If you are retaining your residence as an investment property (rental) and moving on to your next home, there’s one very important first step.
Before you do anything else, evaluate your current financing and look for opportunities to achieve the maximum leverage (i.e., 80% of the value).
There’s a variety of reasons for completing this step well before entering into any written agreements to purchase an additional property.
First, if you (re)structure your current residential financing to maximise the leverage from the property before it becomes an investment property, the mortgage interest becomes tax deductible as soon as the property is occupied by tenants.
It is also important to stretch the amortisation back out to the maximum available (typically 30 years). This achieves a variety of goals:
- Creates a cashflow-positive investment
- Creates a favourable debt-service ratio for future financing goals
- Leverages additional capital to achieve future goals
*Please keep in mind that it is not about what you think you can afford; it is a matter of meeting the lender’s standards… standards that vary significantly from one lender to another.
Once the dust settles, the payments based on current rates are typically ~$400.00 per month per $100,000 borrowed, half of which is principal reduction.
It has never been a better time to be a landlord.
Depending on the amount of mortgage outstanding on your current home, and what 80% of the value equals, you will have an increased down payment for Property #2, the new residence. Better still, a tenant will be covering the cost of those funds for you.
This additional down payment money also creates a smaller mortgage balance and payment on your own residence. (Perhaps you have a rental suite in the new property as well and really maximise the advantages of using OPM or ‘Other People’s Money’.)
Too often I seem unable to clearly express the importance of getting this (re)financing locked down and completed while this is the only property owned, or under contract.
Invariably clients return to me months later with a purchase offer that is dependent on the refinance transaction for down payment and/or debt servicing. Now we’ve got a mad rush─not just to complete the purchase financing within five business days, but also to refinance. And we have the added challenge of having to present one as a rental property at this point, which limits access to equity, access to lenders, access to lending products, and access to certain rates.
It is far better, far smoother, and likely less expensive to address the restructuring of the current residence financing well in advance of writing any other offers.
The concern is always ‘paying interest on money I don’t need’. There are a few simple ways to mitigate this as well, best discussed on a case-by-case basis.
The bottom line: if you are interested in taking a look at your personal numbers and potentially retaining your current home as an investment property, let’s have a detailed conversation and set out a step-by-step plan.