It has been a while since we discussed money matters – so today we are going to quickly talk about home equity loans (HELOC) and how you can use them to maximize your returns.
The readers of The Ultimate Alpha Project know that, alongside with maintaining exemplary health, physical strength and mental capacity, financial success is a major part of being an Alpha and kicking butt in all areas of life. You also know that I consider real estate one of the very few investment vehicles that are worth your while. Let’s see how HELOC loans fit into the bigger real estate investment picture.
Life before HELOC
Because banks do not lend 100% of the value in question, a typical buyer ready to purchase an investment property needs to come up with at least some down payment – typically around about 20% or so. The actual amount of such down payment depends on where you live and what types of properties you specialize in. Let’s say that a “starter home” in a densely populated and otherwise promising suburban area that satisfies other investment criteria, would cost you $300,000. This might mean at least $60,000 as a down payment. Add legal, land transfer tax and other closing costs – and you are potentially looking at more than $65,000.
What do most people do? They save up first for that down payment. But what if you run out of personal funds or simply want to accelerate the process? Naturally, your only other avenue is borrowing to invest (using other people’s money to generate profits for you). We have briefly touched upon the benefits of a properly managed debt in one of the previous articles – borrowing to invest in a profitable project is always a better option because it generates an infinite return on investment (ROI), because there really is NO initial investment out of your pocket, only the return. Essentially, you are creating money from nothing.
When you start investing in real estate (and if you are not convinced that you should – read this introduction and a follow-up articles), the typical path for you as an individual investor usually starts with smaller-scale options: individual houses or condo apartments, pre-construction investment, etc. But, sooner or later, investing in multi-family homes will start looking more and more interesting.
Initially, this task seems very daunting – especially if you are an individual investor who does not have access to unlimited investor funds (like REITs do) – the prospect of you individually owning an apartment building is absolutely unimaginable. But multi-family homes don’t need to contain 200 apartments. Aside from “legal” definitions, assigned by federal corporations dealing with mortgage insurance or lending (CMHC in Canada, Federal Housing Administration, Fannie Mae or Freddie Mac in the US, etc.), for your purposes, a multi-unit building is pretty much any building that contains more than one unit. As simple as that. Technically speaking, it could be a duplex, a triplex, or it could be a building with 10-15 small apartments.
In theory, multi-unit buildings may be of commercial nature (such as office buildings), but for the purposes of this article we are going to discuss residential housing – in other words, apartment buildings that people live in. Due to their nature, I do consider those less risky than office buildings – but that is just my personal opinion and I do understand that sometimes you may want to take bigger risks with a prospect of bigger rewards with commercial buildings.
I am planning my retirement future. Not in a traditional sense, such as preparing for austerity, downsizing my living space, restricting spending and depending on others, including the Government (we have seen in the article on tax-deferred plans that this could be a bad idea). By contrast, my plans have some grandeur, financial freedom, and ever-increasing quality of life.
I do not plan to be forced to significantly reduce my spending after retiring at the risk of having to eat cat food otherwise. I do not anticipate being involved in the typical cliché retirement pastimes, like playing bingo, doing gardening and living off some modest investments with no aspirations and occasional trip to a tropical location in the cheap part of the Caribbean (at most).
Unfortunately, this typical post-retirement scenario is what most people will face. A lot of soon-to-be retirees will have to face this harsh reality – not the perfect lives filled with smiles, walks along the beach in Bali while holding hands, luxury cars and multiple cottages, as painted by investment companies who want your money – but the actual struggle to live from pension cheque to pension cheque and living in hopes that the money they have managed to accumulate in the past doesn’t run out too soon.
In Part I we briefly discussed the benefits of investing in real estate in general and hopefully, you were convinced that this is one of the absolute best types of investment available. In Part II, we are going to look at a few different strategies of building your real estate portfolio. Each strategy requires a lot of time to cover in detail, so it will only be an overview.
There are many ways and many strategies you can use to invest in real estate. Let’s look at some of the most popular ones that you can use.
What do topics related to real estate investing or how to become rich have to do with being an Alpha?
Quite a lot, actually. Remember, an Alpha (-male or –female) is a leader, role model and super-achiever in everything. And although we mostly discuss health, nutrition and how to crush it in the gym (because health and physical fitness is your foundation for succeeding in everything else), we do, sometimes, venture into other topics relevant to creating your perfect lifestyle.
One of these topics is money.
It is no secret that with more money you get more freedom – freedom to support your progress in all other relevant areas, freedom to eat higher quality food, freedom from the shackles of an unsatisfying job, freedom to make your own choices, freedom to pick the best gyms and the best equipment and freedom to use your time as you see fit.
So many people wish they had 48-hour days to be able to do more. “Time Management” – a term that was unheard of several decades ago – is, all of a sudden, a very hot topic because of the demands of the modern era and its information overload – these days you are expected to be able to handle more things than ever before.
Not having enough time (or not being able to find time when truly necessary) is one of the most important reasons for not reaching your true potential. You wish you were fit, but you can’t find time to go to the gym. You wish you learned a new skill, but can’t find time to study, because [insert your own reason]. You have an important project due at work, but between your current tasks and emergencies – don’t know how to squeeze in the hours needed to work on it.
Your to-do list keeps growing and growing and soon enough – you have so many items that you are stressed even thinking about them. How many times did you find yourself lost because you had to tackle a huge list of activities, all of which seemed equally important, and didn’t know where to start?
Well, how about starting with these few tips as your guiding principles?
