# How to Finance Rental Propery?



## canontb81 (Oct 6, 2017)

Hi,

I have a question I was hoping someone could help me out with.

I'm looking to buy a townhouse to rent out as an investment property but I am not sure what the best way to finance it. I do not have enough savings for a down payment so these are the options I think I have:

I have about $50,000 remaining on the mortgage of my primary residence which would be estimated to be worth around $380,000. I want to buy something that costs up to $300,000 (which would require a $60,000 down payment).


1. Refinance primary residence for the amount of the down payment ($60,000)+ the balance on current mortgage ($50,000 = $110,000. Then get a mortgage on the rental property for the remaining amount of ($240,000)

2. Refinance primary residence to the max (80% of assessed value (80% of $380,000 = $304,000) - amount remaining on mortgage ($50,000) = $254,000) and put in $46,000 from my savings?

3. Obtain a HELOC for the down payment of $60,000 and get a mortgage on the rental property of ($240,000) and use my savings to pay off my primary residence mortgage. (Not 100% sure that this is possible)

4. Obtain a HELOC for half of the down payment ($30,000) and take out remaining half ($30,000) from my savings and get a mortgage on the rental property of ($240,000) and pay off some of my primary residence mortgage.

One of my unknowns is the interest I pay on the mortgage in the first two scenarios tax deductible? Is it worth it to incur more debt so that I may deduct more interest off my income tax?


Thank you for your help.


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## james4beach (Nov 15, 2012)

Bumping this post for visibility; was not visible before due to pending moderation.


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## Mortgage u/w (Feb 6, 2014)

Best option in your scenario would be to borrow the whole down-payment since the interest is tax deductible. Ideally, you would want a separate mortgage (either HELOC or fixed) so that it will be easier to figure out the interest portion to deduct. So $60,000 mortgage on your primary residence and remainder on the rental, both of which being fully tax deductible.

You will, however, need to ensure that your rental income is sufficient to cover both mortgages plus other expenses. 
In my opinion, a single door for $300k is not the best investment....unless you are able to rent for $3000/month.


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## OnlyMyOpinion (Sep 1, 2013)

I would never refinance my primary residence/family home just 'roll the dice' on an investment of any kind. But that's me. 

I would also not purchase real estate if I didn't even have the down payment available - not that I would necessarily use those savings, because it is by having as little of your own money into the investment RE that you have a chance of boosting your returns (i.e. by using the leverage of borrowed money). Except that leverage can cut both ways. 

Not having $60k available suggests OP has little diversity in their overall assets/portfolio and would be highly weighted to illiquid RE.


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## Rusty O'Toole (Feb 1, 2012)

I have done something like this when I was investing in real estate. First thing would be to put a home equity line of credit on your home. Get the biggest one they will give you. Remember, you don't have to use it and you only pay interest on the money you borrow.

Now start shopping for bargains. I mean a good property that needs a little work, or where the owners will give you a discount for a quick sale. Do not buy anything just because it is cheap. It may be cheap for a reason if you get my drift. You want a good property in a good neighborhood that you can buy for 10% to 20% below market value. Go in 20% low and raise your price if you have to. But you should not have to pay top dollar, you are one buyer who can afford to wait for the right deal.

If you find a suitable property you can make an all cash offer not conditional on financing. This will be attractive to the right seller. Say, someone who has already bought another house, or who is motivated to sell for some other reason. Such as divorce or to settle an estate. You can make it conditional on a home inspection for your own protection but you want the offer to be as simple as possible.

You want to buy something you can pay for from your HELOC or at worst from the HELOC and a couple of credit card advances. There is a reason for wanting to buy the house outright with no mortgage.

If you go to the bank for a mortgage when you buy a house the mortgage is based on the price. If you go for a mortgage on a house you already own the mortgage is based on the appraisal.

Now if you played your cards right you should be buying 10% to 20% below market value. That means you can finance out in other words the mortgage will cover the cost of the property and you won't need any down payment.

You must be careful that you can handle the payments. My policy was to only buy properties with positive cash flow even if they were fully financed.


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## OhGreatGuru (May 24, 2009)

My snotty comment for the day: (To OP) if you have to ask these questions, you shouldn't be buying a rental property as an investment. Stick to mutual funds, or just paying off your mortgage.


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## Rusty O'Toole (Feb 1, 2012)

If you buy a property for $300,000 it better rent for $3500 a month if you want it to cash flow.


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## agent99 (Sep 11, 2013)

Rusty O'Toole said:


> If you buy a property for $300,000 it better rent for $3500 a month if you want it to cash flow.


And Mortgage u/w said $3000. Either way, could you explain why this is the case?

