There are some parts of Canada where the prices of real estate have already shot up toward what is likely to be a peak for the time being. In some other areas, though, the markets are just heating up, and interest rates are still at rock-bottom levels. This makes this a terrific time to start investing in real estate. However, if your liquidity is on the low side, where do you get the funds?
Take out equity to buy second home
You can take out a mortgage, or you can sell some of your other investment assets, such as bonds or stocks, or you can raid your IRA, or you can take out equity to buy a second home.
What is home equity? It’s the difference between the market value of your home, as determined by an appraisal, and what you owe on the mortgage. If you bought a house for $750,000, and you’ve paid down the balance on the mortgage to $250,000, but the value of the home has gone up to $900,000 in the years since you bought it, you have $650,000 in equity on the house. You can take out a home equity loan, home equity line of credit (HELOC) or cash-out refinance in order to get the money out so that you can buy another house, provided you meet prime lender credit and affordability requirements.
If you want to take equity out of your house to buy another, there are some real benefits. You’re likely to get a better interest rate and lending term from the bank, because you have more at stake – two properties with collateral. If you take out a second mortgage to buy that second home, you represent a higher risk than someone who refinanced their primary residence to make that purchase. If you run into financial difficulties, you’re more likely to let a second home go into foreclosure if that loan doesn’t jeopardize the place where you live. You can save on this loan, because you won’t have to pay fees for title searches or many of the other costs that go with taking out a new mortgage, because you’re accessing the equity in a home you already own instead of asking for financing to purchase a separate one.
There are some drawbacks to this too, of course. You will now face a higher mortgage payment each month when you take equity out of your house to buy another property. If you plan to rent out the second property, that income can counteract the higher payment. However, if you run into financial trouble and can’t make the payments, your primary residence is the collateral – and it is what the bank will come after if you go into default.
If you are planning on investing in a second home to “flip” it – or make some improvements and then sell it at a profit, then you won’t have that larger mortgage payment for long, because you can take the profits and use it to pay down that larger mortgage or save some of the money and then reinvest the profits elsewhere.
If you are planning for this second home to be a vacation home, you could consider renting it out on the weeks when you don’t plan to use it. That secondary income can help you with that larger mortgage that you have now as well. There are many property management companies that can help you administer a rental property either in your own city or in a place on the other side of Canada.
Planning to use it as a rental property with a full-time tenant? You’ll still have money rolling in once the lease gets signed, which should help you with those mortgage payments. Once again, though, you don’t want to take on a mortgage payment that you can’t handle – even if you have zero income coming from the rental property. Don’t let your primary residence end up be the one facing foreclosure because you gambled the place where you and your family live – and you lost.
Do you have questions about taking out equity from your home? Contact Amansad Financial today. Your personal situation can be reviewed so that a recommendation can be made as the best course of action.