Gone are the days of no money down or 5% down to invest in real estate. Canadian banks, having one of the strictest and tightest lending practices in the world, won’t lend you a mortgage for an investment property without a down payment of 20%.
With property prices for a detached home in a good neighbourhood in Barrie hovering around $500k, expect to invest $100k as a down payment. (If you check out our investor package, you get your initial investment back before we split profits in a joint venture agreement.)
Let’s dive into the most common ways of accessing equity that you may already have:
- If you have a property with equity built up in it, you can access that equity through a cash-out refinance. This is how you use money to make more money. You can use that equity to start working for you instead of just sitting there yielding you nothing.
For example, if you bought your house for $500k and you owe $300k on the mortgage, the equity in the house is $200k. Lets say from appreciation, your house is now appraised at $600k. If you want to access that appreciation, you can refinance your property for up to 80% of its value. That means you can take out a mortgage of $480k, pay off your initial mortgage of $300k and have $180k to invest!
- If you own a property, you can apply for a Home Equity Line of Credit (HELOC). Because this is a secured LOC and is collateralized to your property, the interest rates are very competitive (usually prime + 0.5). It’s like a credit card on steroids, but with uber low rates! If you don’t use it, you don’t pay anything. But if you do use it, there will be minimum monthly interest payments to carry it. It is also a revolving LOC, which means your credit limit becomes available again as you pay it off.
- There are unsecured, revolving LOCs available for professionals with even more competitive rates than HELOCs, usually at prime or prime minus a few basis points. These products are available to working professionals such as doctors, dentists, optometrists, pharmacists, accountants, lawyers, engineers, etc. Talk to your bank for these products.
With any one of these three strategies, there are carrying costs to borrowing money. But at these competitive interest rates at or around prime rate, and inflation hovering at 2%, this is cheap money to borrow! Can you obtain yields that far outpace these borrowing costs? With our strategy, the answer is a screaming YES!
Let’s say you borrow $100,000 at prime (3.95%). The costs to carry that per month is $329.17. Cashflow from your investment property can cover this carrying cost PLUS this is tax deductible PLUS you are making returns from borrowed money. WIN WIN WIN. You’re basically putting no money down and getting infinite returns! (http://bjgcapital.com/∞-infinite-roi-return-on-investment/)
The game of real estate is leverage so even though 20% down sounds like a lot, we feel it is a good balance between risk and rewards.
Generally with 80% LTV, property prices have to fall by 20% for you to go under. Possible? Yes, but unlikely given the strong fundamentals in where we invest. That being said, if there is a credit freeze, maybe due to a global economic recession, then no one has access to money and the market dries up. With our strategy, we feel safe because we can ride out the bad times with positive cashflowing properties and a whole line of renters waiting for a place to live. Remember, real estate is a long term game and there will be ups and downs, but for centuries, real estate has proven time and time again to be a stable asset class that goes up over time. So are you ready to invest? Let’s Go!