We are living in some unprecedented times, whether it be a global pandemic, social/economic issues, to all the micro issues we are facing in our own households (homeschooling, working from home, missing all our family and friends, etc). However our Team is always looking for the positives, especially in our industry.
We have been seeing more and more of our clientele transition from buyer/seller clients to investors looking to grow their real estate portfolio. And during this time, those that are well-positioned have the opportunity to take advantage of the historically low interest rates that our banks are offering.
Many of our clients had purchased their homes some years ago within the GTA before the significant appreciations in price. They realized that they had accumulated a great deal of equity now sitting in the value of their homes. Most of them are still hardworking people with some time away from retirement and understand the value of real estate investing and therefore are refinancing their homes to use that equity to grow their real estate portfolios. In turn, we are also seeing them refinance their previous investment properties that have also appreciated in value.
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Let’s take a look at a recent example of one of our clients’ scenarios.
The client refinanced their principal property to “pull” out $100K and pay a rate of 2.5% on the loan which was then added to their principal mortgage. Servicing that debt of $100K for 2.5% is so minimal as that $100K was used to purchase a $500K Freehold Investment property (20% down payment) where they will achieve significant gains in 3 key ways:
In the GTA the appreciation recently has been hovering around 7-10% but with our clients we always make our calculations to analyze if a property is a good investment using a conservative 5% appreciation. Most people make the mistake thinking they are increasing the value of 5% on the original $100K invested (which would be $5k), however you are actually increasing the value of 5% on the value of the home, $500K (which is $25K).
Also, not to discount any other form of investing, but let’s say you placed that $100K in a Mutual Fund earning 10%, at the end of the year you would have realized a gain of only $10K compared to the $25K with the investment property.
2) Principal Paydown:
When the investment property is rented by a tenant, we try to ensure that the Rent paid will cover almost all expenses: Mortgage, Utilities, Property Taxes, House Insurance, and Condo Fees, Etc). However, the most important aspect here is that the Rent is paying down the principal amount in the mortgage, and therefore decreasing your mortgage every single month.
3) Cash flow:
Lastly, we have the gravy on the top. After are expense are paid, the remaining balance becomes the cash flow. This is not a top priority for our clients but we try to stay within a Break-Even Point to a small positive cash flow.
BONUS: Great thing about Refinancing the properties is the money pulled out is TAX FREE. When you pull money out of the stock market, or registered funds, you will be either taxed as income and/or Capital Gains.
So to simply summarize our example below:
Yearly Return on Investment
Please note this does not take into consideration, yearly rent increases, higher appreciations, nor any miscellaneous costs associated with owning a home. But this should give you a general impression of the key benefits of Investing in Real Estate.
Now we don’t recommend everyone refinance their principal properties or investment properties. Each case would be different in regards to household incomes and managing a slightly higher mortgage payment for principal property refinancing or ensuring that when refinancing their investment properties, the rents will still be able to ensure the investor is breaking even or cash flow positive.
The reasons why our Team and so many clients believe in Real Estate Investing:
- Homes Values Increase Over Time
- Monthly Rents Increase Over Time
- You Mortgages is Paid Down by Your Tenants
- Tax Benefits
Our team is never pushing the concept of being rich for money, but rather wealthy enough to have the freedom of time to enjoy the priorities in your life.
Although much of our business is in the GTA, we have been working in Kitchener & Cambridge for investment properties as the numbers and statistics are ideal for our investment criteria and investor appetites.
If you would ever like more information please let us know.
The real estate market in the Greater Toronto Area is vast and always changing, but Team Bhavsar is always available to discuss and help buyers or sellers understand how these changes would affect them individually.
Written by Kalpana Bhavsar and Paul Bajwa.
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