Advice - preparing to make first investment property purchase

[sthyme]

Hi everyone,



My husband and I are trying to get ourselves prepared to make our first investment purchase and I am hoping to get some advice from some of you who have already blazed the trail. We have our own house and have a mortgage and heloc in one where as we pay down the mortgage, our available credit on the heloc increases. We currently are making accelerated payments on the mortgage. Our plan is to use the heloc to finance the down payment on an investment property. The interest rate in the mortgage is lower then the heloc. So my first question is do you think we would be better off reducing our mortgage payments and putting the cash aside to use towards a down payment?



My second question - we've put ourselves on a strict budget so that we can start putting extra cash aside for a down payment and I'm hoping we could put approximately 20k aside in the next year (this will be a challenge as I'm currently on maternity leave, but we're going to do our best). I am wondering if it's worth waiting until we have that cash saved up - or if the likely increase in the market means we are better making a move in the very near future. Sorry for my long winded-ness - I've been ready about real estate investing for years and really want to get off the sidelines.

 

[Sherilynn]

The answer to your first question depends on how much lower your personal mortgage rate is. That being said, I am a big fan of paying down a personal mortgage to increase a business LOC. Remember that a) you only pay interest on the LOC credit that you actually use and b) that interest will be tax-deductible, so your after-tax interest expense could be lower on your LOC than on the mortgage, despite the lower rate.



For your second question, you didn't specify if this extra cash is required and why. For instance, perhaps you could start by buying a townhouse instead of a house, and then you wouldn't need the extra cash. If you have some other reason for asking that question, then please clarify.



As for what the market will do, it largely depends on which market. For instance, Calgary has already seen huge gains and Edmonton hasn't yet, so those two markets could be significantly different over the next 12 months.

 

[Thomas Beyer]

Have you chosen a target market and researched it very well ? Have you researched financing options, rent levels and property management issues ?



Many banks, but not all, want to see the 20% down payment in cash in an account three month prior to property acquisition and as such, moving the money over now may be prudent assuming you have answered the four areas above in the affirmative.



Also, read this REIN post on how to get started: http://myreinspace.com/public_forums/General_Discussion/61-4391-How_to_get_started_.html



Good luck & keep asking ... The first one is the most scary and the hardest but with support within REIN, solid research and preparedness you can overcome most real or perceived challenges !

 

[Matt Crowley]

For your first question, a Matrix-mortgage is a good way to access the additional money you put into your personal residence. One big question to answer is how much of the additional money you put into your home will you be able to access? You must stay within the bank's LTV (loan to value) requirements.



Cash invested in a mortgage is exactly like an investment, it earns the rate of the mortgage as savings through accelerated principal pay down. However, I wouldn't give up the opportunity to earn 30% return on my cash if it is "lost" in accelerated payments I can't access.



I second Thomas' responses on the market and knowing your neighborhood. As someone who started by sprawling out a portfolio and later consolidated in an area, I can't stress how important it is to know as much as possible about where you planning invest. The last thing you want is to pay the costs of liquidating homes (pay a Realtor), when you could have chosen an area more strategically.



The more experience you have, the more you can depend on the costs of your renovation, management, and repairs. The less you are willing to bear this cost risk, the more turn-key you will need to go.

 

[Thomas Beyer]

[quote user=SweetZone]The more experience you have, the more you can depend on the costs of your renovation, management, and repairs. The less you are willing to bear this cost risk, the more turn-key you will need to go.


Well said, as renovations take time, cost money and effort/supervision on your end. Turn-key may be less of an ROI but often also less $s and far less time invested.



On the other hand, many folks have done really well with buying fixer-uppers, renovate them, then rent them and re-finance and pull equity out on refi to buy another one. Both strategies work very well, but it really depends on your goals, your knowledge and your willingness (or lack thereof) to invest time into the real estate venture.



There is not right or wrong answer here, just one that suits your life style and investment objective.

 

[sthyme]

Thank you so much for the responses so far. The difference in the rates for my mortgage and heloc is 0.71% if that helps any. My thought process behind saving up the cash is that we then wouldn't be financing all or most of the down payment on the heloc.



When you are running your numbers to confirm a property would cash flow, do you included your interest costs if you are financing your down payment?



If there's anyone in the Durham region on here who can provide any contacts/advice that would be wonderful. That's where we live and where I plan on researching further since it's close and in the top ten ontario spots according to the rein report.

 

[Matt Crowley]

REIN report is a great starting point...now narrow the focus! What are the different areas like? Where can you earn the greatest yield? Is that the tenant demographic you want? ect



Always include the interest payment as part of the cash flow calculation. Yes, it is true that you can write off the interest. But the property still needs to cash flow! It isn't going to matter if you get a big tax break if you are operating the property at a long-term loss. That will burn out all the cash and no one will ever see the tax break.



Having cash on hand is great...but putting your cash somewhere it can make money is great too. If your LTV on your place will not impair you from accessing the funds, parking some money into a mortgage can be a good way (and very safe way) to earn more than a GIC. DISCLAIMER: you are betting that CMHC isn't going to change the LTV limits for accessing that cash later. If we run into a bit of economic turbulence, this is one of the best tools they have to shore up liquidity - prevent people from over-borrowing in their homes for consumables.



The way I see it, putting cash into a mortgage as additional mortgage pay down is a good strategy for someone who is really risk adverse...and if CMHC would pull in the reins on the LTV requirements, they would probably be too concerned to spend the money on purchasing real estate anyway.



If you are more bullish, you will want more cash in hand; as liquid as possible.