Mortgage

A loan that is used to finance a real estate purchase, usually characterized by specified monthly payments and interest rates. A Mortgage on investment property is a key tool to enhance the return on investment for a real estate investor. A conservative example demonstrates how to calculate the return on the cash investment a Mortgaged real estate investment generates. If an investor invests $100,000 cash on a $500,000 property, a Mortgage at 5% annual interest on $400,000 is required for the purchase of a real estate investment. As the property returns 10% of its value per year, the total return is $50,000 per year. The interest payment on the $400,000 Mortgage at 5% is $20,000. The return is $50,000 minus $20,000, or $30,000. $30,000 is a 30% return on the investor’s cash investment of $100,000. Another way to understand the contribution of return is the investment is returning 10% on the cash and the difference between the investment return and the Mortgage rate on the Mortgaged amount. So the contribution of interest is $10,000 or 10% from the cash and $20,000 or 5% on the Mortgaged portion of the investment. So two thirds of the return is generated from the investors ability to Mortgage 80% of the cost of investment. To maintain this leverage, an investor must refinance or sell a Mortgage property and reinvest the growing equity after several years. In many cases, selling and reinvesting creates greater leverage than refinancing the loan. Another investor is typically able to recognize the increased value in a well managed investment property than a bank’s refinance protocol allows.