Many people know that real estate is a great asset to build wealth with but how do people actually do it? In this blog, I’m going to share with you the blueprint of how to make it happen.
First off, you need to have cash on hand. You’ll want at least 20% and if you’re in Vancouver, that’s around $100,000 if you’re looking to purchase something that’s $500,000. There’s really no short cut to it. You need to work hard, earn has much as possible AND save as much as possible. And with the savings you have, you need to invest it in mutual funds or the stock market that will generate at least 7%- 8% annually. For me, when I purchased my first property in 2010, I had around $40,000 cash on hand. I started working and saving when I was in grade 10. With all that cash, I invested it in the stock market right after the 2008 financial crisis. In 2 years, I more than doubled my money and it allowed me to have a good sum of money as a down payment. With current uncertainties in the market, there may be great investment opportunities in the near future you can take advantage of.
In order to qualify for a mortgage, you need to show the bank that you have a good and stable income. The amount you can borrow is based on how much you make. Now, here’s the trick. The mortgage you need to apply for is a re-advancing mortgage. Or in other words, the mortgage needs to be linked to a home line of credit. As you pay down the mortgage, the equity increases. However, most of the time, you can’t get access to the equity unless you sell the property. With a home line of credit, you can redraw the money back out and use it for other purposes. After say 5 years, your mortgage has decreased BUT your property will have most likely gone UP in value! So the equity has increased more than what you’ve paid into the mortgage.
Next, it’s time to purchase your next property. Because you have a home line of credit, you can draw out the equity from your existing place and put it towards the new property. Again, there are no short cuts. You may need to wait at least 5 years to consider your next property. This is a more difficult step because now your income needs to support 2 mortgages. If your income can't support it, you may want to purchase it with a family member or a trusted business partner. It's best to find a property where the rental income can offset your mortgage payments, taxes, strata fees, and insurance costs. It's easier said than done especially in Vancouver though. Due to higher prices, you may need to still put in extra money each month. But don't let that discourage you. Although the rent may not cover everything, you will get it back in the increase in property value if you keep it for 5-10 years. I find that rental income for studios and one bedrooms have the best chance to offset monthly expenses.
And then, do the same thing. Refinance your properties, attach a home line of credit and repeat the process!
It sounds easy right but what mistakes do people usually make?
Well, like I said before, people can make a mistake right away by not having a home line of credit. But people tend to maximize their borrowing power for their first home and utilize all the ability to borrow money on the home they live in. In order to build wealth, you need at least 2 properties because you need one for a place for you to live in and the other property is for investment purposes. You can sell the rental property, cash out, AND still have a place to live in.
When you’re investing, tax is also a cost to consider. People tend to accumulate more and more properties because it’s actually best to keep the property and keep refinancing it instead of selling. This will avoid capital gains tax and you can actually deduct the interest portion of the mortgage to offset your rental income.
As time goes on, you accumulate more properties and you’ll be profiting from the power of leveraging. Let’s go back to the $500,000 example. You put down $100,000 but say 5 years from now, the place is $600,000. People may say, ohh, it’s one up $100k so you made a 20% return! Yes, in a way that’s correct but remember, you actually just put down only $100,000. So in a way, your return is actually 100%!
And there you go! We just went over how to build wealth using real estate. Of course, I can't cover everything in one blog post, so feel free to contact me or comment below if you have any questions.