Leveraging Home Equity to buying Pre Construction Condo

Leveraging Home Equity to buying Pre Construction Condo

One of the most important goals of anyone interested in building wealth through home equity to purchase a pre-construction condo in Toronto.

Buying Pre Construction Condo

Historically, the majority of people who have invested in pre-construction Toronto condos have made a lot of money doing so over the last 15 years. The ability to leverage a small amount of money over time has proven to be a profitable investment strategy. However, how do you get there? Saving for a down payment can seem interminable. However, there are other ways to invest in pre-construction condos, and the first place to look is within your current home.

Investing shouldn’t be so difficult, and the concept of leverage is actually quite straightforward. We’ll show you how to use a home equity line of credit to leverage the equity in your current home, resulting in more wealth in the long run. More debt means more money!

We’re going to break down a few simple concepts to help you understand the revenue-generating potential of your current home investment.

Concept : Good Debt and Bad Debt

In general, good debt increases your net worth and/or helps you generate value (e.g., taking out a mortgage, borrowing student loans, or accessing a line of credit to consolidate debt), whereas bad debt typically uses borrowed money (e.g., credit cards, payday loans, etc.) to purchase goods or services with no lasting value, such as that sports car in your driveway. Don’t get us wrong: we enjoy a good vacation or a hot car as much as the next person, but they won’t help your financial portfolio or make you money in the future.

Concept : Home Equity, Explained

The longer you own a property, the more equity it accumulates. For example, suppose you paid $500K for your current home. You’ve paid $150,000 toward your mortgage since purchasing it, and its value has increased by $200K in the last few years. Your home’s fair market value (FMV) will be $700,000. The equity is the amount you would receive if you sold your home and paid off the remaining mortgage; in this case, the equity is $450K ($700,000 FMV minus $250,000 remaining mortgage).

Concept : Leverage, Explained

So, now that we’ve established that investing in a mortgage equals good debt — the kind we want — let’s talk about leverage. In layman’s terms, it means borrowing money to boost the potential return on an investment. With that in mind, learning how to use leverage in real estate is actually quite simple. You can use home equity to your advantage by borrowing funds based on the fair market value of your current home. Your home’s value has most likely increased since you bought it. Even if you have only paid down a portion of your mortgage, you can still borrow up to 80% of the fair market value of your home, less any outstanding mortgage payments.   Leveraging your home equity into additional properties is the trick.

Example : Leveraging Equity

To demonstrate the effects of leverage on equity, consider the following example, but divide it into a cash vs. leverage scenario:

  • Cash Option: Purchase a $500K property with all cash.
  • Option for Leverage: Purchase a $500K property with $100K cash and a $400K loan.

What happens if and when the property appreciates to $600,000 the following year?

  • Cash Option: 20% return on equity ($100,000 increase on a $500,000 investment).
  • Leverage Option: Return on equity = 100% (a $100,000 increase on a $100,000 investment).

You not only spend less money when you use leverage, but you also get a much higher (5x) return on equity.

How can you make home equity leverage work for you?

When you own a property and have equity built into it, you can leverage home equity (i.e. borrow that home equity, which means mortgage providers will let you refinance or re-draw 80% of the market value of your home) for a nominal, low interest rate. For example, if your home is worth $500,000, a lender will allow you to borrow $400,000. (minus any current mortgage amount outstanding).

Using a Home Equity Line of Credit (HELOC) as Leverage for
Pre-Construction

As previously stated, if you have equity in a property that you already own, it is simple to obtain leverage. Simply approach your bank and request a home equity line of credit, also known as a HELOC loan. You can then use this HELOC loan to purchase a pre-construction condo by leveraging your home equity.

Assume you still owe $200K on your mortgage on the $400K property mentioned above. In this scenario, you can still borrow $200K (from $400K to 200K) at 3%, or $6K per year, for a total of $30K over five years.

Using A HELOC To Buy a Pre-Construction Investment Property

At this point, you can invest the $200K in a rental property, which will accumulate enough equity over time to more than cover the $30K in interest on the initial loan. Furthermore, the Canada Revenue Agency (CRA) allows you to deduct the interest portion of your investment property mortgage from your taxes, making it a win-win situation.

The more properties you add to this setup, the more complicated the math becomes, but you get the idea: more leverage = more equity = more money in the long run! Leverage increases your ability to purchase high-value investment properties, which increases your net gain as property values rise.

Home Equity Loan versus Home Equity Line of Credit (HELOC)

The distinction between a home equity loan and a home equity line of credit (HELOC) may appear to be complex, but it is actually quite simple.

A loan is a fixed sum of money paid in one lump sum up front. You will begin paying interest on the loan as soon as you take it out. I always recommend using a home equity line of credit (HELOC) instead because you only pay interest on the funds you use as you use them.

This can make a significant difference when purchasing a pre-construction condo with borrowed funds. Pre-construction is paid in instalments, as opposed to resale, which requires a 20% down payment up front. Typically, the first two years are paid in three instalments of 15% to 20%, with the final 5% paid approximately three years later upon completion.

Check out the many pre-construction condos we’re working on right now now that we’ve broken down how you can benefit from borrowing money and leveraging a property instead of paying cash down.

Looking for more information on how to make this happen? We know where to start and can point you in the right direction.

Simply reach out to us and we’ll get back to you right away.

Condos or Townhouses are an excellent choice for a place to live. Visit TALLPROPERTY for exclusive access to all new and upcoming projects in GTA. You’ll have exclusive access to the most recent properties for sale in Toronto right here. We also have a selection of pre-construction condos!

Contact our experts for personalized advise and real estate investment planning. Call 416-878-0749 or Register here.

Tags: how to buy pre construction condo, pre construction condo investment, condo construction loans, home equity line of credit mississauga, buy pre construction condo, buying pre construction condos, home equity line of credit brampton

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