Maturing mortgages on investment properties can give you, the Investor, an opportunity to enhance your retirement income, while maintaining cashflow at its present level.

John & Rita presently own 2 condominium garden homes. They purchased them nearly 10 years ago. The rental income of $814/mo per unit carries all the payments of principal, interest and taxes. The condominium fees on these two units are paid by John, outside of the rental income. This creates an additional write-off against his regular job income of $38,000. Rita, as a teacher, earns $56,000. Both mortgages on these investment properties come due June 1, 1999. The last time they renewed, the interest rate was at 8.5%. The outstanding mortgages ($41000 per unit) represent less than 50% of value of the units.

There are two other units for sale in the same neighbourhood. The asking price is $88,000 per unit. Both these units are owned by one individual who is retiring to Vancouver, permanently. Our couple would like to buy these units but don’t want to touch their cash savings. Here’s how we managed to buy two more units, not use any personal cash, maintained cashflow, and obtained only 75% conventional financing (to avoid the CMHC high ratio insurance cost).

We, first and foremost, wanted the rental income to carry all the debt on all four units. Assuming the monthly rental income of $814 was available, deduct from that amount the property taxes ($178/mo), and the condominium fees ($152), leaving $484/mo to carry the debt. Amortizing that payment over 25 years (normal mortgage) at 6.55% (present five year investment rate), that relates to a mortgage of up to $72,000. If you are buying for $88000, and you only want to mortgage 75% (conventional mortgage), you only require $66,000 worth of financing. So now we realize that the rental can easily pay for all costs, all we need is $22,000 per unit for down payment (that’s $88,000 purchase price less $66,000 mortgage), legal fees and closing costs. Where are we going to find that money? Remember the two existing units our couple own? The mortgage on each of those units was down to $41000. If we refinance the present units to $66,000, like the new units, that would free up $25,000 per unit, more than enough to pay for closing costs and down payment.

The offer went in at full price ($88000 per unit), with the Vendor setting aside $3000 per unit to replace aging appliances. Our couple now own four rental housing units that cost them no more than the two they already had. John is running for a position on the Condo Board of Directors. The lending institution that granted the mortgages was satisfied with credit history and income, although technically, our couple would not have qualified under normal circumstances.

Had their mortgages not come up for renewal, chances are they would have missed this opportunity to purchase and invest.