The Power of Leverage: Home Equity Can be the Ticket to an Investment Property
Your best-performing asset probably isn’t that star mutual fund in your portfolio. Most likely, it’s the roof over your head.
Residential real estate has been on a prolonged and spectacular rise in almost every part of the country. Odds are that – wherever you are in your mortgage – you’ve seen a great increase in your home equity.
Rising home values have made real estate a great investment for Canadians. So good, in fact, that a record number of average Canadian homeowners have a plan to multiply that advantage: by purchasing investment property.
In most cases, these people don’t have wads of cash on hand to plunk down for a second property. What they have is equity in their principal residence. That translates to assets that they can leverage to maximize their real estate investment potential.
Leveraging is a powerful financial strategy. The idea is this: you can access funds for a downpayment on an investment property by tapping into the home equity that’s building in your principal residence. The investment property is managed to provide income to cover the mortgage payments and property expenses. Remember, too, that the interest on the mortgage is tax-deductible for an investment property: another important advantage in building your investment. Many investors keep the leverage strategy going: as one investment property begins to build equity in a rising real estate market, it can be leveraged to purchase another property.
There are many motivations for this kind of investing. In some cases, the investments provide some available income almost immediately. Others see the investment property as a kind of retirement plan: the rent will provide important income at a later date, or the property can be sold to provide a retirement nest egg without the burden of landlord responsibilities.
In university towns, you will often find investment properties that have been purchased by parents. At a time of rising housing costs for students, this has become a sensible strategy: the child has accommodation during their school years, and takes on the responsibility of landlord to other students who rent the extra space to cover the ontairo mortgage.
Investors who are skilled at home improvement will sometimes leverage their equity to purchase an investment property, improve it, and then sell for a profit – progressively building their net worth by capitalizing on both their skills and rising home values.
But the most common reason for purchasing an investment property is simply to capitalize on the wealth-building power of residential real estate. Rising home values continue to give you a steady increase in net worth – whether or not you are pocketing profitable rents. You’ll only want to ensure that the property will cash-flow to cover the mortgage and maintenance costs.
Independent mortgage brokers now have access to a range of mortgage options for investment properties, and can help you assess your situation. One of the most innovative lenders, GMAC, has a mortgage called iinvest, which makes it easier than ever for average Canadian homeowners to purchase investment properties. In most cases, you should anticipate tapping into your home equity for a 25% downpayment on an investment property. (GMAC’s iInvest actually offers approvals up to 85% on mortgages up to $500,000 or $700,000).
How much of your home equity can you access? Let’s say you have $80,000 remaining on your mortgage and your home is valued at $280,000. If a bank will loan 90% of the value, then you have access to $252,000. You still need the $80,000 for your existing mortgage, but that leaves you with a potential $172,000 in available funds. You will, of course, want to make only a minimum downpayment, as it makes good tax sense to hold your larger mortgage on your investment property.
Many wealthy Canadians have achieved their financial success by leveraging small assets to create progressively larger ones. It’s a great way to fatten an investment portfolio, build net worth, or save for an earlier retirement. Best of all, it’s a strategy that’s within the grasp of most Canadian homeowners.
The House Team Of Mortgage Intellingence
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