There are lots of different mortgage products out there for real estate investors to take advantage of. And while most are straightforward enough to understand, some require a little creativity to capitalize on. Take a shared equity mortgage, for example.
Table of Contents - Looking at the Pros and Cons of a Shared Equity Mortgage
A shared equity mortgage is a mortgage that’s shared between the home buyer and the mortgage lender. It effectively reduces the cost of the home for individuals who may not have the financial means to buy one. The caveat is that the lender owns part of the home and capitalizes on the appreciation. Here’s a very basic example:
Jim buys a $500k home using a shared equity mortgage. He can only afford a $300k mortgage, so the bank assumes a $200k stake in his home. Jim gets a lower mortgage payment and the home he wants. 20 years later, Jim sells the home for $1M. he pockets $600k, while the bank takes $400k, proportionate to the value of their shared equity.
Shared equity is a creative mortgage solution. But there’s one big problem for real estate investors: This type of mortgage product is only applicable for your primary residence. You can’t use shared equity mortgages to finance rental properties. So how can you take advantage of one?
The only true way to take advantage of a shared equity mortgage is for your primary residence. Most banks also won’t allow homes backed by shared equity to be leveraged into loans. That nixes any possibility of a down payment on a rental residence. Instead, capitalizing on shared equity as an investor means looking forward and thinking creatively.
If you buy your primary residence using a shared equity mortgage, you’re in for a lower monthly mortgage payment. This unburdens your cash flow, allowing you to save for down payments on rental property. Once you secure a rental property with a conventional mortgage, you can begin to leverage the equity in future homes. In this way, a shared equity mortgage is a good jump start on building cash reserves. It also keeps your overhead low for the duration of your loan.
In many ways, shared equity mortgages are similar to house hacking. The idea is to lower your financial responsibility so you can focus on running a leaner investment operation.
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The pros and cons of shared equity
Since you, the investor, will deal with the parameters of a shared equity mortgage directly, it’s worth understanding the pros and cons. This is your mortgage we’re talking about, so pay close attention to both sides of the coin. There are benefits, but there are also drawbacks.
- Purchasing a primary residence is more affordable
- Your down payment is smaller
- Your monthly mortgage payment is more affordable
- You can accrue more equity by paying down the loan faster
- The overall amount of the mortgage is lower
- You only have a partial stake in the total equity of your home
- Shared equity must be repaid when you sell the home
- Drastic property increases may result in more owed than a conventional mortgage
- Not all lenders offer shared equity loans
- If your home depreciates, you take a loss
The pros and cons are equally balanced. It’s up to homeowners to look at their situation and ask themselves of a shared equity mortgage benefits them more than a traditional mortgage might. It’s also worth asking if the shared equity mortgage is better than the benefits of Canada’s First-Time Home Buyer Incentive (FTHBI).
Why shared equity mortgages are great for real estate investors
Real estate investors are optimally positioned to benefit from shared equity mortgages. As mentioned, the lower mortgage total is great for improving personal cash flow. Not only that, but the long-term prospects of a shared equity mortgage align with the investing philosophy.
If you’re a real estate investor, you probably won’t be moving around too much. Hence, you’ll own your primary residence for a long time. If you get a home below your means using a shared equity mortgage, you’re granting yourself stability for the future. There’s less pressure on your investing strategy to immediately pay off, giving you time to develop it. Consider this example:
Sally has a $200k home, with a shared equity mortgage. Her mortgage payment is $1000/mo. She owns five properties, generating $1000/mo. in revenue, plus a day job. Her investments cover her mortgage payment, allowing her to use her salary for other bills, savings and future investments. If one of her properties sits vacant for a month or two, it doesn’t impact her investing strategy all that much.
The financial stability of a lower mortgage makes all the difference. That and the long-term ownership of your primary residence will pay off nicely someday when you choose to sell it. Sure, you’ll have to buy out the bank’s equity stake, but in the meantime, it allows you to get your investment portfolio off the ground and flourishing.
A hidden benefit of shared equity mortgages is their ability to create affordability in markets. For investors, it helps them secure a primary residence near the market they want to invest in. For example, you may want to invest in the up-and-coming Leslieville neighbourhood in Toronto. But that means buying a home in the GTA—one of the most expensive markets in Canada. Using a shared equity mortgage will allow you to buy a home in the GTA without financially crippling yourself, so you can make sound investments in Leslieville.
Think strategically about shared equity mortgages
A shared equity mortgage isn’t for everyone. But if you’re a real estate investor with a long-term outlook and a well-thought-out investment strategy, it might be worth it to explore one for your primary residence. Like house hacking, it’s a smart way to get a jump on a successful investing career. With looser financial constraints, you’ll be able to pour money into your investments, which means generating cash flow and setting the stage for your next investment. You’ll spend less time worrying about your mortgage and more time optimizing your real estate investing strategy.
The Pro's and Con's of Shared Ownership Properties - First Time Buyer Secrets
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