If you are one of the millions of Canadians who have owned a home for longer than a few years, this post is for you. We've talked a lot about the reasons to invest in Canadian real estate and the fundamental economics behind the real estate market in Canada. We've discussed why I invest in the Niagara region and what makes this a good place to live, and the growth curve we've been seeing over the last few years. Now let's get into how to make this all happen.
If you've owned a home almost anywhere in Canada, but especially in the GTA and Niagara markets, you've probably noticed that the value of your home has increased significantly from when you bought it. Case in point, my wife and I bought a rural property in southern Niagara in the summer of 2016 for $350,000. A recent bank appraisal (June 2021) put it at around $1,000,000. Many Canadians have similar stories. If you sold it today, you would get a lot more money than what you paid for it. But then, you'd have nowhere to live, and you'd be stuck trying to get back into a quickly appreciating real estate market. The only way you'd get out ahead is if you were downsizing. There is one exception though: Through owning good quality, cash-flowing real estate.
Where Do I Get The Money To Buy A Second Property?
Like most people, you probably don't have a minimum of $100,000 sitting around in cash ready to be deployed into the real estate market. However, your home is probably your biggest asset, and you more than likely have a lot of untapped equity inside your primary residence. The most common way to access this equity is through a Home Equity Line of Credit (HELOC). A HELOC is a flexible way to borrow and repay equity without fees or set terms. The interest rates tend to be just a little bit higher than a variable rate mortgage; however, you can set up your payments to be interest-only payments, which cuts down your monthly costs. The bank will lend you up to a set loan-to-value (LTV) for a HELOC, sometimes as high as 65%. So, if your property appraised at $750,000 and you were mortgage-free, a HELOC could be opened with a limit of $487,500. Theoretically, that is enough to buy almost $2.5 million worth of income-producing property. If you factor in the cost of paying your interest payments into the monthly budget of your rental properties, technically speaking, you own and manage a 100% financed property that is getting the mortgage paid down monthly, has cash flow, and is subject to appreciation. It really doesn't get better than this.
What Is Your ROI On A Deal Like This?
Functionally, infinite. With none of your own money invested, you are getting predictable returns on a hard asset, and you are paying an interest rate that is lower than inflation. That is a win in my books.
Another alternative to a HELOC is refinancing your home; however, there are some cons to doing this. When you remortgage, you are taking all your available equity out at one shot and beginning to pay interest on it immediately. Because the loan is wrapped up in a new mortgage, your repayment terms probably aren't going to be as flexible either. If you decide to sell your investment property at any time outside of mortgage renewal time, you won't be able to repay the loan against your primary residence without fees. The small amount that you save on interest is probably going to cost more in the long run.
Are There Risks With This?
Sure, there are risks. If the interest rates go up, it cuts into your cash flow. If you lose tenants, you have vacancies to pay for. If the real estate prices come down, nothing happens unless you need to sell in a down market. Real estate is one of the safest investments available to the general public. Even if we don't continue to see big appreciations year over year in the coming years, we can still count on cash flow, mortgage pay down, and forced appreciation through strategic renovations to make a good investment better over the long run. The key is finding a good property in a good area that makes sense. If you aren't comfortable doing this on your own, find someone who can support you through the process!
Ultimately, while a HELOC is a very useful tool, it is prudent to ensure that you don't get over leveraged across your portfolio. Should rates continue to rise, or we enter a protracted down or sideways market, maintaining an equity buffer in your portfolio is important to provide a cushion and liquidity to weather inevitable storms and maintenance issues.
There are many other ways to obtain 100% financed properties, including but not limited to bringing on partners, vender take back mortgages, and private debt. There are inherent risks with every strategy. When in doubt, reach out!
Have questions about your portfolio or want an outside opinion? Please select the button provided below, and I will schedule a free half-hour call with you to go over your situation! Talking to the right people can really save you money. I really believe that this is the time to expand your network and learn from those around you. I'll be in touch!
I'd love to hear your thoughts on this! Have a great week while working past those obstacles on your climb to success. Let's Grow Together!
Jonathan Beam
Real Estate Investor and Entrepreneur
Jonathan Beam is a real estate investor in the Niagara region who is passionate about helping you achieve financial freedom through real estate. He works with new and experienced investors to formulate a plan that fits your specific situation and provides market guidance and consultation on the best places and strategies to pursue within the Niagara Region. Book a free, half hour no obligation consultation to see how he can help you to achieve your goals. His travels are available at www.realestateandrepeat.com
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