Many homeowners think that owning a second, investment property is something only the very rich can afford to do. Fortunately, that’s just not true. In fact, many a homeowner has used an investment property as a wealth-building strategy – and guess what? You can too!
You can own an investment property by leveraging the equity in your current home. Sounds complicated, doesn’t it? Don’t worry, it really isn’t complicated at all. Besides, there are advantages to borrowing against your home – advantages that other borrowing options just don’t offer. Take advantage of:
- Lower interest rates
- Flexible payment options
- Access to more credit
- Choice of amortization
How much can I borrow?
For the sake of simple math, let’s say that you own a home that’s worth $600,000, and that you currently have a mortgage of $300,000 against your home. You are allowed to borrow up to 80% of your home’s equity. So you can borrow 80% of $600,000, or $480,000. But, since you currently owe $300,000, you can borrow a total of $180,000 – a sum that can be used as the down payment on your second property!
Choosing the right investment property
A financial advisor drew up these two scenarios, one in York region and one in Toronto, to help you to get a better understanding of what you could do. Let’s take a closer look at these two examples:
Purchase price: $284,000
Down Payment: $56,000
Mortgage Amount: $227,200
Monthly principal & interest payments: $1,003.35/month
Summary: The total annual cost of this condo, including monthly maintenance fees ($3,610.80/year) and taxes, is $17,376.68. Divide that into 12 payments and you’ve got a monthly payment of $1,448.06. Since the average lease rate in this building is approximately $1,362.50, you would have to carry a monthly cost of $85.56 – or $1,026.72 annually to own this property. The monthly cost to borrow the equity for the down payment of this home is $301.33 – a totally affordable amount, considering the size of the investment.
Purchase price: $305,000
Down payment: $61,000
Mortgage amount: $244,000
Monthly principal & interest payments: $1,077.55/month
Summary: The total annual cost of this condo, including monthly maintenance fees ($4,210.20/year) and taxes, is $18,678.80. Divide that into 12 payments and you’ve got a monthly payment of $1,556.57. Since the average lease rate in this building is approximately $1,500, you would have to carry a monthly cost of $56.57 – or just $678.84 annually to own this property. The monthly cost to borrow the equity for the down payment of this home is $323.61 – also a totally affordable amount, when you consider the size of your investment.
No matter how you slice it, investment properties are a smart move. They’re one of the few investments that continue to grow, despite an unpredictable economy. If you’re looking for a surefire way to grow your money – and wisely – look no further.
If you have questions about investment properties and how they can work for you, please feel free to contact me directly. I am, after all, an investment property owner myself.