Everyone can use a boost to their bank accounts. If you disagree with this statement, you are probably in the top .1% and there is no need to read any further. For the other 99.9%, how many can say they have a clear plan to retire comfortably, while also funding important milestones along the way?
Events will arise in life that may require large sums of money – often at a moment’s notice and unexpected. Despite earning a decent living, many people still live paycheck-to-paycheck and struggle to get ahead with investment goals because of these unexpected costs.
Do you know how much money you are going to need in order to retire? If so, have you taken into account inflation? And at what age will it actually be feasible? If you have kids, have you taken into consideration future schooling costs? There are so many expenses one occurs in a lifetime that it’s often tough to manage everything and stay afloat.
If you own a home already, you’ve likely already used a Home Equity Line Of Credit (HELOC) to pay for some of these expenses. Sure, it is nice to have a safety blanket, but the truth is, more and more Canadians are taking on debt through HELOCs without the ability or intention to pay it back. This is one of the leading causes of the Canadian household debt ballooning into the trillions and being the highest debt load we have ever seen.
I don’t have to tell you that borrowing money on something that isn’t going to earn you money and instead plunges you further into debt, will not bode well for future you. One of the areas The MINK Group focuses on within our business is reversing the trend of borrowing to go further into bad debt. We believe there is good debt and bad debt and want to steer our clients towards the first and away from the latter.
There are several investment types to consider when deciding what to do with your money or HELOC. Many people are conditioned to believe they need to invest their money with a financial advisor, and there is nothing wrong with that approach. There are many successful examples of people investing in stocks, bonds, mutual funds, etc.
However, with these types of investments, you are investing on a 1:1 ratio. Every dollar you put in goes towards one dollar of investment equity. So if you put in $100,000 and earn 5% the first year, you now have $105,000 at the end of the year. If you are using the equity in your home to borrow for the initial investment and paying 2% to borrow that money, you will have paid $2,000 in interest and you have made $3,000 at the end of the year. That’s a pretty good deal considering you borrowed money to make money. If you have the cash upfront to invest, it’s obviously more attractive as you aren’t subject to the interest costs.
We prefer to show our clients an investment strategy that uses the power of leverage to make other people’s money work for them. This is usually done with the bank’s money in the form of a mortgage. Using the same amount of investment ($100,000) to go towards a down payment of 20%, the remaining $400,000 is leveraged from the bank, making the total amount of the investment $500,000. When you make a return of 5%, that equates to $25,000 instead of the $5,000 you would have earned the traditional way.
The benefit of investing in real estate is that normally you would have a tenant in the property covering your interest costs, expenses, and paying down your principal. With the principal being paid down there is additional equity being added to your investment that brings the total return higher than our 5% example.
We always get a bit of pushback when suggesting that people go this route of investment over more traditional forms. One of the biggest obstacles being the belief that it’s too late. However, we have clients that started in their early 60’s with 5-year plans that have done very well for themselves in a relatively short period of time. Whether you are 65, 25, or anywhere in between, there are solid options for great investments that will net you much higher returns than traditional investments.
Some may not feel comfortable taking on the role of landlord. In which case, there are property management companies that will do almost all of the work for a small fee every month (which is tax-deductible).
Others worry the market will crash. A valid concern, as we have no way of predicting what will happen a year from now. What we do have the benefit of is looking at the past 40 years and the other times markets have corrected. In each instance, within approximately a year and a half, the market came back to pre-crash levels. Also, historically real estate values double every 8-12 years and as long as it isn’t a one-year plan, you will be just fine. Have you heard the saying “don’t wait to buy real estate, buy real estate and wait”? It couldn’t be more true.
For those that don’t believe they have enough money to do it on their own, there are several options we can assist with such as finding other investors, or providing the template for you to do it with a group of friends or family.
The great thing about investing in real estate is that there are so many different avenues and options within residential and commercial investing. Some are hands-on, some are hands-off, and all can be fitted to your risk tolerance.
Money may not always be a motivating factor, but what it can provide is the ability and time to focus on what you want to do, instead of doing what you have to do to get by.