When we got married in 2009, buying a home was completely out of our reach – we didn’t have a down payment and we weren’t ready for the responsibility. Lucky for us, my parents are snowbirds and spend almost half the year travelling – so they generously offered to house us in their condo. We enjoyed 3 good years of rent free living – which allowed us to save up and put a healthy downpayment on a personal property. And let me tell you – I am so glad we made our way into the market.
We were the typical first time home buyer aka we really had no idea what we were doing. Buying a personal home and buying an investment property are two very different things. When I buy investment properties I never measure the closet sizes or worry about having a second floor laundry……….you get the idea. I try to keep the emotions out of it, and stick to the numbers and economic fundamentals.
When we bought our home, it was all about emotions. When we walked in, there were candles and music playing, the house was staged beautifully and within minutes we decided we had to have it. It makes perfect sense, our homes are where we spend time with our loved ones, entertain and make the best of memories.
But on another note, for most people, their homes are their biggest asset. Especially in today’s fast growing market. Within a few short years, it is possible to build up a great deal of equity in your home.
And this is great if you want to make your way into the real estate investment market. You can obtain a secured line of credit against your home equity. Typical interest rates on these Lines of Credit are around prime plus 1%, making it very affordable to borrow funds. Borrowing money this way and using it as a downpayment on an investment property is extremely attractive and a huge opportunity for anyone who owns a home.
Think about it – you could leverage this money which is just sitting there, and use it to make you more money. I know many people are ‘debt averse’ but if you really think about it simply, you are borrowing money to make money. In this case, you are literally purchasing a property with no money down, and so your returns are infinite.
They key to this strategy is to find a property that cash flows enough that the interest payments on your HELOC are covered. And remember, every month the mortgage is being paid down and you are creating more equity through appreciation. As an added bonus, the interest payments are tax deductible.
There are so many creative things you can do with this injection of funds.
I know there are tons of people who would think that this is getting yourself into debt – instead of trying to pay down your debts faster.
But remember that there are differences between good debt and bad debt. If you used this money to buy yourself a new fancy car (which by the way is depreciating every single day) – then this is definitely bad debt.
However, if you used this money to buy yourself an investment property – that would be good debt. I have talked about this time and again – if you make sure your numbers work, your debt is being serviced every month by your tenants, your property is going to steadily appreciate and best of all the mortgage is getting paid down!
If you want to do something more short term and hands free – there are options there too. Investing in development projects or first or second mortgages (depending on how much money you have) are great options which are still backed by real estate.
So if you have home equity you aren’t using, I think the lost opportunity cost is HUGE.
So until next time, happy Ontario Real Estate Investing.
Jose Jafferji, REIA