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Many property flippers can afford the costs of carrying a mortgage while they renovate, but they might not have enough for a down payment until the opportunity is lost. One tool to bridge this gap and take on a property is a shared appreciation mortgage. 

Usually only offered by private funds and lenders, this mortgage arrangement can get you the loan needed to start property investing and flipping. Here’s how they work!

What Is A Shared Appreciation Mortgage?

A shared appreciation mortgage (SAM) is similar to a regular mortgage, but in this case, the lender will offer the lendee a below-market interest rate. They offer these terms in exchange for a portion of the profit made when the property is sold. If you take on a SAM, you agree to share the benefit from the equity gains. Think of the lender as a partner offering to put up an investment for the profits.

A SAM earns interest at a rate that equals an increase in the home’s value; if the value goes up 15%, the SAM would be paid with the mortgage principal amount plus 15% interest.

You’ll often see them described as shared equity mortgages, but be careful: they are not always the same. Many lenders in Canada use the terms interchangeably, but in a shared equity mortgage, the investor or lender owns a part of the property. They might cover a major cost, like the down payment, the closing, or some other part of the initial purchase of the property. The investor then recoups their portion of the equity after the home is sold based on whether the property has increased or decreased in value. This can change the arrangement and how much leeway you have in renovation decisions, so read any paperwork carefully!

Shared Appreciation Mortgages And House Flipping

If you’re looking to finance a great opportunity, a SAMs is an ideal lending choice for flipping houses. For example, if the property investment is likely to appreciate in a short amount of time and it ends up exceeding what is owed to the investor, the flipper will still end up making a very nice profit. 

In fact, for most aspiring property owners, SAMs are only a good idea for fixer-uppers that are ready to be sold for a profit. This is because flipping intends to enhance a property and sell it; the flipper spends little time sitting on or living in the investment. Compare this to a home someone wants to live in – if home prices fall and the owner isn’t planning on increasing their property’s market value (through renovations, etc.), they might not be able to have enough money to repay the lender within the terms of their agreement.

Like any deal, a property investor should only enter into a shared appreciation mortgage arrangement once they’ve read the paperwork and understand the terms. If you need help making the right decision for your circumstances and opportunity, add Matthew J. Scott to your team!