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Andrew Mckay
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The Positive Effect Of Using Other People’s Money To Purchase An Invesment Property
Or how to use the equity in your home to create wealth.
This week I have had the pleasure of viewing and submitting an offer on a couple’s first investment property. Whilst discussing down payments and mortgages there was that Eureka moment when they realized it was not going to cost them any money. The couple have a very nice family home in Wasaga Beach and have built up equity in it. As with all of us there was the feelgood factor of reducing the mortgage on our home but the equity is in essence dead money. We can’t use it unless we sell and down size or refinance somehow and refinancing increases our monthly mortgage payments.
Now a secured line of credit (LOC) can be very effectively used as the down payment on an investment property and leverage makes the asset worth 10 times the down payment 
Let me explain. In Barrie an investment property can be bought for $190,000. With 10% down the monthly mortgage payment on a 5 year fixed term is $845. The property tax and insurance will cost $225 per month. A total out going of $1,070.
The property rents for $1,200 per month ( possibly more) leaving a surplus of $130 per month.
A LOC of $22,500 is used for the down payment and closing/legal costs. The interest on this will be $60 to $70 per month depending on the interest rate for the LOC. The owner is left with a minimum of $60 per month plus a house worth $190,000 without spending a penny.
Now this is where leverage kicks in.
With a very very conservative 3% increase in value the home would be worth $220,262 after 5 years. Remember Barrie real estate prices on average increased about 2% in 2008 which as we all know was a doom and gloom year for property. After 10 years the home would be worth $255,344. A profit of $65,344 over the purchase price PLUS the mortgage is being reduced PLUS there is positive cash flow each month AND it hasn’t cost the investor a penny.
Hands up if you expect to save over $65,000 over the next 10 years.
For arguments sake lets look at the $19,000 down payment being invested in stocks and shares. At 10% growth per year the profit would be $30,281 . Again hands up if you expect stocks and shares to increase by 10% per year 
Decrease maybe.
Yes I know this is somewhat simplified but the basic principles are correct. There may be void periods, repairs to be paid for etc.but the idea is that the positive cash flow each month covers these extra expenses. The skill is buying the right property in the right area at the right price to minimize any unforeseen expenses.
[...] This does even take into account the tax advantages and leverage. [...]
[...] Other People’s Money [...]
[...] in property means taking on debt, something we are all told to avoid as we grow up. It is though GOOD debt. Still it takes courage to make those first steps in to the world of real estate [...]
[...] The skill and planning is in getting from buying your first investment property today to the desired income when you retire. The age you start doesn’t matter; it is the one thing we can’t change. The key is in knowing what properties to buy to produce equity growth or cash flow. AND how to finance those purchases. [...]