Taking out Equity on Paid off Rental

[investornewbie]

Hi,



I have a paid off rental property that I own in the Winnipeg Area. I wanted to take advantage of low interest rates and take out equity on it to re-invest.



I wanted to know what is type of loan I would be taking out on this type of property, ie regular mortgage, Heloc or some other debt instrument? What are the current rates on this type loan?



Also if the property has not been appraised for awhile, and if it is re-appraised at a higher value will my property taxes increase?







Thanks in advance!

 

[Sherilynn]

The best way is usually a HELOC. The interest rates are usually prime + .5 or prime + 1, but some banks occasionally offer even better rates.



HELOCs have several advantages:

• HELOC payments are interest only
• you only pay interest for the balance you actually borrow.
  the credit is always available, so as you pay it down you can use it again for reno's or other down payments.

Tax assessments and market appraisals are totally different, and one won't affect the other.

 

[Thomas Beyer]

Mortgage rates are usually a bit lower than LOCs but you must pay interest on the entire amount and pay off principle. As Sherilyn suggested, a LOC is the best route to go, usually up to about 75%, at prime to prime + 1, but only payable on the money actually used.



Ideally set one up with two accounts, one for business and one for pleasure. The interest on the business account side of the LOC is tax deductible, whereas the one on your new powerboat to cruise Lake of the Woods is not.



The LOC also can be paid down as fast as you want, or drawn from as needed, far more flexible than the somewhat cheaper, but very static high mortgage.



Mortgages are about prime -0.4% (i.e. 2.6%) right now if variable to around 3% for 2-3 years to low 3% range for 5 years. LOCs are usually P+0.5 to P+1%.

 

[bizaro86]

[quote user=ThomasBeyer]Ideally set one up with two accounts, one for business and one for pleasure. The interest on the business account side of the LOC is tax deductible, whereas the one on your new powerboat to cruise Lake of the Woods is not.



Or better yet, just use borrowed money for investments, and never ever use your LOC for anything else, keeping it tax deductible. Use cash from your own jeans for trips and toys.



Regards,



Michael

 

[DonCampbell]

Hi,



It depends on the useage of the funds. However a HELOC will give you the best flexibility.



When you do, make sure that the funds are taken out for further investment and you keep a paper trail of that. CRA has been recently ruling that moneys taken out (equity) that is used for personal use (boat, living, trips, food...) are not considered investment funds and are disallowing the interest as a deductible expense.



However, if the funds are used for investment purposes (get your real estate specific accountant to advise you if use of funds would be considered investment - it's not as black and white as one might expect) then you have a better chance of writing of the interest expense.



If you are going to do BOTH (some for lifestyle/personal debt paydown and some for investing, it is critical that you arrange 2 separate loans/helocs so you keep them separate and don't have the whole amount denied as an expense.

 

[investornewbie]

Thanks for the replies guys(and gal),



At this point Don and Mike the only use of equity would be for Investment purposes, I learned well from REIN.



I just met with a mortgage broker to get a bit more of advice.



I am debating between going Variable and HELOC right now.




Sherilynn



Sherilynn
Sherilynn and Thomas were bang on about the rates, prime+.5 for HELOC and 2.6% Variable



My goal is too expand my portfolio right now in terms of buying more cash flow properties with some appreciation.



The broker suggested it would be a good idea to go for variable to buy an investment property since I would be able to pay some equity into the property. Where if I was doing HELOC I would eventually have to pay back the principal at the end of the term. If doing a HELOC he said it would be best to use it for down payments and put a new variable mortgage on the future investment property. This would give me the flexibility of buying multiple properties. Instead of taking the entire mortgage amount and buying a single property. I guess it boils down to over leveraging in that case.



Besides having positive cash flow what other things should I be looking at in this scenario?

 

[kfort]

Buy / renovate options are always nice if done correctly. This way you can create equity and the property will theoretically be lower LTV. It can also help stretch your initial HELOC. Can speed up refi (but be wary of cashflow and over leverage!) too.

 

[Thomas Beyer]

[quote user=investornewbie]

Besides having positive cash flow what other things should I be looking at in this scenario?


Cash is King - Cash-Flow is Queen (TM) !



Real estate has three profit centers. All three need to be there.



What is better: a $4M asset with a $3M mortgage, a $2M asset with a $1M mortgage or a mortgage free $1M asset ? More here on myreinspace at "Real estate is a three course meal".

 

[investornewbie]

At this point my philosophy is that every property must cash flow(a factor that can be controlled) and have the opportunity to appreciate(not a 100% assured). . .I dunno if that was the principle addressed by Thomas's thread.



I was discussing this issue with a few people. A few important points that came up is that: With HELOCs although 100% deductible payments is that your still paying more for your interest payments. However with a traditional mortgage the interest rate your paying is less and if you can afford it the balance of your payment is putting equity into the property.



I am just a bit weary of the different strategies proposed in terms of how many rental properties to purchase I should look into buying with borrowed funds. I guess this is where LTV values come into play.

 

[Thomas Beyer]

Higher leverage = higher ROI in a flat or growing market on the cash invested, but less cash flow and higher risk if markets decline. As such, leverage level is a matter of personal choice, risk tolerance, other income, life style, age and desire for cash-flow ( to service an LOC or other life's desires or necessities )