In a recent piece for The Motley Fool
, Nelson Smith argued that earning from real estate isn’t as difficult as popular opinion would have one believe—provided that one is prepared to play it safe and avoid major risks.
“The first thing to do is create some leverage,” Smith wrote. “Say you started out with $50,000 of your own capital with the ability to borrow $30,000 more at an interest rate of 3%. You’d then take that $80,000 and invest it with a brokerage.”
“The next step is picking a brokerage with low margin rates,” he added. “You’ll want to pick a brokerage with rates in the neighborhood of 2%.”
“Once the money is ready to go, understand the rules for investing with margin debt. Most Canadian REITs are eligible for what’s called reduced margin, meaning the equity in your account only has to be 30% of the total amount invested. Suddenly, $80,000 in original capital can control $250,000 in assets.”
However, strictly going for the option outlined above will not be ideal, as an investor will get slapped with a margin call if equity falls below the 30 per cent threshold at any time.
“If enough capital isn’t added to the account to get it to good standing, the shares are automatically sold at a loss.”
The best move, then, is to maintain a 50 per cent equity and 50 per cent debt split, which would give “some wiggle room in case the price of the underlying assets falls. This means an investor could end up controlling $160,000 worth of assets while only putting up $50,000 of their own cash.”
Smith concluded that as with every endeavor, versatility is key to the long-term success of such a venture.
“Ideally, investors would use the proceeds to create a high-yield portfolio with many different kinds of assets. Diversification helps to reduce risk, which is doubly important when borrowing.”
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The Canadian residential real estate segment does not appear to be slowing down anytime soon, and a markets observer offered some tips for those who are looking to net some easy money from housing.