Ahh, sweet retirement… Many of us dream of that blessed day when we can finally escape the rat race and enjoy the freedom to travel, enjoy time with family and live life to the fullest, while collecting benefits from pension plans that we so diligently worked to regularly contribute – sometimes for 45 years or more.
But today I am going to give you a piece of some very uncommon advice – consider eliminating conventional tax-haven retirement savings accounts (RRSPs, IRAs, 401(k), etc) altogether. Wait, what?! But aren’t these considered the holy grail of saving for retirement and the best way to make sure you don’t end up eating cat food when you retire? I have to admit – this is not for the faint at heart. It requires careful analysis of your personal situation and a bit of bravery. But remember, the goal of an Ultimate Alpha is to maximize returns.
My personal opinion is that with these retirement accounts you might be leaving a lot of money on the table (that is, if you don’t lose money in them). This article will discuss the reasons why I am not a big fan of locking your money in a tax-deferred retirement savings plan.
Being in debt historically never seemed to be a good thing. It appears that since the beginning of time, it has been cultivated and ingrained in the brains of people that as long as you are in debt – you can’t sleep well. Some noble men of the distant past would rather commit suicide rather than declare bankruptcy and admit that they have amassed a lot of debt. Debtor’s prisons up to the middle of the 19th century used to be a common way to deal with unpaid debt. In some early states of a distant past, if you couldn’t pay debt you could even become a slave of a creditor.
Things have changed quite a bit since then. Bankruptcy laws in most countries generally protect debtors from suffering the consequences of unfortunate events. Aggressive marketing of credit products in our day and age encourages us to take on more debt. Starting from their late teens, people are being aggressively targeted by credit card companies and banks offering starter accounts. Student loans are available in many countries to people who are just starting their adult lives – and wouldn’t mind starting it with a large debt. These days it is almost impossible to find a person who doesn’t have credit in some shape or form. And most people do not consider this wrong or immoral.
At the same time, compared to reckless spenders who amass expensive credit card debt and never seem to be in control of their own finances, there are people on the other end of the spectrum who would do anything possible not to owe anything to anyone, for whom being debt-free is still considered the ultimate goal. Many people celebrate paying out their mortgage in full (possibly, the largest debt every person has), as if it were some very significant achievement. Personal finance gurus preach from pages of countless books that being in debt is bad and you should do anything possible to repay it sooner. Scared of the uncertainties, a lot of people still prefer to buy stuff with cash or not buy it at all. Whipping out a wallet and paying for everything upfront seems to be give some people the ultimate pride of being in total control.
For the majority of people, financial freedom rarely comes from working for somebody else. Unless you are some high-level senior executive in a large corporation, chances are your “day job” is not going to make you very rich. Professional practices that are typically associated with higher pay (doctors, lawyers, etc.) really are a private business of people working for themselves. And, unless you get some unusual level of satisfaction and pride from your work and have no ambition to go way beyond that, the environment where you cannot choose your hours, your clients and your activities, but where you, instead, report to someone else and do a pre-defined set of tasks that is making money for other people is going to get boring pretty quickly. Add this to the fact that tax legislation in most developed countries encourage business activities much more than salaried jobs by preferential taxation rates, benefits and credits – which, in the end may let you keep more of what you earn, rather than sharing it with your government – and the advantages of working for someone else (most of which usually boil down to just “job security”) quickly fade away.
But even if you disregard the innate fear of most people to start their own business (duly fueled by over-quoted statistics that “over 80% of all businesses fail in the first five years” – which is not true, by the way), one of the biggest problems for new entrepreneurs has always been finding the seed capital. It is true that in the era of internet technologies, you can fund your online (and, sometimes, offline) business for under $100, but it still helps to have a bit of a budget before you start, to have one less thing to worry about. Especially if your business involves initial investment into some equipment or something along these lines.
New Year’s Resolutions
We all know that around these days in early January, a lot of people start working on implementing their New Year’s resolutions – apparently, there is something special about “starting clean” on January 1. To be honest – I could never understand why people don’t make important decisions immediately instead of waiting – sometimes for several months!. I’m sure you’ve heard many people say about some bad habit “OK, starting from the New Year… [I will stop doing that]” – even if the New Year was months away!
The sad part is that most of the goals enthusiastically set at the end of the previous year will not be reached. The energy will fizz out in a couple of months and most people will be back to where they started – and keep making promises to themselves to re-start again, starting the following January. Hey, I get it – most people have very busy lives. But “busy” doesn’t necessarily mean “productive” – very few are aiming for meaningful results and end up being trapped in an endless rat race.
Making New Year’s resolutions appears to be a big thing in North America specifically. Interestingly enough, certain cultures that celebrate New Year do not have resolutions – they have New Year wishes (as I, being a representative of one of such cultures, vividly recall from my childhood memories). You’d be surprised, but some are actually surrounded by funny superstitions of unknown origins, such as – to make sure your wish comes true, you have to start opening and pouring Champagne only when the final countdown to midnight begins, then quickly make a wish and drink it before the countdown ends – and some similar nonsense. The other day I came across an article that teaches you, step by step, how to make a New Year wish come true).
Silly, I know. I want to think that in our day and age, nobody really believes that there is some special New Year’s Eve magic that would make your wishes come true, but somehow these traditions continue. Here is the interesting thing, though – when it comes to most people, there really isn’t much of a difference between these two approaches, because most resolutions never graduate past being wishes and dreams.
Take money, for example. Read more