Jay Mcinnes

Mobile: 604-771-4606


E#244 - Buy more to get out of DEBT!

Buying an Investment Property to Build Equity and Pay Off Your Principal Residence Mortgage is a Smart Thing to Do! And this is what we are discussing today!

If you're a homeowner with a mortgage, you know how much it can feel like a never-ending burden. Your mortgage payments, especially if they're high, can put a serious dent in your monthly budget. But what if I told you there's a way to use leverage to cut those payments out of your life and build equity at the same time? Yes, it's possible, and today, we're going to show you how.

The first thing you need to do is take stock of your situation. Let's say you own a $2 million house, with a $500,000 mortgage outstanding on your principal residence. You're paying $2,819.54 per month on your mortgage, and your interest rate is 5.5%. You're currently in a five-year term, with a 30-year amortization. After five years, you've paid off $38,078.78 in principal.

Now, let's fast forward to the end of your second five-year term. You still have a mortgage outstanding on your principal residence, this time for $462,644.20. You're still paying $2,819.54 per month, and your interest rate is still 5.5%. You've paid off $88,024.85 in principal over the past ten years, leaving you with a principal outstanding of $411,975.15.

At this point, you're probably feeling pretty frustrated. You've been paying off your mortgage for ten years, and you still have a significant amount of debt to pay off. But don't worry – we're going to show you how to use leverage to get out of debt faster.

The plan is simple: we're going to buy an investment property to pay off the outstanding mortgage on your principal residence sooner. Here's how it works.We're going to buy a property located at 1480 Howe Street for $950,000. We'll put 30% down – $285,000 – and pay $17,000 in PTT. This leaves us with a total cash outlay of $302,000.

We'll take out a mortgage of $665,000 on the investment property, with a 5.5% interest rate, a five-year term, and a 30-year amortization. Our blended payment will be $3,766 per month. We'll also need to pay property tax of $254 per month and strata fees of $790 per month, along with an additional $100 per month for emergencies. Our total monthly outlay will be $4,910. But here's the thing: we can rent out the investment property for $3,900 per month, which means our monthly outlay is only $1,010. Not amazing, BUT there is a light at the end of this tunnel...

Now, let's talk about the power of compounding. Let's assume that we'll see a compound annual growth rate of only 5% on our investment property. For the record, the last ten years has averaged 8.86% a year for Vancouver condos.Here's how it breaks down:In year one, our investment property is worth $950,000. With 5% compound growth, it's worth $997,500 at the end of Year one.
In year two, it's worth $1,047,375.
In year three, it's worth $1,099,733.75.
In year four, it's worth $1,154,720.44.
In year five, it's worth $1,212,456.46.
In year six, it's worth $1,273,079.28.
In year seven, it's worth $1,336,733.24.
In year eight, it's worth $1,403,569.90
In year nine, it's worth $1,473,748.40
in year ten, it's worth $1,547,435.82
That is a total principal growth of $597,435.82 over the first ten years!

NOW, as you can see we have created a beautiful option for ourselves. Back to the whole point of this story. After 10 years we have a principal residence mortgage total of $411,975.15 still outstanding. However to trump that we have purchased the investment property & it has gained almost $600k in principal value in that time. We now have the option (if we still want) to take that investment property growth via a re-financing of the condo to move it over and finally pay off the mortgage on our principal residence.

Finally allowing us to now be mortgage free, early!!! There you have it, You have spent more to get yourself out of debt!

See you next week!