The power of refinancing is something we educate all of our buyers on – it’s critical to becoming a successful real estate investor, or simply a smart home owner. It may sound risky, but by embracing the power of leverage, you’ll have more opportunities than most to make money in the Real Estate market.
Whether you’re a first-time homebuyer or a seasoned real estate investor, you should be re-evaluating your mortgage (or mortgages) every year. It’s surprising what you may find. Often times, a refinance can save you hundreds or even thousands of dollars per year.
Many people hate or fear debt, but by doing so, they are denying themselves one of the greatest resources available to create wealth. Smart investors know that not all debt is bad – it just depends on what you do with it.
Real Estate Refinancing
Refinancing is simply replacing an older loan with a new loan offering better rates and/or terms.
Refinancing is usually done for two reasons.
- You refinance to take advantage of better interest rates.
- You’re freeing up capital for other investments.
The perceived downside to refinancing is the refinancing fees. Yes, sometimes there are nominal fees. But, because refinancing is done for better rates, terms, or to free up money for more investments, the refinancing payoff will outweigh the penalty. In most cases you will pay off these fees in no time with the amount of money you can save on a monthly basis.
Condo Investing and Refinancing in Action
Canadian banks have been financing the purchase of real estate for many years, with the ‘security deposit’ being the property itself. In some cases, they have even financed up to 100%. Why? These notoriously conservative institutions are fairly sophisticated in protecting their funds, and they know through experience that there is no better security than real estate for their loans.
The real advantage of having banks behind your initial investment is that you can invest more in the first place, enabling real estate to produce higher eventual returns than other forms of investment.
Making Refinancing Work for You
Using leverage to finance your investments is one of the key strategies for maximizing your returns. Leverage can substantially reduce the time required to reach your financial goals. For example, investing $100,000 in a GIC that has an interest rate of 2% per annum would yield a return of $2,000 per year. If you were to take that same $100,000 and use it as leverage to purchase a $500,000 property, assuming the same 2% growth on your new investment value of $500,000, you would get a gross return of $10,000. Which would you prefer?
This is just the beginning of building your real estate portfolio. In the future, you can refinance and leverage the built-up equity into a down payment to finance other properties, thus starting the cycle over again as your equity continues to rise.
Another advantage of only putting down the minimum down payment is that the interest on the mortgage for your income property can be deducted on your taxes. If you put 25% down on a rental property, the bank finances 75%, which means much better returns than paying in cash. Using the lowest down payment and longest financing terms should keep cash flow steady as you build equity.
Benefits of Refinancing
Now more than ever, investors are taking advantage of the cheap cost of money to build their real estate portfolios. The beauty of real estate and leverage is that the tenant pays off your mortgage for you, eventually leaving you with a mortgage-free property that will continue to generate cash flow. Can you imagine if you owned 10 properties with the mortgage paid off and the tenants paying you $2,000 rent each month? That’s $20,000 a month of passive income coming to you forever.
Although this may take some time, think about what you could accomplish over 10 years? Smart investors are achieving this because they’ve taken the time to learn how to use the power of leverage.