Mortgage Investing

Many Canadians who have owned a home for a number of years have seen the value of their home rise at the same time that they have been chipping away at their mortgage. The result of this is many Canadians who may be cash poor, but equity rich. One mistake many make is that because they don’t have cash to invest (in real estate, especially after recent changes in Canada upping the minimum down payment for a rental to 20%), they won’t be able to purchase a property. However, if you own a home and have equity in it you may be pleased to find out that you can access funds to invest.

You just need to utilize the power of leverage better. So how do you do that? You already have!

When you purchased your home, you more than likely had a deposit of 5%-10% and had a mortgage for the balance. You used “OPM”, Other People’s Money, and started to build value in that investment. Keep in mind, your investment did not appreciate based on just what was borrowed, but on the value of your home (i.e.: $ 5000.00 down on a $ 100 000.00 home you are going to realize roughly 5% appreciation on that $ 100 000.00, not just the down payment.) That’s leverage. And you get to live there.

Realize the gains which you are being kept from realizing in your present situation.

Access the Equity In Your Property…

This is the first step to use your home equity to invest in. If you own your own home and owe less than 80% of the value on your current mortgage, you have access to additional funds by refinancing. Although you can get a regular mortgage, many investors opt for a HELOC mortgage which allows them to re-borrow and principal they pay down on their mortgage. This is an important feature for investors, especially as they grow their portfolio, as eventually with 5 or 10 rentals, they are able to pay down their mortgage very aggressively using the positive cash flow from their properties. It’s a snowball effect: the more cash flow, the more you can pay down your mortgage, the more you can pull out of the equity, the more property you can buy, earning more cash flow… and so on.

Once you have a mortgage or HELOC, here are some of the ways you can use it to invest in:

Use it to Borrow / Leverage 100% of the Value of Any Rental Purchase

  • Using your HELOC, you can borrow the 20 – 25% down payment for the rental, and get 75% – 80% financing (if qualified) for a standard mortgage on the rental property itself. There are some properties that when financed strategically (rate is no longer the most important variable) properly will give positive cash flow even when you borrow the entire value. Those properties you may want to leap on!
    Stay liquid for the unforeseen:
  • As you grow your portfolio, liquidity becomes more and more important. The more property you own, the more risk you are at for a number of issues to come up at once (i.e. vacancies for 2 properties, new roof needed for another, renovations needed on another). Having a HELOC with available equity will ensure that if you do have a “cash call”, you will be better equipped to handle it.

But I Don’t Want To Be A Landlord but I Still Want to Invest in Real Estate…

You can use your funds that you have borrowed inexpensively ( HELOC 3.25%-4% or a variable rate at 2.10%) and lend the funds to others through second mortgages. Yes, you can become the bank. Most people think of mortgage Brokers as someone to arrange a mortgage for a purchase. A mortgage Broker can also arrange for you to lend your funds to other individuals. Often this is facilitated through a second mortgage which you hold on a property. To do this alone can be intimidating and there is risk, but the reward is an interest rate of 12%-14%. Often a lawyer or accountant can also help find avenues to invest like this as well. To ensure the safety of your money, consider using an experienced Broker with access to an mortgage investment network specializing in 2nd mortgage loans. These Brokers will have their own underwriters and the proper tools in place to protect investors (you) should defaults occur. One channel I work with diversifies your funds into 3-4-5 different 2nd mortgages, syndicated with other investors like yourself. This offers protection from investing in 1 bad 2nd mortgage. Your exposure to risk is reduced in this manner. At the same time, should default occur they are in a position to pay the arrears on any 1st mortgage holder and purchase the property outright. This allows for sale to recoup what could have been potential losses. Should this type of action occur, your interest payments continue until the matter is resolved and your funds made available again for investing once again.