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.
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.
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.