Did you know that more millionaires are created through real estate than any other form of investment? How do they do it? For starters, they embrace the power of leverage.
Many people hate or fear debt, but by doing so, they are denying themselves one of the greatest resources available to create wealth. Smart investors know that not all debt is bad – it just depends on what you do with it.
Canadian banks have been financing the purchase of real estate for many years, with the ‘security deposit’ being the property itself. In some cases, they have even financed up to 100%. Why? These notoriously conservative institutions are fairly sophisticated in protecting their funds, and they know through experience that there is no better security than real estate for their loans.
The real advantage of having banks behind your initial investment is that you can invest more in the first place, enabling real estate to produce higher eventual returns than other forms of investment.
Using leverage to finance your investments is one of the key strategies for maximizing your returns. Leverage can substantially reduce the time required to reach your financial goals. For example, investing $20,000 in a GIC that has an interest rate of 2% per annum would yield a return of $400 per year. If you were to take that same $20,000 and use it as leverage to purchase a $100,000 property, assuming the same 2% growth on your new investment value of $100,000, you would get a gross return of $2,000. Which would you prefer?
This is just the beginning of building your real estate portfolio. In the future, you can refinance and leverage the built-up equity into a down payment to finance other properties, thus starting the cycle over again as your equity continues to rise.
Another advantage of only putting down the minimum down payment is that the interest on the mortgage for your income property can be deducted on your taxes. If you put 25% down on a rental property, the bank finances 75%, which means much better returns than paying in cash. Using the lowest down payment and longest financing terms should keep cash flow steady as you build equity.
Now more than ever, investors are taking advantage of the cheap cost of money to build their real estate portfolios. The beauty of real estate and leverage is that the tenant pays off your mortgage for you, eventually leaving you with a mortgage-free property that will continue to generate cash flow. Can you imagine if you owned 10 properties with the mortgage paid off and the tenants paying you $1,000 rent each month? That’s $10,000 a month of passive income coming to you forever. Smart investors are achieving this because they’ve taken the time to learn how to use the power of leverage.
Platinum Properties Group works with clients to do a financial assessment from the bank’s perspective to see how they can fully utilize the power of leverage. With more than a century of experience in finance and real estate investing, we can help guide you through the confusing and sometimes intimidating world of bank financing to help you start building your real estate portfolio. To learn more about Platinum Properties Group’s proven real estate investment strategies, or to get started increasing your wealth through income properties, download our free guide at ppgcorp.ca/request-free-guide.
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