Equity in real estate can be utilized for investment purposes, and be tax-deductible.

Jack & Henrietta live in a modest home in a neighboring municipality. Jack is 73 years old and his wife is 71. They are both in excellent physical and mental shape. Twelve years ago, when Jack retire from the civil service, they decided to re-mortgage their house for $50,000 to buy two investment properties. By putting $25,000 down on each property, the rental income was more than sufficient to carry the mortgages on the rental properties. Each townhouse was purchased for $84,000 and after the down payment, a mortgage of $59,000 was taken out on each one.

They realized they were liable for the payments on the rental properties, but all they really needed to pay was the mortgage on their residence which they could afford with Jack’s pension.

Now Jack want to buy two more units in sunny Arizona. The reason for Arizona is twofold. One, as an investment tool, the other as a method of perhaps visiting his rental property once or twice per year and writing off some of the traveling costs to the sunny south. From experience, he has learned that by putting a sufficient down payment on each unit, that the rental property really pays for itself. He wants to continue the trend.

He approaches his bank of some thirty years, to draw equity against the two townhouses he bought twelve years ago. Each unit has a remaining mortgage of $44000. The units are now worth $96000 each. He wants to borrow an extra $20,000 against each unit to put as down payment, so the twelve year old units would still be self-sufficient (the rental income would still pay for the payments on the new mortgages of $66000 [that’s the old mortgage of $44000 plus the equity draw of $20000]. To his surprise, his banker said no. The reason was that of debt service ratios. Apparently his pension could no longer service all the mortgages within the bank’s criteria. The banker was quite right! If you calculate all the debt owed by Jack & his wife, divided into Jack pension income, there is no way that Jack could afford all the mortgages, should the units become empty. Jack argument is that he has had the same tenants in his townhouses since the beginning, because he treats them right, and his rental rate is reasonable. He knows that in the rare event of 100% vacancy, he can still sell his units, pay off the mortgages and make money.

Most traditional lenders would turn down the application. Non traditional lenders though would be more than willing to allow Jack to draw equity up to 65-70% of the appraised value of the rental properties. These non-traditional lenders charge a little extra in the mortgage rate, but as long as the mortgage is still self-sufficient, Jack does not mind paying. He gets to write-off the interest against the rental income in any case.

We were able to satisfy his request because of the equity he had built up over the years.