Where Can I Find Money To Invest In Real Estate?
The truth is not everyone has tens or hundreds of thousands of dollars in the bank account waiting to invest in properties. When I first started out, I didn’t have much money to invest. Other than my principal residence, some money sitting in the registered retirement savings account earning meager returns, and a bit of liquid cash for daily use, I really had no spare money to invest in stocks or mutual funds, let alone real estate. However, once I understood the power of leverage, a whole new world suddenly opened up and real estate investment all of a sudden became more a reality than an elusive dream.
So exactly, where do I find money?
If you have a full-time employment, you are in luck. The bank loves to lend money to people with full-time jobs. Here are some products you can consider:
1. Line of credit – secured or unsecured (“LOC”)
Depending on your employment income and debt level, the bank will determine the maximum amount they are comfortable with lending to you. Remember: it is the amount the bank feels safe in lending, not how much you want them to lend. Secured LOC will require your personal assets to be the collateral and typically has lower borrowing costs. Unsecured LOC doesn’t have the requirement for personal assets to be collateral but the borrowing costs are usually 1-2% higher than that of secured LOC. Typically, the bank will lend a lower amount with unsecured LOC compared to secured LOC.
2. Home equity line of credit (“HELOC”)
For those of us who own a home (whether it’s a house or condo) and has a healthy level of equity in the home, you can access the equity through the home equity line of credit. For most of us, our biggest savings account resides with our home. So why not tap into that savings account if I am comfortable that I can service the borrowing costs and use the savings to make solid investments that can generate enough income to pay for the cost of borrowing and still leave some in my pocket?
One product that I particularly love is the Manulife One product. By the way, I don’t get commissions from them by mentioning them. I have been using this Manulife One product since 2006 and have never regretted the move from traditional mortgage to their new concept of borrowing. I love the flexibility of not having to renew mortgages ever as long as I own my home. It is basically a giant line of credit on your home for the amount you borrow from Manulife Bank. It is pretty awesome and makes financial sense. You can check them out here.
3. Funds from family/friends
You need to tread on this one very carefully. Unless you are absolutely comfortable with the person who provides you with the money and there is a very deep level of trust, I would recommend against it. Albeit this avenue can be very helpful in getting you started in investing in real estate.
You may have a rich aunt or uncle who is currently earning interest from GIC’s at 2%. If you borrow their funds at 5% and earn 8% from your property, you will still be ahead by 3%. Your rich aunt or uncle will thank you too because they are earning an additional 3% by lending to you. Alternatively, you can joint venture with them by investing in a cash-flow positive property together and all benefit. That’s what I call win-win!
4. Be the bank
You can actually act like a bank and lend money out to people who need borrowing on their property. This is called private lending. This is a very popular way to gain a very decent return.
For those who don’t have full-time jobs (like me), joint venture is a very powerful way to invest in properties. It is one of the efficient ways to expand your real estate investment business. As I always say, there are essentially two elements in every successful business or investment opportunity: Capital and Knowledge. Without either one of them, the business can’t sustain. That’s why it is ultra-important to have both of them. However, as we live in an imperfect world, we most likely have either capital or knowledge. If you don’t have capital, you better have a tremendous amount of knowledge in real estate investing to make up for lack of capital. For those with capital, you should be extremely selective in finding the right partner. I would select someone who is trustworthy and honest, who has demonstrated a tremendous amount of knowledge in real estate investing and, who already owns properties with his/her own money, among others. Money is easy to be lost than earned. I would rather forgo the seemingly enticing opportunity with a high risk profile than losing my hard-earned money.
If you notice closely, most of the sources of funds are in a form of debt. With any debt, you need to pay back the loan and borrowing costs. That’s why it is very crucial for you to assess your risk tolerance and strength of the investment you will put the money in. Never attempt to invest in real estate blindly without education. Otherwise, you will pay dearly and painfully.
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