Can REIN work for me right now

[Cory Sperle]

[quote user=jameskeith]My question has to do with your 2nd point Corey. I was under the impression that high ratio mortgages were not ideal when it comes to creating positive cash flow on your properties. I was also reading that having a high ratio mortgage makes it difficult if not impossible to access equity in that property. Can you (or anyone) shed some light on this topic? Does it make a difference in this case because it will be your primary residence?





James, with the high cost of housing these days, do you have 20% down to buy your first property in order to have better cash flow? It was the same back in 2000, when houses were half the price they are now. I would remove the words 'cash flow' from the vocabulary altogether as in my opinion if you have a mortgage, there is no cash flow! Any cash you do make will go back into the property to keep it afloat while you wait for the equity to build. I don't think we will see the crazy double digit price increases in the near future so I wouldn't bank on using equity in one property to buy another. Yes, my second point save and scrounge for the 5% down payment on property 1, rent out part of your space while saving and scrounging again, buy another place, etc. carefully. This is what I would do if I was starting over today, without any previous track record of success.


Most families today are living check to check, and have little saved and even scarcer time. The key is being disciplined enough to save while also spending time to educate yourself. Good for you for taking this step, that most people are unwilling or unmotivated to do.

 

[landownunder]

We have had great success in purchasing cash flowing properties with high ratio mortgages. We purchased our second property in the summer of 2013, a legally suited bungalow in north Edmonton, and moved into the main floor and rented the basement. We did a 'Purchase Plus Improvements' mortgage and got an extra 15k for renovations that I used to renovate the kitchen and bathroom myself. We lived there for just over a year until we purchased a new property for us to live in, and now we are able to cashflow $500 per month from this property with it fully rented (including renting half of the double garage separately). If we had purchased it with 20% down instead of 5% like we did our mortgage payment would of been reduced by roughly $350 per month over what it is now but I am still more than satisfied with the current amount of cash flow.

 

[Matt Crowley]

[quote user=landownunder]We did a 'Purchase Plus Improvements' mortgage and got an extra 15k for renovations that I used to renovate the kitchen and bathroom myself. We lived there for just over a year until we purchased a new property for us to live in, and now we are able to cashflow $500 per month from this property with it fully rented (including renting half of the double garage separately). If we had purchased it with 20% down instead of 5% like we did our mortgage payment would of been reduced by roughly $350 per month over what it is now but I am still more than satisfied with the current amount of cash flow.



Landownunder we are doing practically the exact same strategy. Good neighborhoods + permanent change of function of the house. It's a great value-creation strategy.



Why did you decide to go with Purchase + Improvements vs. a LOC or refinance? We are just starting to look into the renovation financing now. How did it work?

 

[landownunder]

Hi Matt



It has been a great strategy for us also.



I went with the Purchase Plus Improvements because it was simply less out of my pocket. Our plan when we purchased it was to only live in it for approximately a year until we bought our long term personal residence, so we were saving for our next property purchase and also for our wedding. It made more sense to add the renovation costs to our mortgage rather than using a LOC because the interest rate on our mortgage is so low, and I can make extra payments to my mortgage if I choose. We did not refinance as in the time frame we had planned there was not going to be enough equity created to do this even with the renovations. The basement suite had been legalized just before we bought it so we weren't able to take advantage of the increase in value of adding a legal suite.



The Purchase Plus Improvements was pretty straightforward - after we went pending on the property we provided our mortgage broker with written quotes of the renovations we had planned, and he added this amount to our mortgage. The extra funds for renovations were held back until the renovations were completed and we had an appraiser come in and confirm for our lender that we actually did do a renovation, and a few days after they released the funds to us. Since you don't get any of the renovation funds until the renovations are completed you need to be able to carry all of the renovation costs until completion. Our renovation did not go exactly as planned in our original quotes - I am quite handy and ended up doing a lot of the work myself so by not having to pay for labour I was able to stretch the renovation fund a lot further. The lender also only holds the money for three months for you as well, so you must have the work completed by then.



Ryan

 

[Matt Crowley]

[quote user=landownunder]Since you don't get any of the renovation funds until the renovations are completed you need to be able to carry all of the renovation costs until completion.



[quote user=landownunder] The lender also only holds the money for three months for you as well, so you must have the work completed by then.


Nicely done! Do renovations ever go according to plan? haha



I am going to very seriously consider this for our upcoming purchase, thanks.



Another positive externality of the Purchase Plus Improvements Plan is that it demonstrates to the money partner the value that has been created from the development. It allows immediate payback of part of their capital and finances the development once reappraisal is completed at the mortgage rate.



It allows us to behave a lot more like a home developers, unfortunately we still need to outlay the cash for initial renovations (and interest payments).



Thanks for the explanation!