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. With the record low interest rates we have, 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.
So I like numbers (no surprise) – let’s crunch some!
So just for ease of calculations, let us assume you have $100k in equity in your house.
Now let us say that you decide to use your home equity line of credit (HELOC). You buy a $300k investment property at 20% down + closing costs ($70k).
You now have a loan payment from your HELOC. Let’s assume this is costing you 3.2% (typically bank prime rate 2.7% + 0.5%). The $70k will then cost you about $187 a month.
Let us assume that after all expenses paid (mortgage, taxes and insurance), you manage to make $300-$400/month. At the very least, you would be able to fully service your loan.
But now, instead of owning a single property that appreciates at 6% a year (conservatively in this market is closer to 10%) … you now own and additional $300,000 worth of property that appreciates at 6% a year – this amounts to $18,000 in appreciation alone. Plus, you pick up some more equity in mortgage paydown(tenants paying your mortgage plus expenses) – maybe $7000. So all together you have made an additional $25,000 minimum per year from smartly leveraging your home’s equity from only buying 1 property. Imagine if you had $300,000 in equity and you were able to buy 4 properties; that’s a cool $100,000 a year.
I hope I didn’t lose you with the math.
So if you have home equity you aren’t using, I think the lost opportunity cost is HUGE.
Until next time…………..