Oran Hall | The wisdom of having multiple mortgages

QUESTION: I’m currently in the process of purchasing a town house for which I already paid the deposit. I have been pre-approved for the mortgage. However, I’m seeing another property that I would like to acquire also. Both properties cost the same ($13 million). This second property would be ideal for my spouse due to proximity to work. Her rent is currently $70,000 – both mine and hers totalling $120,000 – which I currently cover.

However, I’m wondering if I’m planning on purchasing ‘too much’ real estate. My current stable monthly income averages around $700,000, and my net expense is $250,000. I’ve purposefully left out her income from my total as I want her to focus on building her stock portfolio before taking on significant debt. By the way, I am 32 years old, so I would get at least a 30-year mortgage. Ideally, my goal is to invest as much as possible. However, I’m averse to long-term liabilities due to how unpredictable incomes can be. I also do not like to pass up a potentially good opportunity. Do you think, given the numbers, having multiple mortgages is wise?

— Williams

FINANCIAL ADVISER: It is not how many mortgages you have that matters most; it is how much they cost you and the level of your income, that is, your ability to service your debt.

There are advantages to purchasing real estate. It is an asset that has a long life and you can pay over a long time. You believe you should be able to secure a 30-year mortgage. Thus, you would benefit from the property while paying for it, and, during that time and later, expect the value to appreciate even as the real value of each dollar that you pay declines.

No longer needed

You have indicated that the second property would be ideal for your spouse due to its proximity to where she works. You currently cover her rent, which you would no longer need to do in the event that you purchase it and she moves into it. The savings could go towards the mortgage payment.

I take it that you would be able to make the deposit and cover the costs associated with both transactions.

You have not said if you plan to move into the housing unit you are in the process of purchasing. If you do, the rent you now pay for your own accommodation could go towards the mortgage. If that is not your plan, it seems the logical action to take would be to rent the property and direct that income to the paying of the mortgage.

I have no clue as to what mortgage payments you would be required to make, but it seems you should be able to make the required monthly payments considering what you now pay for accommodation and the income that you say you earn. Of course, your ability to make the deposits and pay the closing costs would help determine if you can make the purchases.

Ultimately, it is the mortgage-lending institution that determines if you qualify for the mortgages.

A mortgage is a good debt given what I said previously and the opportunity that it creates to increase your net worth over an extended period.

Buying too much

I can understand why you are wondering if you are risking buying too much real estate. You are clearly making an investment decision and you would want to have a diversified portfolio. I do not know what your portfolio looks like, though, so I am not able to comment on that.

You should bear in mind that you could buy a single property that costs much more than the two you are considering, so what matters is the level of spending you make ultimately. Owning two units has clear advantages. You may rent one and live in the other, and you may choose to sell one and retain the other in the future, if you so decide.

It is sensible to invest as much as possible and being young allows you to do so over a long time, thus allowing compounding to boost your position.

You have taken a balanced view in assessing your position, for it is very true that incomes can be uncertain. One advantage of owning real estate is that it is not generally too hard to sell if it is in a good location.

If the time comes when you must sell, then you have to do what you have to do. It may not necessarily have to come to that if, for instance, you decide to rent and save or invest that income wisely, thus making you able to have a cushion against an unfavourable future development in your circumstances.

The ball is in your court.

Oran A. Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel.

finviser.jm@gmail.com.