BHoward]

Hi Martin,

Congratulations on your great action taking ... and fantastic purchase.

There has been some talk recently at REIN meetings about `getting caught swimming in the ocean ... naked ... when the tide goes out`.

Your SAFE bet is to get out of negative cash flow.

However, the market in Edmonton appreciated something like 40% to date in 2007.
If you bought the property in Jan 2007 ... put 25% cash down ... and let it sit vacant until now ... your Return on Investment to date has been about 175%!

If you have a good job ... and can plan for negative cash flow (ie: sell a property, refiance, etc.) ... I`d leverage that baby and go buy as many more properties as you can.

I swim naked ... and, (to date) ... love the feeling.

Bryon

ps. I`d pay interest only. I would not pay down the PLC. I would go buy more property as fast as possible ... and watch this existing property continue to appreciate at least 15% in 2008. Perhaps plan to do a FLIP on another property ... to cover the negative cash flow.

 

[marcp]

Hi Martin,
Congratulations on taking action - that`s the most important thing here.

Whether you pay down your PLC or not is really a personal decision, and education will help you make that decision. That`s why people hesitate to give an opinion - it`s kind of up to you.

If you`re going to try and qualify for more properties by yourself at the bank, the 1.1 rule will be important, so you would probably put the priority on paying down the PLC so as to reduce your debt and get enough positive cashflow to meet the 1.1 rule.

If you`re going to focus on doing JV`s for your next properties, and perhaps not even go on title/mortgage yourself, except for a JV caveat, then paying down the PLC may not be a priority, as long as you`re comfortable with making the interest payments.

Sit down and draft a picture on paper of what your lifestyle might look like if you had 3 properties for which the rent didn`t cover your LOC payments - it might impact your lifestyle. How do I know that? He he....

 

[Peter]

QUOTE (martinmeb @ Oct 21 2007, 08:54 PM) Hi all,

I bought a house in Edmonton in Jan/07 for $405,000, had it appraised in June/07 for $473,000.
I than took out a Secured Personal Line of Credit from the equity for $83,000 and bought a revenue condo
in Edmonton for $230,000 using the PLC for the down payment.

My question is should I pay the interest and as much principle as I can (which I`ve been doing) on the PLC or
should I just pay the interest only for as long as I choose?

The condo is slightly negitive cash flowing but my job pays well and I`m okay with it.

Both mortgages and PLC interest rates are all under 6%.

I will be needing to get money out of these properties to buy a third property.

Thanks to all that respond.

P.S. Great Quickstart this weekend.

Martin

Hi Martin,

That`s a complicated question and the answer really depends on a couple of things, namely your 5 year plan, and the details of your mortgage application. I am also assuming that the property you are referring to is your principal residence.

Ideally, on your principal residence you would want to have a readvanceable mortgage - the beauty of these products is that as you pay down the principal on the mortgage, it becomes availiable to you as a line of credit so with each payment you make you are increasing your accessible equity for additional downpayments. You are also in the correct tool to be able to use the smith manoeurve.

If your goal is to purchase another property as quickly as possible, you would obviously want to pay down that LOC quickly so you can readvance it, if your goal is to maximizemonthly cashflow, you would continue to make the interest only payments. Another option to consider is to convert that LOC into a mortgage, where it would be amoritized, and that way you would be be making principal reductions.

I hope that helps, this is very difficult question to answer as it really depends on alot of variables. Any lender or broker familiar with the needs and strategies of investors should be able to have a look at your application and be able to offer some more concrete advise.

Thanks, Rebecca (for Peter Kinch)

 

[timk519]

QUOTE (Peter @ Oct 23 2007, 02:06 PM) Another option to consider is to convert that LOC into a mortgage, where it would be amoritized, and that way you would be be making principal reductions. Could you explain this? A LOC has P&I payments, as long as you pay more than the interest costs every month. It`s also more flexible than a mortgage as you can opt how much to pay, and when to pay, while that`s pretty well locked in with a mortgage.

Or am I mis-understanding what you`re saying?

 

[martinmeb]

Thanks again to all that have replyed.

Yes, the house I paid $405,000 in Jan/07 is my principal residence. As I said it was appraised at $473,000 in June/07. It has most likely come down a little in market value since then. Balance owing is about $292,000. Interest rate is 5.04% fixed for 5 years with a 25 year amortization. The $83,000 LOC is at 5.24% and is readvanceable. The investment property (Condo) was $230,000 with 25% down (from the LOC) balance owing is $172,240.00.

My job pays over $80,000 a year and wifes pays about $25,000 a year. We just started making good money a couple years ago and we`ve been very blessed as of late. However it doesn`t take many negitive cash flow properties to run the well dry.

We want to reorginize or restructure to be able to buy another long term hold property as soon as we can. I will be meeting with one of Peter Kinch`s mortgage brokers soon for help.

The goal is 20 properties in 3 to 4 years.

I hope I gave you all enough detail to make it clear. Ask me anything if you want. I am totally open. That`s the only way to get specific answers.

Thanks again,

Martin

 

[martinmeb]

I forgot to mention the condo has a 25 year amortization ( I wanted 30 or 35 years but CIBC wouldn`t because it is for investment ) at least that is what they told me. All three debts are with CIBC. The interest rate for the condo is 5.84% fixed for 5 year term. Total owing on all three debts is $545,000

Thanks,

Martin

 

[PeterKinchMortgageTeam]

QUOTE (timk519 @ Oct 23 2007, 06:29 PM) Could you explain this? A LOC has P&I payments, as long as you pay more than the interest costs every month. It`s also more flexible than a mortgage as you can opt how much to pay, and when to pay, while that`s pretty well locked in with a mortgage.

Or am I mis-understanding what you`re saying?


If you are paying more than your minimum interest payment, you are paying down principal on your LOC - though it is not a predefined calculation as with a standard amoritized mortgage. Almost all mortgages allow you prepayment priviledges meaning that if you choose, you can increase your payments by as much as 20% or 25%, in additon to making lump sum payments ranging from 15% to 25% of your principal amount. If you use these tools, you are are paying down your mortgage much faster, thereby increasing the access to your LOC. Most locs are at prime, while most mortgages are discounted below prime (even some open mortgages where there are no restrictions), so if you have flexibility to paydown with both, why not choose the mortgage option, and pay a lower rate.

Thanks

Rebecca Harrap (for Peter Kinch)

 

[PeterKinchMortgageTeam]

QUOTE (martinmeb @ Oct 23 2007, 07:53 PM) I forgot to mention the condo has a 25 year amortization ( I wanted 30 or 35 years but CIBC wouldn`t because it is for investment ) at least that is what they told me. All three debts are with CIBC. The interest rate for the condo is 5.84% fixed for 5 year term. Total owing on all three debts is $545,000

Thanks,

Martin


Hi Martin,

Some institutions offer extended amoritizations on rentals, and unfortunatly CIBC is not one of them (though I hear its coming.....). Because you have an excellent rate on your principal residence currently, I probably wounldn`t touch it and just wait until its up for renewal to transfer it into a matrix. Ask your broker to shop around for you on your next deal to make sure the terms are what you want - there are various lenders offering extended amoritzations so you should be able to get it - depending on your application of course.

Thanks, Rebecca (for Peter Kinch)

 

[martinmeb]

Thanks again to all who`ve replied.


Cheers

Martin