If you use a mortgage to buy investment property, you can write off the interest. Suppose, for example, you buy a rental house or condo for $400,000, paying $80,000 down and taking out a $320,000 mortgage. Assuming an 8 percent interest rate, you’ll owe $25,600 (8 percent of $320,000) a year, which you can deduct.
Most real estate investors want to be confident the property will pay out enough net income from operations to cover the interest expense, or $2,200 per month in this example. Otherwise, you’ll have to go into your own pocket to make these payments.
Using a mortgage will enhance your upside potential. In this example, a 10 percent ($40,000) rise in property value would be a 50 percent return on your $80,000 down payment.
If the property appreciates, you may be able to refinance with a larger mortgage. With a $400,000 mortgage, for example, you could pay off the old $320,000 loan and pull out $80,000 in cash, tax-free.
