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Using Your Home's Equity to Buy Real Estate

For most Canadians, purchasing a home will be the largest investment of their lives. One day, many homeowners expect the equity they accumulate to fund a significant portion of their retirement plan.

But after understanding the potential rewards of tapping into that equity to fuel the purchase of additional real estate, more and more savvy homeowners realize that their home can be transformed into a wealth-building juggernaut if appropriately handled.

How is this possible? How can the equity in your home be used to buy real estate? It all depends on how your house appreciates over the years. This article will examine how you can use your home as an investment vehicle.

The Magic of Appreciation

Most Canadians only think of their home as their primary shelter as it safely and securely builds equity year after year. But property values in the Greater Toronto Area (GTA) have shown stunning appreciation rates over the last few years.

According to an article in Precondo.ca, the average GTA detached home price peaked at $1,275,000 in 2017 before retracing to $1,000,000 in 2019, up from $465,000 in 2010 compared to pre-construction condo prices that appreciated to $490,000 over the same period from $290,000 but continued to rise to $560,000 by 2019 without showing any retracement at all. That's a lot of value stored between four walls and a bath or two.

All of that equity is essentially "dead money," meaning that other than making your net worth statement look fabulous, it doesn't do you much good as a wealth accelerator.

However, by properly leveraging that equity into funding the purchase of an additional real estate in the GTA, you can double and triple your gains by owning two or three appreciating properties instead of just one. It's like controlling a venture capital fund on steroids.

For example, if your home is currently worth $500,000 and you owe $300,000 on your mortgage, you have $200,000 of equity. Lenders will normally allow you to borrow a maximum of 80% of your home's value, leaving you with $100,000 to purchase an investment rental property valued at $350,000 with the obligatory 20% down payment to secure an additional mortgage, making you the proud owner of an income-producing property.

So long as the property you purchase has a positive cash flow, meaning the rent you collect is greater than the first mortgage plus the equity loan payment used to acquire the rental, you allow time to improve your balance sheet through additional equity appreciation, mortgage paydown via your monthly payments, annual rent increases, depreciation, and interest deductions off your tax bill.

Using Equity for Leverage

Essentially, there are two ways to tap into your home's equity. The first is by qualifying for a fixed-term home equity loan. In simple terms, you borrow money from a bank or finance company at a fixed rate for a fixed length of time, at a fixed monthly payment amortized over the life of the loan.

Fixed-rate loans are a straightforward way to borrow money for real estate investments, but they're also the least flexible, and the payments don't change until the entire loan is paid in full.

The second way to access the equity in your house is through a home equity line of credit, known as a HELOC. This type of borrowing functions much like a credit card because it's a revolving, non-amortizing credit line that's secured by your home.

You borrow against your approved line of credit at will, usually by writing a check provided by your lender, and you only pay interest on the outstanding balance. Once you pay off the balance, no interest is due, but the HELOC remains in place until you're ready to make another investment.

HELOCs can be a bit confusing, so let's walk through a practical example. Suppose your approved line of credit is $50,000, and you borrow $20,000 to purchase real estate. In that case, you'll only pay interest on the $20,000 of borrowed funds, not the entire line of credit, and you'll still have $30,000 of credit available for use should you decide to make additional purchases.

If you've paid off $5,000 of your balance after six months, you'll only pay interest on the remaining $15,000 and your available credit increases to $35,000 of the total credit line for which you're approved. Each month you make a payment, the outstanding balance is reduced, and you pay less interest.

The HELOC is a highly flexible financial instrument and wildly popular with homeowners. A research study released by the Financial Consumer Agency of Canada reports that the HELOC is the second-largest source of consumer debt, that is surpassed only by home mortgages.

Market Opportunities

Precisely what kind of investments can you make using the equity in your home? Several, actually.

Home improvements and renovations are a leading use of borrowed equity funds for many homeowners. This type of investment can potentially increase your home's value while simultaneously providing a mortgage interest deduction at favourable interest rates.

As alluded to earlier, pre-construction condominiums have historically performed well over the last ten years as an investment. Of course, past performance doesn't guarantee future profits, but it's certainly a strong indicator. As long as the number of available buyers (demand) exceeds the available real estate supply, prices are more likely to hold steady.

You can also invest in detached housing with your home equity if you can withstand the more volatile nature of that market. Some investors with nerves of steel patiently wait for housing bottoms and use price volatility to their advantage by jumping into the market after panic sets in to pick up properties at bargain-basement prices during panic selling.

Conclusion

Using the equity accumulated in your home can be a lucrative proposition for Canadian real estate investments by unlocking its untapped value. But only if assets are chosen cautiously with the guidance of skilled real estate professionals such as an experienced real estate lawyer and Realtor as your support team. They can help you avoid making bad decisions when choosing an investment strategy that's right for you.



Have You Considered Investing in Brampton's Innovation District?

Brampton is a bustling city that's part of the Greater Toronto Area (GTA) located in the province of Ontario. Previously known mainly as a food distribution, paper, automotive manufacturing, technology, and brick production economy for decades.

