August 15th 2019
As a kid, I spent my summers up in the highlands of Haliburton. We had a rustic cottage on a creek that ran through a small farm. In addition to swimming and boating, I got to work with the farmer during hay season and at harvest. I remember the huge thrashing machine set up by the barn and the chute unloading a steady stream of grain into the granary.
So, pretend you are the farmer for a moment. The harvest is done. Your granary is full. Now what do you do? Well, you can just sit on it. Next year that heap of grain will still be there, except perhaps for a few bushels the chipmunks carry off. And the year after. And the year after that.
But then there is the third option. Take a portion of the grain and sow it. Invest it in the earth. It will return you a healthy increase. And that’s what farmers do. No farmer I know of would just hoard his crop. And unless he were retiring, he wouldn’t sell it all off.
Nope, farmers understand the principle of investing for their future.
And that’s a lesson we need to learn and apply in our lives.
If you own your own home, and have done so for some time, the chances are you have built up considerable equity. Statistically, prices in Niagara have increased over 80% in the last 5 years or so. There’s a lot of grain in those bins so to speak.
What I’m suggesting is that you take out a sizeable chunk of equity, not by selling the home, but by registering a secured line of credit against it. And use that money to invest in rental real estate.
In order to do so, you’ll have to re-arrange your thinking first. Especially if your home is mortgage free or nearly so. It’ll seem like you are taking a step backwards, renewing your mortgage or enlarging the debt, but understand it as an investment, not a debt.
Let me illustrate. Suppose you have enough equity in your home to set up a $200,000 line of credit or mortgage. Based on 20% down, you’ll be able to purchase a million dollars worth of investment real estate. Amortize it over 15 years and once it’s paid for, it’ll net you $50,000 a year at a 5% cap rate.
And one of the nice things about a secured line of credit is the re-payment options. Normally a credit line if unsecured requires a minimum monthly payment of 3%. Not so with a secured line. You are required to pay interest only. But it is fully open. You can pay any amount off the principal at any time. And even though it is against your principal residence, because you are using the money for investment, all the interest is tax deductible.
One word of caution though. Even though it can be interest only, if you do use a credit line instead of a fixed mortgage, work hard at paying off the principal. Tighten the belt and make regular payments reducing the debt. It’ll seem tough at first, but you’ll adjust. Remember, the goal one day is to retire debt free. But with as much real estate as you can amass.
In closing, I don’t want to belabor the point, but like the Nike commercial says: Just do it! The years pass so quickly. Take action now. Release that built-up latent equity and get those dollars working for you. You’ll be so glad come harvest time.
Wayne Quirk, Author
“THE MONEY MACHINE”
wayneq@remax-gc.com