As you would expect, I find myself talking to a lot of people about investing. I talk about the shortage of quality housing, and about the sub-prime crisis. I discuss how the tenant is your real asset, and not the house.

But the one thing that I talk most about is the power of leverage. This one thing is the most powerful part of real estate investing, and can sky-rocket your returns.

So, how does leverage relate to you paying off your mortgage? Let me explain.

Let's say that you bought your house worth $300,000, and put 10% down. Assuming a 25 year amortization, a 5.50% interest rate, and once monthly payments, your mortgage payment would be $1681.

Now, let's assume you are a diligent saver, and decide to pay an extra $500 on your mortgage every month. This is a great move, and will shorten your mortgage from 25 years to 15.3 years, saving you $94,698 of interest payments.

Sounds great, but let's look at another strategy. Let's say you don't accelerate your mortgage payments, but instead use that extra $500 per month for an investment.

In this situation, you borrow against the equity in your house, and use the $500 per month to pay the carrying costs on that loan. With today's interest rate, you could easily borrow $110,000 and have under a $500 per month cost. For the sake of simplicity, let's assume you borrow $100,000 as a nice round number.

You then take that $100,000 and invest with us, and we purchase a great $400,000 property for you. You own the property, and we manage all aspects of the day-to-day operation. Again, to keep things simple, let's also assume that the property does not generate any monthly cash flow.

If this property was held for 10 years with an average annual appreciation of 8.0%, the property would be worth $863,570, and the mortgage balance (based on the investment mortgages we typically use) would have been reduced $34,611 by the tenants.

Upon sale of this property, you would receive your initial $100,000 investment back, plus a profit cheque of $239,091.

Now, let's go back to your personal mortgage. After 10 years without any accelerated payments, your mortgage balance would be $206,564. If you applied the $239,091 profit cheque to your mortgage, not only is your mortgage paid in full, but you're left with $32,527 pocket change to go celebrate your new mortgage free status (in the Bahamas maybe).

So, by using that small $500 per month investment to invest, instead of paying off your home mortgage, you reduced your mortgage period from 25 years all the way down to 10 years - a full 5.3 years sooner than adding that $500 to your mortgage payment.

Sounds great, doesn't it? But there's even more to the story. Because you owned the investment property for 10 years, you paid $71,539 of interest on that investment property's mortgage, which is a deductable expense. Also, you made 12 monthly payments of $500 for 10 years, totaling $60,000 of interest payment. That's a total of $131,539 of interest payments incurred for investments, meaning fairly significant tax deductions each year.

Also missing from this scenario is the monthly cash flow that is distributed from our investment properties. Simply put, this is the cash remaining each month after all expenses are paid. To keep pace with market conditions, annual rent increases are normal, meaning that the passive income provided by the investment would go up every month, and realistically would cover your $500 per month interest payment within a few years.

Now, it needs to be said that leverage is a very powerful tool in investing, but it does come with its risks, and is not for everyone. Also, everybody's tax situation is different, so you would need to consult your own accountant and tax advisor to determine what the correct deduction plan for your situation is.


I would be happy to sit down with you and run some real numbers that are more accurate to your situation if you are interested in more details. Please see our Contact Us page to reach me.

David.