Empty Nest? Let’s Do Something Productive With It
With property in Toronto appreciating at incredible rates and the vacancy rates in the city as low as they have been in recent years, many are turning to investment properties as a way to build wealth and secure their retirement. Are you thinking of buying an investment property? Here are some of the rules you need to know as well as some strategies to make it a little easier on your wallet.
The majority of banks and lenders will require at least 20% down on your purchase today. This is true of rental condos in the $250,000 range as well as $1million dollar duplex and triplex properties and above. Once you exceed the $1.5 million mark, the required down payment can start to increase as well, requiring more than just 20%. Many buyers will use their own savings to facilitate a down payment but if you don’t have this cash lying around or perhaps don’t want to leave yourself with a liquidity problem, why not look to your equity?
Banks allow for mortgaged funds to constitute your down payment because they are secured. Conversely, unsecured funds such as credit cards or personal lines of credit are usually not allowed. But knowing that you have access to your home’s equity opens up many more possibilities. Provided you have enough equity in your home, you can mortgage the down payment, closing costs, and other sunk costs to purchase an income property and allow rental income to carry the debt. Let’s look at an example.
Mary and George own a $900,000 detached home in Leslieville. They have lived there for 12 years and have a current mortgage of $280,000. Instead of dipping into their savings and leaving themselves strapped for cash, they take out a mortgage of $600,000 on their house. This allows them to pay off their existing mortgage of $280,000 and access another $320,000 in equity. With this money they can either buy a 1-bedroom rental suite or put this money down on another single family home and mortgage the remainder. Either way, they’ve used none of their cash and have now acquired another wealth-building property.
The above example is obviously very specific to a certain demographic, but it is possible in many different price ranges and it illustrates how easily money can be moved to enhance your wealth-building strategy. The trick is to know how much equity you have in your home and how much you can access. Here are some things to know about refinancing:
You are only able to refinance up to 80% of your home’s value. If your home is worth $400,000 and you don’t have a mortgage, you can access $320,000 in equity. Conversely, if you have a mortgage of $360,000 you would not be able to refinance at this time.
You can use rental income to qualify for your mortgage – but there are limitations. For example, you can buy a one-bedroom condo and use portions of the monthly rent it will generate to be able to qualify for a higher mortgage. You cannot, however, rent every bedroom in your home out to exchange students and use this income to qualify for example. The rental units considered would need to be individual units that meet fire code and certain zoning requirements among other things.
You can refinance now with the intention of buying later, and hold off on paying for the extra money until you’re ready. Many people put off refinancing when the time is right because they don’t plan on buying for another year and don’t want to pay interest on the borrowed funds in the meantime. To combat this, you can take out a Home Equity Line Of Credit (HELOC). This gives you access to the money when you need it, and doesn’t charge you interest on money you don’t use.
Because there are so many combinations and examples of leveraging one property for another, it’s best to consult a mortgage professional that can walk you through all of your options. But the fact that these options are available is quite exciting!
If you’re considering looking at an investment property, or even curious about your net equity position, let’s have a conversation.