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Low Mortgage Interest Rates Increase Your Cash Flow
The old axiom ‘Cash is King’ especially holds true in the lucrative world of real estate investing. However the mistake that many investors make is believing that a low interest rate is the only thing that they have to take into consideration. The two most important factors that affect cash flow, besides vacancy rates and expenses, are the term of the mortgage and whether or not the mortgage is fixed or variable.
Without getting too technical, variable interest rates are increased and decreased as a part of the Bank of Canada’s Monetary Policies measures to maintain the country’s economic growth and stability. Fixed interest rates, on the other hand, are tied to the bond markets. So, by simply considering the lowest interest rate and defaulting to a five-year mortgage term, you may have a devastating impact on your investment’s profitability. REICO’s financing plan ensures that all factors are taken into consideration to not only ensure profitability today but also tomorrow.
‘Penny Wise, Pound Foolish’?
There are several common reasons why real estate horror stories exist and the incorrect type of mortgage product has been the culprit in more than one instance.
We can all agree that without a shadow of a doubt that the best available interest rate will maximize cash flow. However, if interest rates are the only factor taken into consideration today, you may be jeopardizing your investment’s profitability tomorrow. You need to avoid being seduced into a mortgage that is superficially attractive but limited in borrower-friendly terms and conditions.
A low interest rate mortgage that has a term that matures after interest rates have risen can quickly turn a positive cash flowing property into a negative cash flowing nightmare.
The penalty to break a mortgage prior to maturity (due to unforeseen events) can be as high as $20k, which could drain all of your built up equity. Unforeseen circumstances and needs are best handled when there has been good planning in place from the start.
Also, as many investors have discovered, by not finding and following a sound mortgage financing strategy, individuals are, in fact, putting unnecessary limits on their ability to seize upon new opportunities. Structuring loans properly can avoid the arbitrary limits set by lending institutions; limits with respect to number of properties, types, and units; limits relating to the net equity per unit; etc.
Watch the video below for exciting historical insights on interest rates.