Mortgage Investing – How and Why To Invest In 2nd Mortgages To Reap 12% – 14% Return

Don’t Let Your Home Equity “Rust” Away! Use Your Home Equity To Invest In Real Estate! Equity Wasted & Unused Is Leaving Money At The Table! One mistake many make is that because they don’t have cash to invest, in real estate or any other investment, they won’t be able to invest properly in their future.

By Sean Martin

Many Canadians who have owned a home for a number of years have seen the value of their home rise at the same time that they have been chipping away at their mortgage. The result of this is many Canadians who may be cash poor, but equity rich. One mistake many make is that because they don’t have cash to invest (in real estate, especially after recent changes in Canada upping the minimum down payment for a rental to 20%), they won’t be able to purchase a property. However, if you own a home and have equity in it you may be pleased to find out that you can access funds to invest.

You just need to utilize the power of leverage better. So how do you do that? You already have!

When you purchased your home, you more than likely had a deposit of 5%-10% and had a mortgage for the balance. You used “OPM”, Other People’s Money, and started to build value in that investment. Keep in mind, your investment did not appreciate based on just what was borrowed, but on the value of your home (i.e.: $ 5000.00 down on a $ 100 000.00 home you are going to realize roughly 5% appreciation on that $ 100 000.00, not just the down payment.) That’s leverage. And you get to live there.

Realize the gains which you are being kept from realizing in your present situation.

Access the Equity In Your Property…

This is the first step to use your home equity to invest in. If you own your own home and owe less than 80% of the value on your current mortgage, you have access to additional funds by refinancing. Although you can get a regular mortgage, many investors opt for a HELOC mortgage which allows them to re-borrow and principal they pay down on their mortgage. This is an important feature for investors, especially as they grow their portfolio, as eventually with 5 or 10 rentals, they are able to pay down their mortgage very aggressively using the positive cash flow from their properties. It’s a snowball effect: the more cash flow, the more you can pay down your mortgage, the more you can pull out of the equity, the more property you can buy, earning more cash flow… and so on.

Once you have a mortgage or HELOC, here are some of the ways you can use it to invest in:

Use it to Borrow / Leverage 100% of the Value of Any Rental Purchase

- Using your HELOC, you can borrow the 20 – 25% down payment for the rental, and get 75% – 80% financing (if qualified) for a standard mortgage on the rental property itself. There are some properties that when financed strategically (rate is no longer the most important variable) properly will give positive cash flow even when you borrow the entire value. Those properties you may want to leap on!
Stay liquid for the unforeseen:

- As you grow your portfolio, liquidity becomes more and more important. The more property you own, the more risk you are at for a number of issues to come up at once (i.e. vacancies for 2 properties, new roof needed for another, renovations needed on another). Having a HELOC with available equity will ensure that if you do have a “cash call”, you will be better equipped to handle it.

But I Don’t Want To Be A Landlord but I Still Want to Invest in Real Estate…

You can use your funds that you have borrowed inexpensively ( HELOC 3.25%-4% or a variable rate at 2.10%) and lend the funds to others through second mortgages. Yes, you can become the bank. Most people think of mortgage Brokers as someone to arrange a mortgage for a purchase. A mortgage Broker can also arrange for you to lend your funds to other individuals. Often this is facilitated through a second mortgage which you hold on a property. To do this alone can be intimidating and there is risk, but the reward is an interest rate of 12%-14%. Often a lawyer or accountant can also help find avenues to invest like this as well. To ensure the safety of your money, consider using an experienced Broker with access to an mortgage investment network specializing in 2nd mortgage loans. These Brokers will have their own underwriters and the proper tools in place to protect investors (you) should defaults occur. One channel I work with diversifies your funds into 3-4-5 different 2nd mortgages, syndicated with other investors like yourself. This offers protection from investing in 1 bad 2nd mortgage. Your exposure to risk is reduced in this manner. At the same time, should default occur they are in a position to pay the arrears on any 1st mortgage holder and purchase the property outright. This allows for sale to recoup what could have been potential losses. Should this type of action occur, your interest payments continue until the matter is resolved and your funds made available again for investing once again.

