It took me some time to come around and accept that mortgages can be good debt, if the property is well chosen and the mortgage is properly planned. It is the key to accelerating your wealth growth. Your initial challenge is getting over your fear of debt, and wiping away the generalities you have learned about debt from your parents, newspaper headlines and society. In this way you empower yourself and open yourself to learning how mortgages can help you grow your wealth.
When you buy stocks, as a regular small-time stock investor, you rarely get significant leverage of your money. Most likely, 100% of the money you put in is used to purchase the stock. If you are lucky, you may be able to qualify for a margin account of 50% or 2 to 1. The reason for this discriminating leverage is that lenders consider stocks risky and not a reliable asset. At zero leverage, for example, if you have $50K to invest, you control $50K worth of asset.
Lenders view real estate as a much less risky venture. That is why they are willing to lend at a much higher leverage than for stocks. They view real estate as a real tangible asset, and great security as collateral for loan (real estate can’t physically disappear, stock certificates can go to zero on the other hand). Typically for a rental property, lenders are willing to loan 80% of the value of the property, allowing you a down payment of 20% and allowing you to purchase property priced 5 times your down payment. At 80% loan to value, if you have $50K to invest, you control $250K worth of asset. Essentially, any increase in real estate asset value yields you 5 times more than in a zero leverage stock investment scenario. (Works the other way too, 5 times depreciation, but that is why you focus on well selected real estate that has positive cashflow, to mitigate this risk).
Having learned this concept, I realized that it would take me 5 times longer to make money via stocks or other safer investments, like saving accounts, mutual funds or GICs, than if I decided to invest it in real estate. I realized that I could get to my wealth goal 5 times faster if I simply got over my generalized fear of leverage and started to educate myself on how it can help me.
Getting over this fear for some can be difficult, especially when the people that are close to you do not embrace this concept with you. I was raised thinking debt is bad (yes, absolutely, don’t get me wrong, that is healthy to think that, you can’t spend yourself into oblivion but you do need to do something productive with your savings…..) Getting one mortgage, let alone multiple mortgages for investment property was not in the vocabulary of how I was raised. Yet, I did overcome my fear, and that was the beginning of my journey to a brighter financial future. At this point, I was yet not a mortgage broker (more on how I came to this profession later), I was working as an engineer in the automotive manufacturing industry.
I studied mortgages and how I could maximize my existing savings and equity into multiple investment property purchases. I figured what better way to attract future joint venture money partners, then to use my own money first and learn from my own investment properties? I learned that there were more options for mortgage products on your primary residence than rental properties. So, I focussed first on getting my primary residence mortgage structured properly. This was fundamental in the subsequent success of growing my rental property portfolio.
I realized at this point, my existing condo residence (my only property at the time) was what real estate veterans call a ‘dog property’, sucks money and does not appreciate. The condo fees were too high, the appreciation was not as much as I expected and if my husband and I moved out and rented it, it would not cashflow. Also, I had some equity in the property that was sitting there doing nothing. So we decided to sell it and buy a freehold property in Toronto, in an area that was poised for gentrification. The priority was getting that primary residence purchase done first, we felt it was safest to qualify for the home mortgage first before building a portfolio with other mortgages.
We ended up looking for the next 8 months in the competitive Toronto market (my awesome husband trusted me and gave me the reins to all this real estate investing stuff while he focussed on his IT business). This was truly a test for our emotions. We were looking for a modest house with a basement apartment, renovated property or not, in neighbourhoods that still had some transitioning to go. Seems like everyone was looking for the same thing as well. I remember the first property we put bid on, 11 offers and it went $110K over asking price. And this place needed a lot of upgrading! What a blow to us. Subsequently, our scope widened to other neighbourhoods, and we kept trying for 8 months. 11 times we put in offers and we finally got a great property under contract with a financing and home inspection condition. Because I knew about the ‘purchase plus improvement’ mortgage product, I did not get scared by the work that property needed, I believe that could have been a competitive edge I had over the other buyers. I put together a contractor quote for the work required, focussed on easy to understand and big ticket improvements, and submitted for mortgage approval. We took advantage of low down payment for owner-occupied residence and an extended amortization to make our monthly payments manageable. We also chose to rent out our basement to help with the mortgage payment. Doing this made part of our mortgage interest tax deductible and also keeps me sharp with my property management skills (I outsource property management for all my other properties).
Because of the low downpayment and adding the renovation costs to the mortgage via purchase plus improvement, I was able to have money for downpayments on investment property, which I subsequently began purchasing (after careful studying and due diligence). I chose to specialize in the Alberta market due to its economic fundamentals. I took advantage of mortgage strategies such as extended amortization and RRSP 2nd mortgages to make my money work harder.
So, in a nut shell, From one dog of a property, selling it and proper mortgage planning, I was able to stretch my money over 4 properties comprising of a total of 7 doors (single family homes and duplexes) with my own money. Instead of my money controlling assets at a 1 to 1 ratio, I was now in control of over $1.2M worth of cashflowing assets (today I have more property, I now work with joint venture money partners). Even 1% increase in appreciation is $12K, not bad! Then you add mortgage paydown and rental cashflow after expenses, amazing! It’s almost crazy to think even after paying the interest on a large sum of borrowed money, you can still make significant money! I was completely in love with the power of leverage and the power of a well-chosen mortgage combined with well-chosen real estate. I couldn’t stop telling people this has to part of their wealth growth strategy! I began telling co-workers, friends and family how mortgages can help you get wealthy. Then I knew, that I had to leave my engineering job and become a mortgage agent :o) The timing was right, by this time my own money was exhausted for downpayments and I knew I would not be applying for any mortgages in the near future that needed a reliable salaried job income to qualify.
So this is sort of full circle for me. I now help many new investors get started on the same journey as me. I see my story in them and I am enthousiastic about passing on my knowledge and helping investors with mortgage planning. I want to inspire people to take control of their financial destiny, so that they have a brighter future. I believe real estate and mortgages are a stepping stone to that future.
Thank you for reading my story and enjoy the rest of the blog posts.