Investing with a HELOC
Making Money Without Using Your Own Money!
Sounds too good to be true doesn’t it? But many people have what they think is a huge asset – their home – that is more than likely acting as a liability!
What if I was to ask you the question: “Can you define an asset”? Most would respond with ‘something of value that belongs to them’ – examples people might use are cash, cars, bonds, stocks, jewellery…and their home…
But what if I now ask, “Can you define a liability”? The answer is often along the lines of ‘something that costs them money’, or, ‘an item that is financed through credit’.
Do you see the paradox?
Most people consider their home to be an asset, but in reality, it costs them money every month in mortgage payments – a portion of which is pure interest being paid to the bank. So doesn’t this make your home also a liability?!
Even if your property is mortgage free, you are likely sitting on a huge pile of net worth, but that money is not working for you. It just sits there, quite happy and content, not really doing anything!
Make Your Home Do More For YOU!
You can use the equity in your home to put your property more into the ‘asset’ side of the equation by making it work for you in some form of investment vehicle.
The first step is to set-up what’s called a Home Equity Line of Credit (or HELOC) with a lender. This is basically a loan that is secured by the equity in your property. Then you use this loan in your preferred investment (preferably nothing too volatile!). By doing this you can significantly increase your return on that money (or, ROI – Return on Investment) as compared to just investing your available cash.
The reason this works is that during the time of the investment, that HELOC money that you have made available is only costing you a monthly interest payment, you are not repaying the principal amount. This, in combination with the fact that you have not invested any of your own cash, means that your returns can be quite staggering!
Let’s take a look at how this works, by looking at some examples. I’m going to use real estate as our investment vehicle, in particular a property that is held in a rent-to-own program, as that’s what I’m familiar with!
But just before I do that, let me ask you a question…
What would you consider a good return for your investments? What returns are you achieving at the moment? Keep this in mind as you read the examples below!
Example 1:
Let’s say you borrowed $50,000 of equity from your home using a HELOC and used it for a down payment to buy an investment property costing $250,000. You pay the bank a 6% interest rate on that money.
Interest paid (over 3 years) = $9,000
Let’s take a look at your Return on Investment:
At 6% interest, you would need to make a payment of $250/month over the 3 years.
After holding the property for 3 years, we sell it to the tenant-buyer in our rent-to-own program, at an already determined sale price. [Figures rounded to the nearest 1000]
| Sale Price Revenue | $289,000 |
| Revenue from Cashflow and Mortgage Paydown | $16,000 |
| Total Revenue | $305,000 |
| Less Purchase Price & Tenant Credits | $263,000 |
| Net Profit | $42,000 |
| Investor’s share of Profit (50%) | $21,000 |
| Less HELOC Interest | $9,000 |
| Net Profit for Investor | $12,000* |
At the end of the term, your HELOC is re-paid from the sale of the property.
Based on your investment of $9,000 (of interest payments) you have produced an ROI of 133% over 3 years! Your interest payments turn into a net profit of $12,000 and you have not used any of your own cash! That certainly is money working for you!
Example 2:
Let’s now say that you had made the same investment, but instead of using your HELOC, you had instead used your own savings of $50,000.
In this case your ROI would still be a very healthy 42% over 3 years…certainly much better than 2% with GICs, but nowhere near as good as putting your home equity to work for you!
In summary, what are the benefits of using borrowed funds?
- Your returns sky rocket!
- Increase your tax deductions – interest payments based on investments are tax deductible. (please obtain tax advice from an accountant first)
- You keep your cash for whatever you need.
If you want to know more about finding a plan that works for you and using your home’s power to invest in income producing real estate, feel free to reach out to us for more information. Ian will be happy to talk to you 1.800.271.4343 or ian@aspirerealestate.ca
*This cash flow scenario is very typical of what can be generated with our investment properties however this is not a guaranteed return!
Canadian Real Estate Wealth Magazine Top Investor Awards!!
