Markham Boxgrove: Should you Borrow to Invest or Save First?
Should you Borrow to Invest or Save First?
A number of years back I would have said without hesitation save first! that was before I was introduced to the concept of leveraging.
Leveraging is: the use of a small initial investment, credit, or borrowed funds to gain a very high return in relation to one's investment, to control a much larger investment, or to reduce one's own liability for any loss.
The best way to understand this concept is by using an example. I’ll use the purchase of a $300K condo since I’m in the real estate investing business.
Background Info: You earn $50K a year and after subtracting taxes and personal living expenses you end up saving $5000 ($5K) for the year. What could you invest your $5000 in?
Well the government would like you, along with millions of others to invest in RRSPs, TFSA (Tax Free Saving Accounts), bonds, etc. Banks and private companies would like you to choose stocks, commodities, options and variety of mutual funds. When choosing these options most of us would be happy to get 10% annual rate of return. I know for many, myself included, that just isn’t the case. Many are still looking to break even.
Now what if you invested in Real Estate. How can you leverage a $5000 yearly saving and control a much larger investment and make money, while minimizing your liability.
Step 1. You need a source of money you can borrow. Either a low interest HELOC or a line of credit.
Step 2. You would borrow the deposit money on your line of credit.
Step 3. You would make interest payments with your yearly "savings” which become a tax deduction.
Step 4. Wait until your condo gets built (3-4 years)
Step 5. Assign / Sell your condo and bank the appreciation.
So a $300K Condo with a 20% deposit structure would require a $60K deposit.
The interest at 5% would be $3,000 a year.
Conservative appreciation at 5% would be: $15,000 a year.
Total Interest in 4 years is $12K and appreciation is $60K
So your return on $10K investment is ($60K-$12K) = $48K or 133% per year over 4 years.
What are the numbers of a traditional investment?
Suppose we are lucky and get 10% interest.
$5000 savings at 10% would give you $500 a year interest
Over 4 years you would gain a little over $2000.
Invest $10K you would get about $4000 or so.
As you can see the difference in the gain on your investment of $48K or $4K is like night and day. Even if you were ultra conservative and saw gains of $25K on your real estate investment you are far better than the market. So what would you want your money invested in?
As you can see by leveraging your money and holding a much larger investment you can vastly grow your money than if you were to invest using your own savings. In addition you did not tie up all your savings and are able to use it to invest in another condo or use it for emergency expenses.
Are you still confused? Give Jas a call and he will be happy to sit down with you and provide you a no obligation consultation and help you create your real estate investment strategy.
By the way… email me at jasjagpal@rogers.com and stay updated to VIP condo investment opportunities. Also if you are looking to buy or sell your condo, or assign your condo, call me and I’ll be happy to assist you.
Jas Jagpal, Sales Representative, 647-272-6629
Remax Dynasty Realty Inc. Brokerage
