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Private lending is a great tool to maximize real estate returns. Typically you can only finance up to 80% LTV (loan to value) on a rental property with traditional lenders. By adding additional mortgage debt through the use of a second mortgage, it is possible to leverage properties up to 90% LTV and beyond. This may be advantageous for investors. I was challenged to prove this formula actually works. Don’t take my word for it, do the math. I am providing you a simple example but you can use your own numbers and decide if additional leverage is right for you.

Investor One
Purchased a $200,000 property at 80% LTV. First mortgage of $160,000, 2.1%, 30 year amortization. $600 per month 1st mortgage payment. Rent of $1500 per month less $300 for property tax and insurance, net of $1,200 per month before financing, $600 per month after financing. Cash flow of $7,200 per year. Based on the $40,000 initial investment your return on investment is 18% per year.

Investor Two
Purchased a $200,000 property at 90% LTV. First mortgage of $160,000, 2.1%, 30 year amortization. Second mortgage of $20,000, 15%, interest only. $600 per month 1st mortgage payment. $250 per month second mortgage payment. Rent of $1500 per month less $300 for property tax and insurance, net of $1,200 per month before financing, $350 per month after financing. Cash flow of $4,200 per year. Based on the $20,000 initial investment your return on investment is 21% per year.

Investor two outperforms investor one returns by 16.7%. Investor two has increased their capacity to purchase additional properties by 100%. What is stopping you from maximizing your returns? We are here to help provide you with creative financing options using the concepts of leverage and private lending.

Originally posted January, 2021.