An Investment Real Estate Strategy Unknown To Most Is A Negative Amortization Loan

If you want to make the most of your personal or investment real estate, you should consider a negative amortization loan. Mortgage amortization is basically mortgage balance reduction. Consequently, when a mortgage has negative amortization, the loan balance not only is not reduced, it actually grows. So, why should you consider this? Simple. It is a great way to invest money from real estate someplace else.

This is a very aggressive and fairly unknown approach to real estate investment. In fact, it is a method of investing that does not have to involve real estate, in usual way we consider real estate investing. In other words, a negative amortization loan can give you money to invest in areas other than real estate, and this is how many people use this type of loan.

Let’s assume your mortgage has a conventional loan that calls for a monthly payment of $800. If you refinance to a negative amortization loan, your payment may go down to $400 or less, leaving you $400 or more each month to invest. Now, keep in mind, your mortgage balance is actually increasing with this loan, because you are not paying the required interest, and it is being added to your principal balance.

However, imagine having an extra $5,000 to $6,000 each year to put into a high-yield stock or mutual fund. After five to ten years, this could turn into a very lucrative strategy.

Remember, it is important to consult with a financial advisor, before attempting this loan and this strategy. You might also consult with the wealth-building system, Winning the Mortgage Game.

Investing in Residential Apartment Complexes – Advantages Over Other Residential Investments

If you are interested in investing in real estate, you may be wondering which particular sector to become involved with. There are both residential and commercial options to choose from. If you want to invest in buildings where people live, you will be putting your money in residential properties. When compared to investing in single-family dwellings, there are certainly some advantages of investing in residential apartment complexes. Here are the top four reasons that may convince you that this kind of investment is for you.

The first advantage is your level of cash flow. Even when people move out, your stream of income is not put on a standstill-it simply is reduced. Vacancies result in others paying at least a portion of the rent in the place of moved-out tenants. Then, when someone new moves in, it could actually result in a benefit because the new tenants are likely to pay higher rent.

In general, all kinds of real estate appreciate in value as long as proper maintenance is included in the equation. However, it may be easier to improve the value of residential apartment complexes than single-family homes. It is an excellent combination that by adding conveniences for residents, such as laundry rooms, vending machines, and rentable storage facilities, the value of the property goes up while providing you with an additional source of income from your efforts of investing in residential apartment complexes.

Commercial loans are used for the financing of these kinds of investments. Most commercial lenders will take the potential profitability of the property into account when they decide whether to approve your request for a loan or not. The best part is that commercial loans for investing in residential apartment complexes are usually non-recourse, which means that you will not be personally liable for the debt if the deal goes south. Residential loans, on the other hand, show up on your personal credit report.

The final benefit of investing in residential apartment complexes instead of single-family homes is that, at least for large apartment complexes, there is a professional management team that takes care of the regular day-to-day operations of the property. This improves property value and decreases the owner’s responsibility. Keep in mind that hiring a reliable management team will be the key to this benefit working out for out. A poor management company could result in a disastrous situation for your investment.

Loans Between Limited Companies For Property Investment

Do you have a company for your core business activities?

Are you being taxed heavily on the money that you withdraw from the company and invest in property?

The problem – tax on money you pull out of a company

The problem I see with many property investors who own limited companies is that they do not take into account the amount of tax they pay by taking wages or dividends from the company. If you are a higher rate taxpayer then you will pay an additional 22.5% tax on the money you take out of the company as dividends.

I have worked with a few clients who made a loss on a flip once they took tax into account. Why would you put in the hard work just to pay HMRC?

You may wish to claim entrepreneurs’ relief on your trading business activities and therefore do not wish to jeopardise this by investing in residential properties that you plan to keep long-term and rent out. As such you could have two limited companies:

One for trade business activities
One for investment activities

Scenario 1: Current structure

Let’s say you pay yourself £100K out of the limited company. For simplicity let’s imagine that you are using £50K of this money for a property investment as follows:

£50,000 investment
-£11,250 tax on dividends at 22.5%
£38,750 net cash to invest

You then buy a property using the above money that makes £500 per month profit:

£6,000 annual profit
£2,400 tax at 40% on the above amount
£3,600 net cash

As you can see from the above scenario you are going to pay £13,650 in tax. This does not even take into account the fact that mortgage interest relief will soon be capped at 20%. This issue is explored further in our budget announcement blog.

Scenario 2: Suggested limited company structure

Instead of buying properties in your own name you can buy properties in a new limited company, one that is separate from your trading activities. You, as an individual, set up the company with a £1 share, or £2 if you are setting the company up with your partner. This way you can take advantage of the entrepreneurs’ relief if the company is shut down.

Company A (your trading company) loans Company B (your investment company) £50,000. No tax is payable on this loan.

Now let’s take another look at the figures.

£6,000 annual profit in Company B
£1,500 interest paid to Company A
£4,500 profit
£665 tax based on 19% corporation tax (by 2017)

You can see from the above that you will pay just £665 tax in scenario 2 compared to a tax liability in scenario 1 of £13,650.

Interest from one company to another: commercial arrangement

As Company A is loaning Company B money and they are both separate legal entities then the loan interest needs to be at commercial rates. Therefore it needs to be circa 3% above the Bank of England interest rate, which right now would mean a 3.5% loan interest charge.

• 3.5% interest per annum from one limited company
• The interest income will be taxable in Company A
• The interest charged to the second company will be a tax deductible expense for Company B

As an aside, I would caution against charging a limited company an interest charge if you personally loan it money as you would then be paying tax on the interest.