TFSA / SELF DIRECTED RSP…

If you are in a position where you have a self-directed RSP with your bank or financial institution can you use these funds to invest in mortgages?

Most institutions will still not allow you to use the funds in your “Self-Directed” RSP to invest as your wish. Again, an experienced mortgage Broker can offer advice and show you how to continue to shelter your profits within a RSP, but invest in these products. There are financial institutions that will allow these profitable investments and a mortgage Broker can show you the options.

A TFSA again has limiting rules with most banks and financial institutions. An experienced mortgage Broker will be able to guide you to help

Things to think about:

- When you borrow for investment purposes, you are able to write off the interest portion of the payments. Make sure you speak with an accountant to ensure this works for your situation.
- Investing the funds from a TFSA, RRSP or RESP protect you from paying taxes on the income.

- Even if you have a self-directed RRSP you financial institution will have policies prohibiting you from investing in second mortgage products. Ask me where to relocate your funds to maximize profits.

- Release the equity in your house to invest, but divert it through your RRSP or TFSA 1st, especially if you have unused allocations from previous years available. Again, this should be done with the assistance of your accountant to ensure that it is done correctly for you and to keep the CRA happy. Always keep the CRA happy.

- Most HELOC’s offered right now are Prime +.5%, or 3.5% today. Fixed rate refinance mortgages are available for as low as 2.54% and variable rate mortgages as low as 2.05%.

- HELOC’s usually have interest only payments available to better your cash flow, while standard fixed rate/variable rate mortgages do not.

- Make sure your HELOC is re-advance able! Not all are.

Gold, One of the Safest Ways to Invest

The precious metals market has always been one of the best ways to invest for virtually every investor. Gold stands at the head of the precious metals market as the most covered and easiest investment to get into. Here are just a few of the ways that gold can protect and build your wealth.

- There are more ways to invest in gold than many other kinds of securities.

The safe-haven investor is made even more safe because of the many ways that there are to invest in the metal. This ensures a high volume on the metal, and the high volume in turn secures a more stable price for the investments of everyone.

You can invest directly in gold bullion in most countries; however, you will need a professional partner in order to protect your investment from the government. If you do not feel like going through this hassle, then you can invest in many derivatives of gold such as exchange traded funds and mutual funds that include gold. These investments may be slightly off of the true value of gold; the derivative investments tend to be affected by the short term attitudes in the market more than gold bullion direct investments. All of these investments are still safer than other securities because they respond much less to short term movements in the market.

In order to decide between the ways to invest in gold, you should consult a professional financial advisor whom you trust. If you want to protect and build your wealth, then you must be sure that you deal with an investment that is within your budget as well as the one that is right for your portfolio.

- The safe-haven investor invests in gold for the long term.

If you are looking for investment that you can keep for a while without having to monitor it, then gold is definitely the investment for you. Most people do not have the time to look over their investments on a day-to-day basis. However, the only investments that truly make money outside of the precious metals market require a great deal of personal management in order to succeed. You get the best of both worlds when you invest in gold – the safety of a precious metal along with the ability to create wealth for yourself while saving time.

- Gold can maintain your portfolio even when the market is going down.

One of the main reasons that people invest in gold is the ability of the precious metal to maintain value and even go up in value during a bear market or recession. Gold is usually the investment that people look to when the dollar is falling. This means that you can actually reverse some of the negative effects of a recession including higher interest rates and a higher cost of living. Once the recession is over, precious metals tend to retain their value. This means that you do not have to sell your holdings once the recession is over – you can keep them as an addition to your net worth.

As one of the safest ways to invest, gold is quickly becoming a staple in the portfolios of many people. In order to get the most value out of the investment, you should start to invest in the product before people begin to truly understand what gold does. Once the general public is made aware of the true nature of the precious metals market, those people will likely flood the market and drive up the price. If you get in ahead of them, then you will reap the benefits of your good decision without having to pay a premium.

Try to invest in gold at a basic level if you can. The upfront cost of time that you will have to put in for bullion is well worth it. You will get the safest investment of all gold investments.