Jan 15, 2013 / 5:00 am
OK so were in a flat market, this isn’t good or bad news; it just is what it is. We are well into the recovery on the road back to the next boom but the next few years are predicted to perform at the regular completely un sexy inflation rate of 3.0-3.5% Since most of us pay about that in interest on our mortgages, the equity we have in our homes is rendered “dead” or stagnant for lack of a better term.
So with that said how do we make the equity in our houses do what all capital is designed to do, create wonderful opportunity for its master. What you’re about to read is an extremely easy strategy to employ, in fact by the time you’re done reading this you may wonder why you haven’t already done this a couple times over every year since you’ve been able. All it requires is for you to “tap” the existing equity in your home utilizing a line of credit. For this example we will use a sum of $200,000. This may seem like a lot of money however statistically; almost half of Kelowna home owners would have access to at least this amount.
So here is the move. It involves buying a property in the 160-190 range, one that would typically be a $250,000 property if not for the special “selling circumstances”. What we are looking for here are distress sales, court ordered or estate sales, something that needs cosmetic help to reach its full potential. You might be saying, oh yeah, and how do we go about finding one of those? Let me say this, before sitting down to write this, I found 3 good candidates in matter of 20 min which I’d be more than happy to share with anyone who asks. Simply put, they’re definitely out there, if you know where to look.
So lets fast forward for a moment, you’ve located a distress sale for 189,900 and made your offer, once you’ve negotiated the best price on the property say $180,000, you now have 20k left in your 200k budget to help this property get up to its full potential. Something in this price range can easily be totally overhauled for 10-20k even using professional contractors to do all the work. This is the fun part! Allowing 3-6 weeks for the renovations to complete, you have created a tremendous amount of what we call “sweat equity.”
OK so now what? You’ve got a property that is now worth 250k and you are into it for $200,000 total after costs and renovations. This is where things get exciting, to a real estate geek like me anyway, it’s time to bring every penny of this capital back into your hands. For this final step we need to engage the services of a good mortgage professional. It should be a smooth and extremely easy process as you currently own this property outright, with zero debt. The bank will order an appraisal to verify the current value of 250k. The mortgage broker will then qualify you at 80% loan to value for a rental property. The property will bring in approximately 1300-1800 in rent which will more than offset the 850/mo mortgage and 150/mo property taxes. Once the loan against the clear title property is approved. The bank advances funds to your lawyer, your lawyer registers the mortgage to the property and a 200k cheque is waiting at the front desk of your legal beagle’s office.
Now you have a decision to make. Do it all over again? Or simply replace the equity you utilized from your primary residence and sit back and enjoy the fact that you have just created $50,000 in equity, hundreds of dollars in positive monthly cash-flow and a wealth building rental property that your tenant is paying off by almost 500 dollars per month, on a property that now stands you ZERO
Some of you are thinking wow that’s brilliant! Some of your heads are spinning with information overload and have some major questions, either way please don’t hesitate to contact me for a one on one consultation. The purpose of these articles is merely to show what is possible when you become aware of the opportunities that are right in front of us. There truly is a fortune at our feet.
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