The Challenges of Buying More Rental Properties
For a lot of real estate investors, there are two key factors that limit growth in a rental property portfolio, which are:
1. The funds needed to secure more real estate deals
2. Financing more real estate deals.
But there's a solution.
Let's address these limiting factors and talk about why using equity is one of the best ways to grow your real estate portfolio fast.
Equity is one of the most powerful strategies for growing real estate, especially compared to regular savings and Joint Venture capital.
Here's why:
1. Equity is cheaper than other sources of capital; especially given the low-rate environment we are in
2. Equity has been accumulating fast in many properties across many markets; therefore, the time and energy involved in accumulating it is significantly less than trying to save or source funds from others to invest with you
3. With equity, you can have your cake and eat it too! you own all of the cash flow, all of the upside, and all of the mortgage paydown and you do not need to split your returns with other.
What are the different ways to access Equity in your properties?
There are four strategies to access equity to invest:
1. Secured Lines of Credit
2. A full refinance
3. A Blend and Extend
4. And Private Mortgages
In this blog post, we will walk you through the first strategy, which is accessing capital through secured lines of credit
A secured line of credit gets set up against a property you own and is like a big checking account with funds available to you to access at any time.
When you access these funds, interest starts to accrue, and you can either make a minimum interest payment or a payment larger than the minimum required to pay it down faster.
What are the pros and cons and most importantly what is the best way to go about it?
The Pros..
1. Pay as you go and only when you use it
2. It can be set up in the first or second position on a property.
When set up in a second position (i.e. behind an existing mortgage), it can be set up with the current lender that holds the first mortgage or in some cases behind a mortgage held by a lender that is different from the lender offering the LOC.
3. An interest only payment is often lower than a principal and interest.
This will be easier on your monthly budget and will help your cash flow
4. Flexibility:
Witaan LOC, you can pay an interest-only payment or make a higher payment if want.
Some lines of credit also allow you to roll them into a mortgage at any point in time. These are called advanceable lines. They are my absolute favorite and, in my view, a “mmust-have on as many properties as you can especially if you are an investor.
Aside from the fact that you convert them a mortgage at any point in time, they are dynamic.
Imagine this..
You have a mortgage, and you have a line of credit, otherwise known as an advanceable mortgage.
As you make your regular mortgage payments, the limit on the line of credit increases automatically by the amount of principal you paid down without having to re-qualify.
For example: say your monthly mortgage payment is $2000 per month (that is $24,000 per year) . Half of that roughly (which is $12,000) would go to principal (especially in the early years of the mortgage) and as a result, your LOC would increase by $12,000.
This auto limit increase builds up capital for any emergency reserves, renovations, or future down payments at no extra cost to you!
Further, over the long run: once the mortgage is fully paid down on the property, you will have access to a large LOC that had built up over time that you do not have to re-qualify for again and which you can re-invest again if you want.
The Cons..
1. Rates on LOCs are higher than mortgages. They are often priced at prime + versus a variable rate mortgage at prime minus
As of today: prime is at 2.45 and a typical secured line of credit is priced at prime + .50% (that is 2.95%) versus a 5 years mortgage at 1.5% for example
2. If you have a property with no mortgage and you are setting up an LOC only. The max you can access with a bank is 65% of the value versus 80% of the value that you can access with a straight mortgage.
3. You still have to qualify for a secured line of credit. The qualification process and rules are the same as qualifying for a mortgage.
As an investor, setting up an advanceable line of credit when you are able to versus when you really need it will serve you well in the long run as you can then jump quickly on any opportunities that come your way and have a cushion for a rainy day or a future renovation without any ongoing costs.
To explore your options for setting up equity using an advanceable line, CLICK HERE to book a complimentary planning session with one of our amazing income property mortgage advisors.
If you have any questions, feel free to shoot us an email at info@streetwisemortgages.com