Many large real estate projects are undertaken on borrowed money. They include some of the great hotels, office buildings, factories, loft buildings, warehouses, railroad terminals and stations. The borrowings may be represented by a mortgage to a single lender or by a bond issue secured by a trust mortgage. Why it pays the owner to borrow part of the cost. - From an analysis of the various kinds of borrowers, the reasons for borrowing on a real estate mortgage are apparent. These reasons may be amplified. There are those who own property outright, free and clear of mortgage. They may mortgage the property to raise money for the purpose of paying debts, or for investment in other enterprises, or the purchase of other securities. They may also require it for developing or improving the property itself. Others never own the property free and clear, they place a mortgage on it at the time of purchase to pay part of the purchase price. Some of this borrowing may be a matter of necessity but much of it is because of the fact that it is an advantage to the owner; it pays him to have a mortgage on his property. As an illustration assume that a piece of property costing $100,000 brings in a gross rental of $15,000 per annum and that it is free and clear. If the taxes, repairs and other expenses and provision for depreciation amount to $8,000 annually the net income is $7,000 or 7% on the owner's investment. Now suppose the owner mortgages the property for $60,000 at 5 1/2 per annum. The interest amounting to $3,300 would reduce the net income to $3,700 per annum, but as the owner's investment is now only $40,000 his rate of return is 9 1/4% per annum. It can be taken as a rule that when mortgage money can be borrowed at a rate less than the rate of net return on the property unmortgaged, borrowing raises the rate of return on the owner's investment.

When property is unimproved, or inadequately improved, borrowing to erect a suitable improvement is invariably an advantage. An annual loss or a very small annual return may be turned into an annual income commensurate with the value of the property. The land may be valuable but it will only yield its economic rent when improved with a building, and it is often a financial advantage to obtain a mortgage loan to pay all or part of the cost of such building. Suppose a piece of unimproved land to be worth $100,000. The taxes can be figured at $2,000, and the loss of interest on the money invested on the land at 5%, $5,000, a total annual loss of $7,000 to the owner. To save this loss the owner puts up a building costing $200,000 and he borrows all of this amount on a mortgage at 6%. The land and building together produce a rent income of $35,000, the taxes, repairs, depreciation and other charges are $18,000, leaving a net rental of $17,000. Out of this, $12,000 is paid as interest on the money borrowed leaving $5,000 for the owner, being 5% on his investment which is still $100,000. He has therefore stopped his loss, and now gets an income of $5,000. It is probable that in a case of this kind the amount of depreciation of the building would be represented by a corresponding annual payment to reduce the amount of the mortgage. No careful mortgagee would allow the building to depreciate, and permit the mortgage to remain for its full amount. It is possible that the annual payments on the mortgage would be much more than the depreciation, and if so it would mean that the owner was constantly increasing his equity by a further investment.

The two foregoing illustrations serve to show why income property may sometimes be mortgaged to advantage. The principle applies to all property dealt in for income or profit. The advantages of borrowing to buy a home are more than monetary. Mortgage loans enable families to secure homes on small cash payments. Additional savings may thereafter be applied to reduce or pay off the mortgages. .