Hi Everyone,
A major reason why people do not invest in real estate is because they have many questions that go unanswered. In an effort to answer questions from my readers, I have implemented, Priceless Tips From An Experienced Real Estate Investor.
Already we are on Part 2 of this series. I have no doubt that this article series will continue on for a long time, as the questions from you the readers will continue to come in.
As time goes on, I am going to have other experienced real estate investors take turns in answering your questions. However for now, it is I who will be providing the feedback on these questions.
So here we go.
I got an email yesterday from another reader. This reader wanted some direction on how to move forward with real estate investing. Once again, to protect their confidentiality, i am going to be referring to them as, ‘Reader’.
Here is the question that the Reader sent. I have included their question in BLUE Text. My answers to their questions are in RED Text.
Here we go…
“Hey Neil
I am currently in my first home and am soon going to be buying a larger one now that the family has grown. I am considering keeping my first home as a rental property. (Great idea so far. Definitely hold onto all the real estate that you can. Let’s read on…) However, I am not sure what is the best way to go about with the mortgages. Here’s what I am thinking my 2 options are. (In the coming weeks I am going to be having guest posts from Mortgage Brokers who help people finance their first rental property purchases. Stay tuned for those upcoming posts. However, for now, let’s answer the questions at hand…)
1) Take out a line of credit and use it as a down payment on the larger house house and pay off the remaining mortgage on the home I will be renting out.
2) Remortgage my current home and use the equity as a down payment on the new larger one
In the first scenario, I would have a mortgage on my new home, and a line of credit on my rental property. (Reader, this first scenario that you outline is not a bad one. The benefit of having a line of credit on your rental property would be that your monthly carrying cost of that property would be reduced versus, if you had a mortgage on that property. For example, if you had a line of credit on that property, all you would owe monthly would be the interest payments. Versus, if you had a mortgage on the property, you would own interest and principal. The disadvantage to this is of course when and if interest rates go up, your monthly carrying cost will increase, as the interest that you owe each month will go up.)
In the second scenario, I have a mortgage on my new home and a mortgage on the rental home. (I personally like this option better. I had the option of putting a line of credit on one of my rental properties but opted not to. I opted not to because I like the idea of mortgage pay down. As the years go by, and the longer you own a rental property, you are always delighted to see the mortgage balance come tax time because it is always a little bit lower than it was the previous year. Fast Forward 5 years and you see significant mortgage pay down) Which way is better for taxes? I know with a line of credit, i would have more flexibility with making payments in case i had problems collecting rent, but i’m not sure if I get the same tax breaks. Do you have any recommendations?
Any info would be great, thanks”
(The one thing that I have learned over the years is that taxes are complicated! Your tax advantages or disadvantages can be dependent upon where you are geographically. I would recommend asking an accountant that has experience in dealing with clients who are real estate investors. Whenever I have a question related to taxes, I always refer to my real estate accountant. The best place to find an accountant who is competent with real estate related questions, is to get a referral from real estate investors who are currently utilizing this type of accountant. )
Reader, I hope this information helps to answer your questions. For those of you with questions, please keep them coming.
Until next time…
Neil.
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pps: don’t forget to read part one of this series titled, Priceless Tips From An Experienced Real Estate Investor
