Use your equity to fuel growth

Given the rapid increase in property values across a number of Ontario markets, investors are accumulating new, unexpected levels of equity within their homes and/or rental portfolios. Equity is one of the most valuable benefits of owning a property, but it’s really more of a means than an end. How you go about unleashing your equity and how you put it to use will have a profound impact on your ability to grow your wealth and increase the cash flow from your portfolio. Here are the key things you need to plan for as you consider leveraging your equity to generate more income.

How to take out the equity
There are three ways to take out equity from a property: through a mortgage, by setting up a secured line of credit against that equity or through a combination of both methods.

With a mortgage, you begin paying back the principal and interest charged on it from the minute the deal closes. With a secured line of credit, you don’t pay anything until you start using it; when you do, you can either make interest-only payments, which are often at a higher rate than the mortgage, or principal and interest payments.

So which method is best? In my view, the best method is to use a secured line of credit, which can also work like a mortgage if you want it to. This is called a readvanceable
mortgage product.

What a readvanceable mortgage essentially does is allow you to pull out the equity through a secured line of credit, but it gives you the flexibility to convert any revolving balance at any point in time into a mortgage. The product also allows you to accumulate further equity on the line of credit as you pay down the principal on the mortgage without having to jump through the hoop of getting approved – a big bonus.

For investors, the benefits of such a product
are huge:
  • You don’t pay for the equity until you start using it.
  • Making interest-only payments gives you the opportunity to stabilize cash flow on the property you are buying and maximize the net cash flow in the meantime. Once you have a firm grasp on your property’s income and expenses, you can convert from an interest-only payment to principal and interest, which will help you accumulate additional equity.
  • The ability to convert a revolving line of credit to a mortgage could help your future approvals because lenders (especially the banks) calculate monthly payments on a revolving line of credit’s balance that are higher than the payments on a mortgage.
It is important to keep in mind that readvanceable mortgages are only offered through a select group of lenders, and you will have to qualify for such a product.

Timing your equity take-out
It may seem counterintuitive, but the best time to tap into the equity from your home or rental properties is when you do not need it. I suggest investors refrain from taking out equity when they have a property they have agreed to purchase and are relying on that equity to close the deal.

First, it is much less stressful to pull out your equity ahead of time. Do you really want to get involved in another significant financial transaction while in the midst of closing on a property? Save yourself the hassle. Second, accessing your equity at the time you qualify for it is a more secure option. Your income situation or the rules of qualification could change down the road, thus hampering or nullifying your ability to leverage your equity.

Further, it is generally easier and more cost-effective to take out equity from your rental portfolio before you own your sixth rental property. Once you own more than five rentals, your ability to qualify for a readvanceable mortgage product becomes tougher, and the costs associated with equity take-out tend to be higher. This is especially true if you don’t have liquid assets (nonregistered investments or cash assets) that you can show to lenders.

The plan
Equity take-out as a strategy should be a part of your overall portfolio financing plan. But accessing your equity, like most things in life, is not as easy as it seems.

Without a plan that takes into account the impact one property’s equity take-out can have on another’s, you run the risk of qualifying for less money overall and/or not qualifying for the right equity take-out product. Added challenges exist for investors who are planning on positioning equity in more than one property – they may not know which property to position first or which lenders to take each deal to.

To determine how best to go about the process of equity take-out, investors should speak with a qualified mortgage broker with investment property expertise. A broker can help you qualify for the right products and guide you through the process to ensure that leverage through equity take-out does not disrupt your portfolio’s cash flow or limit your ability to get favourable financing terms on your future deals.

Dalis Barsoum is an award-winning mortgage broker, real estate investor and finance advisor with more than 20 years of experience in the banking sector. She is CREW’s 2017 Mortgage Broker of the Year, a regular speaker and contributor on the topics of investing and financing, and author of Canada’s number-one financing book, Canadian Real Estate Investor Financing: 7 Secrets to Getting All the Money You Want. For a complimentary consultation or to plan your equity take-out, contact her at info@streetwisemortgages.com, or visit streetwisemortgages.com.

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