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Capital for investing comes from three primary sources: savings, recycled equity, and other people\u2019s money (OPM). On one end of the scale your cheapest source of capital is savings, but it is the most expensive in terms of time in my view as it takes time to save and opportunities may pass you by. On the other end of the scale, you\u2019ve got OPM. I see investors jump into OPM capital prematurely because of its unlimited potential of \u201cusing other people\u2019s money to own real estate\u201d. While true, it is the most expensive source of capital in terms of cost and time to source it. While there is a place for that capital within one\u2019s portfolio, I believe it should be used as a last resource and that investors should first maximize on what they can do on their own using their own capital to own a property and its cash flow 100% before they utilize OPM.<\/p>\n
The most powerful source of capital for investors in my view is recycled equity.<\/p>\n
I think this for two reasons: 1. investors do not have to \u201cwork\u201d for that money. Their properties do. Many investors have seen their properties (primary residence and rentals) appreciate over time, picking up hundreds of thousands of dollars in equity that they can extract to re-invest. 2. Extracting equity is relatively cheap given the low cost of borrowing with many lenders<\/p>\n
In this article , I will share with you the key financing strategies relating to tapping into your portfolio equity to fuel growth<\/p>\n
HOW YOU TAKE OUT THE EQUITY<\/strong><\/p>\n There are three ways to take out equity from a property: the first is through a mortgage, the second is through setting up a secured line of credit against that equity and the third is a combination of both.<\/p>\n With a mortgage, you pay principal and interest on that money from day 1 \u2013 the minute the deal closes \u2013 while with a secured line of credit, you don\u2019t pay anything until you start using the line; and when you do: you can either pay an interest only payment \u2013 which is often at a higher rate than the mortgage \u2013 or a principal and interest payment.<\/p>\n So which method is best? <\/strong><\/p>\n The best method in my view is to utilize a secured line of credit \u2013 that could also work like a mortgage if you want it to \u2013 This is called an advanceable mortgage product.<\/p>\n What it does essentially is allow you to pull out the equity through a secured line but it gives you the flexibility to convert any revolving balance at any point in time into a mortgage. Further, the product allows you to accumulate equity on the line as you pay down the principal on the mortgage without having to go through the hoopla\u2019s of approvals. A big bonus!<\/p>\n To investors, the benefits of such product are huge:<\/p>\n Firstly: you don\u2019t pay for the equity until you start using it<\/p>\n Secondly: paying an interest only payment, gives you the opportunity to stabilize cash flow on the property you are buying and maximize the net cash flow in the meantime. Once accomplished and you have a \u201cgood grasp\u201d on the income and expenses your property generates, you can convert from an interest only payment to a principal and interest; which will help you accumulate additional equity<\/p>\n Lastly: The ability to convert a revolving line of credit to a mortgage could help your future approvals because the lenders (especially the banks) factor a monthly payment on a revolving line of credit balance that is higher than the payment on a mortgage payment.<\/p>\n Advanceable mortgages are offered only through a select group of lenders and you have to qualify for such a product. <\/p>\n TIMING OF THE EQUITY TAKE OUT<\/strong><\/p>\n <\/p>\n It is best to position the equity in your home or rentals when you do not need it versus when you have a property that you purchased and plan to rely on equity from another property to close the deal.<\/p>\n Not only it is less stressful to do it ahead of time versus in the midst of closing another deal but also doing it at the time you qualify for it is the best time to do it as your income situation or the rules of qualification could change down the road.<\/p>\n Further, it is generally easier and more cost effective to take out equity from your rental portfolio before you own your 6th rental property. The reason is that once you own more than 5 rentals, the ability to qualify for an advanceable mortgage product is tougher and the costs associated with equity take out tend to be higher, especially if you don\u2019t have liquid assets (non registered investments or cash assets) that you can prove to the lenders.<\/p>\n SEQUENCE OF THE EQUITY TAKE OUT<\/strong><\/p>\n If you are planning on positioning equity in more than one property; it is important to speak with a qualified investment property mortgage broker to help you determine how to go about the process, which property to position first and which lenders to take each deal to.<\/p>\n Without a plan that factors the impact of taking out equity from one property on the equity take out from another property, you run the risk of qualifying for less money overall and\/or not qualifying for the right equity take out product.<\/p>\n THE PLAN <\/strong><\/p>\n Equity take out as a strategy should be part of your overall portfolio financing<\/a> plan. A qualified mortgage 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 cash flow and does not limit your ability to get favorable financing terms on your future deals. <\/p>\n![\"EQUITY](\"https:\/\/www.canadianrealestatemagazine.ca\/wp-content\/uploads\/2020\/08\/Depositphotos_255707936_L-1024x714.jpg\" "\\"-\\"")
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