Sarah Colucci's Mortgage Blog
Stay enlightened about mortgage & real estate news in Canada.
Want to have a real estate empire? Most people want to be millionaires, have lots of property under their belt and retire in some exclusive resort somewhere. Why don't they? They think building an impressive portfolio is too complicated when it's really not at all.
It may surprise you to learn that approximately 76 percent of Canadians hold their wealth in real estate.
The reason is likely because even without having all of the funds available to purchase real estate outright, mortgage financing is still relatively easy to acquire if you have a sufficient income stream, the minimum required down payment and an adequate credit score. And even if you don't qualify for financing via the conventional routes, there is still a plethora of alternative and private lenders who can still lend you mortgage money for investment purposes just at a slightly higher cost.
Since the recession that hit the Canadian economy in the 90s, real estate's return on investment has been on an upward trend, outpacing most other moderately-risked investments. For example, a bond mutual fund may only yield a return of 2 to 5 percent for ten years, whereas real estate value in some pockets of Ontario has increased by 10 to 12 percent per year.
For example, in 2010, an average three-bedroom home in Newmarket, Ontario, sold for around $430,000. In 2017, the same home would have sold for approximately $1.2M. Today, because of the introduction of the mortgage stress test and foreign investment tax that created a slight correction in market values, the same home will likely still be worth around $900,000. Therefore, even accounting for Government induced real estate depreciation since 2017, its return on investment has still been around 12 percent each year.
And so, there are not many people in this day and age who challenge the benefits of owning property or deny the fact that the property they have owned has increased in value, which has, of course, increased their net worth sometimes almost tenfold.
Therefore, let us consider astute property investors who have built an empire leveraging both existing equity and mortgage financing to their advantage.
In my experience as a mortgage professional, it's not wise for anyone to purchase investment properties with cash no matter how much of their own money, they may be able to access.
Most people do not have the cash to buy a property outright, and even if they did, they would be tieing up too much of their money unnecessarily, which would prevent them from engaging in further investments that also didn't require 100 percent of their capital.
When it comes to investments, the old saying, "money makes money" holds more weight than ever. Successful real estate investment is about learning to leverage what you have to be able to take immediate action when a good investment comes your way. It's also about using mortgage lending to offset costs and build your empire in a way that allows you to put forward as little capital as possible while enjoying all the profits.
For example, you may start off buying a home to live in and only put 5 percent down towards the purchase price. In a couple of years, your property may increase in value enough to be able to refinance your mortgage to access liquid funds. You may use those funds as a down payment on another property that can be rented out and deemed an investment property. You may keep doing this until you own three to five properties.
Although this practice of buying, refinancing and buying seems easy, there are other technical aspects to consider, and you must also acquire the knowledge of how mortgage lending works to pull the entire thing off.
Setting up your mortgage in a way that allows you to keep qualifying for financing in the future is imperative. It may not be wise to take a fixed-rate mortgage or use a secured line of credit instead of a conventional mortgage as they can unnecessarily inflate your monthly payment on a mortgage application, which could disqualify you for further mortgage financing in the future.
Also, when you get to own three or four properties, it becomes increasingly more challenging to get financing, which would put you at an increased risk of having to use alternative or private lenders at a much higher cost. By borrowing at higher costs, you'll compromise your ability to cash flow each month from rental income since your profit margin gets squeezed.
Also, there is the issue of capital gains and taxation, which must also be thought through wisely. It would be best if you considered market rents as well as other ways to maximize monthly rental income, whether through long or short term tenants, for example, and the rent that gets charged.
Most importantly, you should likely consider consistency in income and your credit and how any changes to either could impact your chance of growing your real estate portfolio.
Some professionals overemphasize the intricacies of growing your real estate portfolio, but the truth is it's not rocket science. One of the best courses of action you can take is working with someone who understands mortgages (like a tenured mortgage broker or bank specialist) that can advise you on ways to begin investing in real estate that can reduce any roadblocks in the future that may present themselves as you keep expanding.
It's a good idea also to map out a plan that includes your goals about how many properties you want to own in a specific time frame — for example, one property per year and four properties by 2024. You can start working with a mortgage professional right away to find out your chances of fulfilling your goals in the time frame you have set for yourself while also helping you set the foundation for a life investing in real estate.
By: Sarah Colucci
Senior Mortgage Agent, Lic. M14000929