Most people have two phases to their real estate investing. First, they’ve got a little cash for downpayments. Maybe it came from selling their last principle residence, an inheritance, or a buyout or retirement. Either way, cash is the first and most obvious way to go.
Phase two is borrowed money for downpayments and such. The most common is a Home Equity Line of Credit or HELOC. People don’t realize how handy this is, particularly when coupled with one of the mortgage products that automatically converts your principle payments into space on your HELOC. However, for the majority of us, the concern is how much will it cost me each month?
I’m just finishing a mortgage application for an Edmonton condo that I’m using JV money on. The JV share is about $40,000. What’s that really cost my joint venture partner if they use a Line fo Credit? At 4.5%, that’s about $150 per month. But what if rates on the HELOC go up to 6%? Then you’re looking at *gasp* $200. (that was supposed to be sarcastic)
Maybe I’m crazy, but I think that $150 or $200 a month to own a $250,000 asset that throws off positive cashflow that will likely cover your HELOC payment is a good deal.
I’ve made this chart, and linked it to the spreadsheet that you can use or download.
You can view and download the spreadsheet (three tabs) here: Cost of Borrowing.