In part 1 of Managing your Real Estate portfolio finances during uncertain times we discussed the importance of revisiting the financing (Capital structure) for your real estate portfolio to ensure that it withstands the storm and that you emerge out of it in a stronger financial position. We highlighted the three core financing areas where you can pivot as an investor: Stability, Agility and Opportunity.
In this article, we shed light on the financing strategies and tools available to you to enhance the stability of your portfolio.
The focus is to ensure that you have enough liquidity and reserves to hedge or deal with a disruption to your employment income and/or portfolio rental income.
If you have a large cash reserve that would be best, but if you don’t then we suggest setting up a secured line of credit (LOC) against one or more of the properties you own that have dormant equity (i.e. equity that has built up over time, above and beyond the 20% of the property value) An LOC comes with many benefits at a time like this:
- It gives you access to capital in case you need it without adding extra load on your monthly budget. With an LOC: you pay as you go as you pay interest only on the funds used (the balance) and not the limit.
- An interest only payment on a secured line of credit balance is often lower than a principal and interest payment (associated with a mortgage) for the same amount. For example: an interest payment on $100,000 used from a secured LOC today, would be 204 per month (at prime, which is currently at 2.45). A payment on the same $100,000 setup as a mortgage at today’s rates (5 years’ variable at 2.35, 30-year amortization) would be 386.78.
- Flexibility: once the storm passes, you can always convert a revolving balance on the LOC to a mortgage and start making principal & interest payments.
- Advanceable lines of credit, in particular, offer additional cushion as the limit automatically increases when the principal on the mortgage component is paid down over time. Say, you have a property that is worth $ 550,000 with an existing mortgage of $300,000. Assuming that you qualify: you can access $140,000 of dormant equity in this property (i.e. 80% of $550,000 – 300,000). An advanceable line of credit can be set up for the $140,000 with a mortgage of $300,000 connected to it. As you pay down the principal on the $300,000 mortgage, your line of credit would increase by an equal amount to the principal pay down; essentially giving you access to equity without having to re-qualify all over again for a full refinance.
It is important to mention that LOCs should be set up in a strategic fashion within the context of your future plans. Setting up a large LOC may impact your future approvals with banks that factor the limit in their calculation versus the balance that you have on the LOC. Understanding how much to set up today and how that will impact what you qualify for given your unique financial situation and future plans will help give you access to immediate liquidity while preserving your future borrowing power.
Dalia Barsoum is president and principal broker at Streetwise Mortgages and a regular columnist for Canadian Real Estate Wealth. She leads an award-winning team of mortgage advisors offering strategic income property and portfolio advice to Real Estate investors across Ontario.
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