A cash-flow investor’s number-one goal is to have investment income that exceeds the cost of their living expenses. From this perspective, the fundamentals of recreational properties don’t fit within my own particular investment criteria. Even in the best of times, cottage rental demand is seasonal, while resale demand (and thus my exit option) is directly tied to a seven to 10-year market cycle that is completely outside of my control. Further, cottages can be expensive to maintain, given the higher upkeep that comes with a harsh natural environment and limited tradespeople to do the work.
Regardless, for many, the enjoyment of owning a cottage is undeniable, so here is one way you can turn an existing cottage into a cash cow instead of a cash drain, without needing to rent it out. (If your lender allows it, you might choose to occasionally rent out your cottage on top of this for more income, but be sure to check, as not all lenders or loan types allow cottage rentals.)
Even if owning a cottage isn’t a reality or isn’t of interest to you, these strategies can be applied to nearly any type of real estate, or even as an alternative to owning investment property in the first place.
Tapping into equity
As real estate investors, our primary tool to make money is the smart use of other people’s money, or OPM. While non-investors may prefer the feel-good factor of paying off their mortgages, by far the cheapest and easiest source of OPM we investors will ever have access to is through leveraging real estate. For us, it rarely makes sense to leave equity sitting dormant. The opportunity cost of forgoing the income you could receive if you deployed those funds is huge, and it increases exponentially over time.
If you have owned your cottage, or any other real estate, for even just three to five years, it’s quite likely that your property has experienced a significant increase in its market value. That equity is money that can be better put to work.
The first step is to refinance and thaw your frozen equity into liquid cash. There are numerous banks and institutions that, subject to other criteria, will refinance up to 80% of the property value (the current refinance limit on all residential property).
This works equally well for rental properties or your own home. The second step is to strategically deploy that money across a series of private mortgages to earn cash flow in the form of mortgage payments. Due to legal restrictions that apply only to institutional lenders but not private individuals, there’s a large market of worthy homeowners with quality properties who are unable to get bank financing.
Basic economics says that when there’s a high demand but a limited supply, premium prices will result. This little-known, high-demand private mortgage market is where investors in the know can lend their funds at double-digit interest rates, while enjoying the same levels of security that are typically reserved for the banks.
There are up to four levels of security backing your money: the owner’s equity in the property itself, the property owner’s other assets, the property owner’s income and the addressed registered appraisal. When mortgage investments are screened and structured wisely, and then systematically managed by a licensed mortgage administrator, they have a high level of reliability and exceptionally low default rate; these factors give the investor a high degree of security and control.
An optional intermediate step is to determine the most tax-efficient allocation of your funds (TFSA, RRSP, cash, etc.) to optimize your results. Sometimes a small improvement in your implementation can produce a massive change in your results.
The ROI bottom line
If you’re earning 10% to 12% income, as most of my clients do, while paying 3% to the bank, you’re clearing a 7% to 9% return on your property’s otherwise locked-up equity. That’s a gross profit of 233% to 300% on the 3% interest cost of your equity – a very hard profit margin to beat in any business, especially when you get to keep and enjoy your cottage, rental property or home just the same.
By using this method, you can have the otherwise stagnant equity in your cottage paying a large portion of the cost of owning it, freeing up your other income to invest into generating even more cash flow.
MICHAEL ANGER is a mortgage agent and account manager with Paramount Equity Financial Corporation. FSCO LIC: Administrator 11747; Brokerage 12158 855-4-MONEY-4U (855-466-6394) [email protected] paramountequity.ca/am/MichaelAnger Michael’s private mortgage blog: CanadianCashFlow.ca
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Now that spring is upon us, it’s natural to start planning where and how we’ll spend our time enjoying the warmer months. For many Canadians, ‘where’ will be at a cottage a few hours’ drive from home, and ‘how’ will involve copious amounts of rest, relaxation and recreation.