Case Study: Refinancing & Rental Properties
James and Jessica Refinancing and Purchasing a Rental Property
Their Situation – Just Like Anyone Else!
James and Jessica have owned a home for 10 years. They’re happy that their home has increased in value, but they’re also worried about housing costs when their younger children are older.
With rising housing costs, will their kids be able to own a home?
James hears from a friend that David at Olympic Mortgages helped him figure out how to buy a rental property (which he will eventually give to his kids), and how easy it was. David also took care of all the money steps along the way.
James hops onto his computer and books his own 15 minute consultation with David, easily using David’s calendar app.
During their first call together, David learns about their current financial picture:
James works for the government, and Jessica is a 2nd grade teacher, so they make pretty good money. Having kids though, most of what they earn goes into their expenses – mortgage, loan payments, food, kids costs, you know, all the “stuff”.
Their single family home is worth $700,000, and they owe around $300,000 on their mortgage.
They also owe $15,000 on a line of credit costing them around $300/month, and they have a car loan of $20,000, costing them $400/month.
James and Jessica also have around $45,000 in RRSPs, but they admit, they don’t come close to maxing out their RRSPs because their monthly costs are simply too high.
David comes up with the following plan:
James and Jessica can refinance their house up to 80% of the value, but they don’t actually need to go that high to achieve their goals.
David plans that they will borrow an extra $220,000 bringing their total mortgage to $520,000.
Out of the $220,000, $35,000 will go directly towards paying off their car loan and line of credit. This automatically saves the couple $700 per month, and lowers their interest borrowing costs. The extra $700 gives the family the breathing room they need.
James and Jessica will take the rest of the funds, $185,000, and put it into a savings account which they will have at the ready, when they’re ready to buy their next place.
Now, they probably wont need the full $185,000, but David likes to budget in extra money for the unexpected, and to have some savings leftover to boost their RRSPs.
Getting the Refinance Done – Sit Back and Let Us Do the Grunt work!
After David, James, and Jessica, agree on the plan, David jumps into action to make that refinance happen.
David’s team collects all the important documents, and submits the application to the lender that has the lowest rates, but also terms that the clients are happy with.
Once the lender approves the deal, they provide a conditional approval”. The lender then confirms the documentation, and also gets confirmation on the value of the home, normally done by an appraiser. David’s team helps with the appraisal, and makes sure the lender has all they need too.When the final approval comes through, David meets with James and Jessica to sign the documents and answer any of their final questions.
Lastly, James and Jessica meet with their lawyer to finish up the deal. The lawyer takes care of the mortgage registrations, payouts, and finally, gives James and Jessica their huge cheque for the remaining amount.
Right away, James and Jessica pay off their other loans for $35,000, and puts the $185,000 remaining into a safe account to access when they need.
The refinance is done!
James and Jessica are ready to start looking for their rental property!
Buying The Rental
James and Jessica, with the help of their realtor, find a house they like for $650,000. It’ll rent for around $3000 per month, pretty easily.
David plans that they will put 20% down, or $130,000. They already have the $185,000 in their savings, so the downpayment is no problem and leaves them with extra money.
The mortgage on the rental property will be $520,000 and cost them $2356/month, on a 30 year amortization. The rental income of $3000 will easily cover the mortgage payment, but it should also cover the property tax. James and Jessica will have a bit of cash leftover each month, which they’ll save into their rental account.
After the property transfer tax of $12,000 and the downpayment of $130,000, the clients have $43,000 leftover. They decide to split that money up; half will go into RRSP’s right away, and the other half will become their emergency savings or budget shortfall fund.
The End Result for James and Jessica
By borrowing more money against their home, James and Jessica lowered their interest costs and monthly payments, purchase a 2nd property, and boost their savings and RRSPs.
In another 20 years or so, they will have a rental property which has increased in value and had the mortgage paid down considerably.
Jessica and James went from doing pretty well and getting by, to doing GREAT. They are creating more wealth for themselves each month, without having to do any extra work.