Buying your first rental property is not a difficult thing to do relatively speaking.
The key things that you need are a down payment and a mortgage. Your personal debt level is also taken into consideration when you are applying for the mortgage on your first rental property. If your ‘house’ is in order with regards to your personal debt, you should not have much trouble in obtaining a first mortgage for your first rental property.
When a real estate investor begins to acquire multiple rental properties, the financing of these properties becomes increasingly difficult.
As an example, the first purchase could be easy to do however, the 2nd, 5th, 8th, or 13th property purchase could prove to be a little bit more challenging.
If real estate investors are purchasing their properties in their own name (their name on title), it is only a matter of time that they hit a roadblock, and thus are not able to obtain financing (get a mortgage) from any financial institution. People tend to hit this roadblock at different stages, as each real estate investor’s situation is different with respect to their personal debt level. The roadblock will eventually occur.
This is because the Total Debt Servicing Ratios of the real estate investor have reached a certain limit. Because of this, mortgage companies and banks will no longer lend out any funds to the investor.
This means that every real estate investor will at some point in time, hit the brick wall, and will no longer be able to purchase properties. It is only a matter of time, but it will happen to all active real estate investors who are putting the wheels in motion and continually adding properties to their portfolio.
Enter the mortgage partner…
A real estate investor who has mortgage partners is able to continue to purchase rental properties, with no end in sight. Theoretically, a real estate investor could purchase an unlimited amount rental properties, using this mortgage partner strategy.
The relationship with the mortgage partner is as follows.
A real estate investor purchases a rental property. In this example, let’s assume that the real estate investor is working with a joint venture partner. The joint venture partner would provide the real estate investor with all of the money required to purchase the property, and the real estate investor would do all of the work. Let’s further assume that this scenario is a classic joint venture. As such, in a classical joint venture, the real estate investor and the joint venture partner would split the monthly positive cash flow 50/50. In addition, the real estate investor and the joint venture partner would split the proceeds of the sale of the property 50/50, after of course, the joint venture partner’s initial investment is returned.
A mortgage partner is used when the real estate investor can no longer be approved for mortgages by banks or financial institutions. So, in the above example, instead of the real estate investor’s name on the mortgage, it will be the name of the mortgage partner. Meaning that the mortgage partner is the one who qualifies for the mortgage. The mortgage is never in the name of the real estate investor here, because they have already reached their absolute limit with regards to the amount of mortgages they can qualify for.
This arrangement is truly a sweet deal for the mortgage partner.
The mortgage partner will often receive a substantial share in the property. A 10% share in the property is not uncommon.
The joint venture partner will receive their 50% share.
As a result, given the numbers stated above, the real estate investor would retain a 40% interest in the property.
Many experienced real estate investors who own large amounts of rental properties use this strategy.
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Great information. We use this strategy. You could also ask your Joint Venture partner to get a mortgage and alter your split accordingly.
The good thing about a mortgage partner is there are many people who would be interested in investing with their good credit rating if they don’t have cash.
Thanks for your comment Danielle.
Just the other day I was having a conversation with some real estate investors as to what the ideal percentage split is for the mortgage partner. Some were saying 10% while others were saying 25%. Any thoughts on this?
Best Regards,
Neil.
Depends on the property, mortgage etc. Generally speaking I would say with a percent of cashflow 10% -15%.
The hardest part of investing comes after the property is bought in keeping the property well managed, tenanted and equity building.
That in my opinion is worth a lot more than the 25% the investor would get if the mortgage partner gets 25% to hold the mortgage.
Take care,
Danielle
Thanks for sharing your insights Danielle.
I agree, the hardest part definitely comes after the property has been purchased!
Many new real estate investors, or potential real estate investors do not realize how much work is involved after the initial purchase.
[…] “What is a Mortgage Partner,” First Rental Property, January 2010. Another very interesting post that gives some very good analysis and introduction for investors. Writing could have been a little tighter but solid overall. […]
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