When it comes to your first investment, there is one universal requirement. Whether you’re looking to buy stocks, buy a business or buy real estate, you’re going to need some money. You’ll need capital for a down payment, for repairs and for emergency funds. That means building up a fund of several thousand dollars that you can put in play.
Table of Contents - How to Raise Money for a Down Payment on an Investment Property
With the way that home costs in Canada have risen in the last five years, the price of a down payment and expenses gets higher and higher every day. That means you’ll likely have to do some creative planning to get all the money you’ll need for a rental property down payment.
How much do I need?
The first question to ask yourself when you begin to raise capital is how much you’re going to need. The general rule of thumb is that you will need about 20 percent of the home’s value to qualify for a down payment. (Really, though, you should have your 20 percent plus a few thousand in liquid capital to cover unexpected expenses.)
The question remains, however: how much is 20 percent? That’s fair. After all, the idea is that you’ll need to raise capital before you can properly invest. Picking a property to purchase before you’ve raised enough money is foolhardy. Unless you’re independently wealthy and can pull together the funds in a few days, you will inevitably discover that the property you’ve set your sights on is no longer on the market by the time you’ve raised enough cash.
To make sure you have enough money to invest before you have a property in mind, here’s a simple equation you can do:
- Determine the housing market you want to invest in
- Research the average cost of a home in that area
- Research the speed with which home prices have risen over the last two years.
- Add the current average value of a home plus the percent rise in home prices
- Twenty percent of your sum is the amount of money you’ll need
Remember to add another $5,000 to $10,000 for expenses. Now that you’ve got some clue about how much cash you’ll need on hand, here are some strategies you can employ to raise it.
If you’re already paying a mortgage on a private home, you’re one step ahead of the game. Several financial lenders will be able to provide mortgages on your first home that will free up the capital you need to kickstart your investment portfolio. Before you go with a second mortgage, it’s crucial that you know whether you will be living in the property or not. If you’re not living on the premises, you should still raise 20 percent of the down payment, as you intended.
If, however, you will be living on the property with your tenants, you can apply for an owner-occupied mortgage. In this case, you will only need to raise 5 to 10 percent of the down payment for your rental property.
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Home equity line of credit
If you’re not interested in a second mortgage, it’s time to explore a home equity line of credit (HELOC). A HELOC is a type of loan based on the amount of money you have put into your home’s mortgage. Financial lenders will look at the value of your home, and then assess that against any loans on the property. The remaining amount is the equity in your home.
Let’s say your house is worth $100,000. You initially took out a mortgage for that amount, but you’ve paid off all but $40,000 of it. When a lender examines the value of your house (100K) minus the amount left on your loan (40K), they arrive at the amount of equity in your home, which — in this case — is $60,000. With a HELOC, you can take a loan in the amount of your home’s equity and use that as a down payment on the mortgage of your investment property.
Borrow against assets
Do you have a valuable recreational vehicle? How about a second car or home? If you have something that’s worth real money, then you can borrow money against the actual value of the item. If you choose to go this route, it’s essential that you choose the right institution from which to borrow. Keep a close eye on proposed interest rates and repayment cycles.
Get a partner
You don’t have to go it alone in the world of real estate investment. Suppose you only have a few thousand dollars, but you possess industry knowledge or a keen work ethic. In that case, you may be able to connect with a like-minded individual who has the money you need for a down payment. If you’re unable to find an individual partner, Canada is filled to the brim with real estate investment groups composed of several people who pool their collective cash to pursue opportunities in the industry.
If you’re able to buy into a real estate investment group, you can sit back and wait for your stake to increase to the amount you’ll need for an individual down payment.
Raid your RRSP
Choosing to withdraw the money you’ve invested in your retirement through an RRSP is a risky move, but it’s worked for some investors in the past. The benefit of using your retirement account is that you can take out all the money you’ll need without fear of reprisal, provided you return that money within 60 days. For a fledgling investor looking for a short-term loan, this can be the ideal solution.
As with borrowing against your assets, it’s essential to understand the challenges of withdrawing money from your RRSP. Be absolutely sure that you will be able to pay back your money, or you could get hit with some hefty tax penalties.
Whichever method you choose, be sure to seek out trusted advisors to ensure that you’ve adequately protected yourself, and your investment.
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