But if city officials have any say in the matter, Brampton will also be known as a major technology hub as the city moves forward with its ambitious plans to strengthen its position in the GTA innovation corridor as a renowned innovation district.

An innovation district combines existing infrastructure with planned investments in additional retail establishments, venture capital laboratories, business incubators, commercial office buildings, and other physical assets. Combined, they create a technology ecosystem that fuels real estate development, economic expansion, and disruptive technological advancement in a bid to restart the local economy.

The District is being created to build a powerful ecosystem with resources available for companies in all stages of development, from start-ups to large corporations.

An important goal of the District is to unite local talent with corporate partners for collaboration on innovative projects. That effort has moved into a virtual environment due to the covid-19 pandemic. However, in the future the District is expected to move back into physical spaces while maintaining its digital presence.

According to 2021 census data recorded by Statistics Canada, the cities burgeoning population of 656,480 includes a thriving academic community that provides a rich and diverse technology-driven workforce for its high tech industry.

For Brampton, that means recruiting talent from Algoma University Brampton Campus, Ryerson University Chang School of Continuing Education, Rogers Cybersecure Catalyst, BramptonU, and Sheridan College Centre for Advanced Manufacturing and Design Technologies, in addition to 20 post-secondary institutions located within an hour of the city centre.

"The City of Brampton continues to invest in a stronger future for local health care, with Brampton City Council approving $2.5 million in funding to support Sheridan College's new Centre for Healthy Communities," reports Brampton City Officials in a press release.

Brampton officially became a city in 1974 and has since developed into a diverse, cosmopolitan metropolis with a reputation as a vibrant place to live.

“The city is home to over 75,000 businesses, [and] 700,000 residents, with a diverse workforce representing 234 cultures speaking 115 different languages. We have the lowest average age of 36 years in Canada for a big city, and we have access to a highly-skilled talent pool. Our Innovation District is steps away from the Brampton GO station, interconnecting the entire GTA innovation corridor,” says Brampton Mayor Patrick Brown.

Some of the biggest and most innovative names in business and across a multitude of industries have joined the Innovation District, including:

• Altitude Accelerator
• Bhive
• Brampton Entrepreneur Centre
• Founders Institute
• Future Centre for Innovation
• Rogers Cyber Secure Catalyst
• Ryerson Venture Zone

Many more members are expected to join the District as the city welcomes more key partners by implementing business-friendly policies, building more infrastructure, and providing the governmental support needed by local entrepreneurs and risk-takers.

The level of capital investment and economic growth spurred by the District is expected to fuel residential real estate development in outlying suburbs and condominium development within the district hub itself. Some of the increase will be encouraged by a legion of employers and employees embracing the expansion of the remote workforce movement. These social-economic developments make Brampton a highly desirable destination for people with strong family values.

In 2019, Brampton authorized three major initiatives to revitalize the downtown area and increase the development of the city's core infrastructure. In the future, the Centre for Innovation (CFI) will function as a transformational initiative to support the expansion of Brampton's innovation ecosystem by providing the public with a new central library, additional office space, and more convenient access to mass transit. The CFI will be a stabilizing force for Brampton's Innovation District.

These initiatives will balance the city's efforts to establish entire communities, unleash economic capabilities and strengthen Brampton's leadership position within the Innovation Corridor. Building a gateway structure similar to the Centre for Innovation will transform downtown Brampton and secure the Innovation District as a focal point for talent in the city to prosper.

All the elements necessary for propelling Brampton's economy ahead are being assembled and implemented to ensure that a full complement of supporting systems and infrastructure are prepared to meet the needs of Brampton's downtown Innovation District occupants.

As a result, many new developments are coming up in the area. Bristol Place by Solmar Developments is one of the latest projects in the vicinity, with over a 1000 suites across two massive 48-floor towers.

Cultural magnets that continue to fuel the area's growing population boom are the Arts Walk of Fame, whose mission is to celebrate and connect with local creative artists, the city Performing Arts Division to promote the cultural identity of Brampton, numerous festivals and events hosted by the city, a robust filming industry, and a vibrant Farmers Market, overflowing with deliciously fresh, local-grown fruits and vegetables.

"In addition to a well developed economic base, Brampton residents enjoy a high quality lifestyle. It combines big city [convenience] with traditional quality of life. People from around the world has come together to live, work, play and pray in this city. Brampton residents represents more than 170 different cultures and speak no more than 70 languages," reports the Brampton Real Estate Board.”

Taken together, the Innovation District's cultural opportunities, basic infrastructure development, its drive towards technological leadership and excellence, and the allure of an enhanced quality of life, are fueling economic activity across the board, including buying and selling all classes of real estate, as showcased in this Innovation District promotional video.

Brampton residents will tell anyone who listens that the city is a wonderful place to work, raise a family, and enjoy many cultural and social activities all year round. The influx of higher-paying jobs increases affordability for skilled workers and a ready economic outlet for college graduates.

Business leaders desiring to participate in one of the most significant technological, economic, and sociological initiatives in the history of Brampton are flocking to the city to work, live, learn, invent, and thrive.

To learn all you want to know about the Brampton Innovation District project, visit the Invest Brampton website for more information.

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