I was just looking at small older bungalows in a desirable mature Ottawa suburb. I see these homes listed in the $400-$500k range. Then when I look at rentals available for similar homes, they are in the $1500-$2500 range. Using $450k and 4% for mortgage or LOC, that comes to $1500/month. Taxes & insurance another $500? Maintenance ?? OK, so if you want another 4% return, I can see getting up to your figures. But then why are those rentals priced that low? I guess some bought low some time ago and will take whatever the market dictates?


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## andrewf (Mar 1, 2010)

To answer the question, I think the best solution is option 3, which would result in 100% of the property being financed by investment loan, interest expense for which would be eligible to be deducted from income. Notwithstanding all the concerns everyone has about OP and the viability of this investment.


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## Mortgage u/w (Feb 6, 2014)

agent99 said:


> And Mortgage u/w said $3000. Either way, could you explain why this is the case?
> 
> I was just looking at small older bungalows in a desirable mature Ottawa suburb. I see these homes listed in the $400-$500k range. Then when I look at rentals available for similar homes, they are in the $1500-$2500 range. Using $450k and 4% for mortgage or LOC, that comes to $1500/month. Taxes & insurance another $500? Maintenance ?? OK, so if you want another 4% return, I can see getting up to your figures. But then why are those rentals priced that low? I guess some bought low some time ago and will take whatever the market dictates?


Rents have not increased at the same rate as housing prices. And you can't base a rent on the property's market value either. Those renting $1500-$2500 have most likely bought a long time ago and their current expenses justify the rent being sought. The same formula does not work with today's prices.

So lets take your example and simplify numbers for calculation purposes. A $500k rental will require, at least, a $400k mortgage. That represents a mortgage payment of $1900/mth. Add $500 taxes, $100 insurance and your fixed costs come to $2500 - not considering maintenance, vacancy and/or utilities if applicable. If you rent $2500, you barely break even. You haven't considered any other surprises nor income taxes. And lets not forget that you invested $100k which your return on it is 0%. If you can rent $3000, then your $500 profit represents a 6% gross return on your $100k investment. It starts to make a little more sense. But as you mention, even $2500 is pushing it.

With figures like that, it makes more sense to invest your money in the stock market - A 5% return is realistic and headache-free.


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## nobleea (Oct 11, 2013)

agent99 said:


> And Mortgage u/w said $3000. Either way, could you explain why this is the case?
> 
> I was just looking at small older bungalows in a desirable mature Ottawa suburb. I see these homes listed in the $400-$500k range. Then when I look at rentals available for similar homes, they are in the $1500-$2500 range. Using $450k and 4% for mortgage or LOC, that comes to $1500/month. Taxes & insurance another $500? Maintenance ?? OK, so if you want another 4% return, I can see getting up to your figures. But then why are those rentals priced that low? I guess some bought low some time ago and will take whatever the market dictates?


Maintenance. Repairs when tenants move out. Vacancies. Increases in interest rates. Income taxes.

Rentals are priced that low because that is what the rental market says its worth. The housing market says they're worth 450K. The consumers in the rental and housing market are not the same people and have different levels of access to money.


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## agent99 (Sep 11, 2013)

Mortgage u/w said:


> Rents have not increased at the same rate as housing prices. And you can't base a rent on the property's market value either. Those renting $1500-$2500 have most likely bought a long time ago and their current expenses justify the rent being sought. The same formula does not work with today's prices.
> 
> With figures like that, it makes more sense to invest your money in the stock market - A 5% return is realistic and headache-free.


I see where you are both coming from. In a market like the one I described, it wouldn't make much sense to buy a property for rental purposes. Not a single detached dwelling anyway. 

No desire to do it, but was looking at possibly buying out a family member's home (They are having financial problems). Then renting it back to them. Equity in home would pay the rent for first 4 years. After that we would be in the rental business  or would sell property. Not an investment - we would likely lose money. Other option is to sell home now and have them move to rental accommodation. Again, equity would pay the rent for 3 or 4 years. Cleaner, but finding buyer takes time. Ottawa market seems to be a bit depressed.


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## Just a Guy (Mar 27, 2012)

If equity pays the rent for 3-4 years, where does the money come from to service the mortgage, taxes, insurance, maintenance, etc. For those 3-4 years no one is paying you cash?

Investments like this lead to foreclosure.


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## agent99 (Sep 11, 2013)

Just a Guy said:


> If equity pays the rent for 3-4 years, where does the money come from to service the mortgage, taxes, insurance, maintenance, etc. For those 3-4 years no one is paying you cash?
> 
> Investments like this lead to foreclosure.


I could explain how it would work, but this is not the place. I already said it was NOT an investment.


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## Rusty O'Toole (Feb 1, 2012)

My policy was only to buy positive cash flow properties as a measure of self protection. It meant I could hang onto my properties indefinitely.
As for return on investment, what investment? If I didn't put up any down payment and I didn't make any payments what did I have to lose?


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