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What Is It, What Are The Advantages, And Where Do I Begin?
So, you’ve decided to expand your portfolio by investing in real estate. Whether you’re an experienced investor or are completely new to the game, investing in real estate is a relatively simple and reliable way to diversify your passive income stream.
Real estate investments are appealing to so many investors because they are low risk, high return, and come with a fair share of tax advantages. Rental houses, apartments, commercial or industrial properties, warehouses, and even vacant plots of land all come with their own variation of tax incentives. For these reasons and more, both veteran and new investors are more likely to turn to real estate than any other type of investment.
But which route should you take, and better yet, should you borrow to invest? This article will cover the topic of real estate investments, explaining the different options along with their pros and cons, and your options for borrowing to invest.
Types of Real Estate Investments and the Pros and Cons of Each
One of the most common types of real estate investments is purchasing a rental property to become a landlord. One of the biggest advantages to this is that rental properties provide ongoing income while maximizing available capital, so they can be quite profitable. Many of the costs associated with rental properties are tax-deductible, and most rental properties appreciate over time, leaving you with an increasingly valuable asset as time passes. Another important benefit is that once the mortgage is paid off, the rent you obtain from tenants will become all-profit.
However, to get started, you’ll need a substantial amount of capital up-front to cover initial maintenance costs and vacant months. There are a few other drawbacks – property management can be complicated, and rental properties can be a giant headache due to potential property damage and vacancies and a fluctuating rental market. This is why it’s recommend to hire a property management company for your property.
Also known as real estate trading, this route is ideal for the seasoned investor. House flipping means purchasing a “fixer upper” property in order to renovate it, increase the value, and re-sell. To succeed in this field, you should be experienced in real estate valuation and marketing and have ample capital available for repairs as needed. Plus, some renovation expertise doesn’t hurt.
On the plus side, house flipping has a relatively quick turnover. Your capital and effort will be tied up for less time and there can be significant returns in very little time if the market is hot. However, it also involves a deeper market knowledge and more than a little luck – the real estate market fluctuates quickly and suddenly, which can leave short-term investors with a long-term headache.
A lesser known way to invest in real estate is lending private mortgages to borrowers who are willing to pay a high rate of interest to fund their real estate projects.Like any other real estate investment, there is risk. However, private lending represents one of the easiest ways to earn passive income without as much effort. Private lending can provide a stable and secure income if done properly.
Before investing in private mortgages, consider whether you can afford to lose the funds you have available for investment, because there is a chance that the deal could become unprofitable. The investment risk is entirely yours but rely on your mortgage broker to help you assess the level of risk.
Should You Borrow to Invest?
Borrowing to invest has many advantages. Borrowing money for property is a common practice because it will not tie up massive amounts of capital. No matter how successful your real estate investments have been, spending $100,000 or more in a property outright can cause serious cash flow difficulties. This is especially true for seasoned investors who have multiple deals going at one time.
While buying an investment property outright with cash if you have the means is ideal, this is often not realistic for many. This is why borrowing to invest can be a great option for investors.
Borrowing Options for Investing in Real Estate
The most common, and perhaps the simplest way to finance a real estate investment is to take out a mortgage on one of your existing properties. If you already own rental properties, it is often recommended to take the equity out of those rental properties. If you do not own rental properties and own a primary residence, then you can borrow equity from the primary residence.
Keep in mind that mortgage rates on rental properties are generally higher than mortgage rates on owner-occupied homes. When taking equity out of a home, you can borrow up to 80 per cent of the value of the home minus what you already owe on that property. If you are buying a rental property, you will generally need 20 per cent of the purchase price as a down payment, as well as closing cost.
A HELOC, or a Home Equity Line of Credit, is a line of credit secured by the equity in the house in which you live, using your existing home loan. This is a popular option among investors because you must only pay the interest payment instead of principal and interest like a standard mortgage. Also, you can pay it off as fast or as slow as you would like without penalty.
Generally, the HELOC will have a higher interest rate than a mortgage, so If you do not intend on paying the HELOC balance in full in short period of time, it ends up being more costly than a mortgage.
If you purchased a rental property with these funds, then once you begin to receive some positive cash flow, you can either pay the minimum on your HELOC and keep the rest in your pocket or simply bite the bullet and pay the principal down as well. This would depend on your end goals..
Using the Equity In Your Home
Have you wondered if you can accelerate your real estate investment plan using the equity in your home? An option is to to buy two additional properties by using the equity in your existing home.
Chris Allard has often shown borrowers how to use the equity in their home to buy two properties in a short time period.
Contact Chris today to learn more about how you can use the equity in your home to fund your next real estate investment.
Now that you know the ins and outs of borrowing to invest in real estate, the final step is to book a consultation with a reliable mortgage broker to help plan out the next steps that will be right for you. Whether you’re an experienced investor or are still testing the waters, investing in real estate is a great jumping off point. Borrowing to invest is simply one way to help you get where you need to be.
Before you know it, you’ll have a steady and reliable second income stream, and you’ll be confident that you have invested your money in a way that is safe and secures the highest possible return.
Chris Allard’s experience in the field means he can get you offers with over 50 financial institutions lending in Ottawa. Every lender has many mortgage products they offer, which means Chris and his team will make sure a mortgage caters to your needs while also ensuring you get a competitive rate. Chris Allard is a proud mortgage broker of Smart Debt Mortgages, independently owned and operated. Smart Debt broker #12236.