How to Leverage Your Assets to Invest in Real Estate and Stocks in Canada Without Getting Burned

Introduction

Welcome to the Wisdom Lifestyle Money Show. I'm your host, Scott Dillingham. The show is designed to help Canadians invest better in Canada and the United States. We are the North America-based mortgage financing lender and provide education to both countries.

Discover how you can become a better investor and access the financing you need. Thanks for tuning in today.

Today, I'm actually really excited. I'm gonna show you multiple ways that you can use leverage or available assets or strategies to purchase investments. So that could be an investment property, stocks, mutual funds, whatever you wanted to do. And I wouldn't use any of these strategies to over leverage and buy things that don't make you money.

Use these strategies to make money. And as I mentioned in the first and second episodes, we like to use calculated leverage, right? So we can look at what your expense is and then you look at the return or the potential return of an investment and you run the numbers and you see what makes sense to move forward with. So we've got a bunch of examples here written down.

The Core Idea

So some of which you might not have known is available and some of which are. Now, in all cases, right, we're not authorized to give investing advice and pick stocks and things like that, but we partner with people who are. We are able to give mortgage and financing advice and investing in real estate, that type of thing.

So keep that in mind. And also, of course, depending on the advice given here, you might want to speak to an accountant to just confirm from taxation purposes that none of these affect you negatively or also to make sure that you can use them to positively help you out. So one of the first things I want to discuss is credit cards.

Never use credit cards. I hear and have seen clients that will use those balance transfers of 1% and they use that and buy their things and don't do that.

It's a risky business. If you forget to pay off the credit card with any type of investing, then you're back at that really high interest rate from a credit card. So I would encourage you to never use a credit card. Okay, so I just want to get that out there.

Deep Dive

So we're going to start with some very basic things and then we'll move to the more advanced stuff. One of the first things that you could do to buy any investment would be to get a gift from a family member. Now, if you're using this to purchase a rental property, most of the lenders do not accept a gift. We do have access at Lent City to a handful that will, all with great rates, like you're not going to pay for it.

Still amazing rates, but just know that a lot of lenders do not gift it down payments for a rental property. Okay?

Gifts are always available. There's always family members willing to give them. And if you don't have any family member that would give you a gift, then, you know, let's move on to the next one. So this strategy would be to refinance your home.

So obviously the key to this strategy is you have to own a home. Assuming you own a home, when you do a refinance, some of the benefits are that you can get up to 80% of your home's equity.

Practical Steps

So I'll give you an example. Let's say your home's worth a million dollars. You'll be able to take out 800,000 and you can invest that into whatever options you want, whether it's down payments, or you're going to go right to stocks, or mutual funds, index funds, like any of those things, you'll have the funds to do it. So you always have to look at your interest paid versus potential profits.

Now, another benefit of doing a regular mortgage is that regular mortgages have the lowest borrowing rates out of any borrowing product you could get in the market. So a lot of people like to refinance their mortgage. It's also good for your credit. And I'll touch on that in a second once we speak about lines of credit, but a mortgage is deemed like an installment loan as far as your credit bureau is concerned.

So it doesn't negatively impact it like a line of credit would. And again, I'll touch on that in a minute. Now, some of the cons is there's no equity left in the property that you can pull from unless you went to a private lender or something, but a traditional lender can only take out 80%. So if there was a family emergency or something and you needed money, if you've pulled it all out and used it for investing, you know, that wouldn't be available.

The other thing is there's potentially a mortgage penalty. There are some lenders out there and we actually dive into this more. We have the emergency homeowner savings guide. They're free to pick up if you want one.

Key Takeaways

Just pop into LendCity one day. We have a whole bunch of them.

No questions asked. We'll just give you one. But a lot of the lenders will charge you a mortgage penalty when you refinance. But there's a few of them that do not.

They'll do it as a refinance blend. So there's no penalty. So you want to see if you have a penalty or not, right? Because if you do, not to say don't move forward, but if you do have a penalty, you need to run the numbers and see what makes sense.

If you should still continue with the refinance and pay the penalty, will your investment yield be greater than your expenses? And then of course, with the mortgage, if you're leveraging your home at 80% loan to value, you're going to have a higher payment because the more money you take out of your home, the higher the monthly payment is. Okay, so that covers refinancing your home. Next would be an interest-only mortgage.

Resources

Now the bankers are going to look at me like, what? That's available?

Yes, it is. Not at the banks though. So through brokers, again, like LendCity, we have quite a few lenders that have the interest-only mortgage. The benefit of the interest-only mortgage is you have the lowest absolute payments, right?

Because it doesn't include principal. It's just interest-only. So this mortgage, I think, would be ideal, in my opinion, for a dividend-paying stock. Because if you got a stock that paid a dividend and the yield was greater than the interest rate on your mortgage and you used the dividend to pay your interest-only mortgage and then the profits you reinvested, I think that would be actually quite a smart strategy.

Interest-only mortgages, I think, are great. Again, they still have low rates. They're not as low as a regular refinanced mortgage, but they're still quite low. And they're also great for your credit.

Introduction

It doesn't negatively impact your credit score. Now, the cons would be that you can only borrow 65% of below-end value in your home. Now, that might be a benefit, right? Because it still leaves you some in case there was a family emergency and you needed money or vacation, renovation, anything like that.

Another con is you never end up paying it off unless you make a forced principal payment. So, that can catch someone. If you do want to pay off your mortgage, you've got to make sure you're making those extra payments. Okay, so that's pretty much it for the interest-only lines of credit.

Now, we'll go to the regular lines of credit. So, a benefit for a regular line of credit, now this is a secure line of credit to your home, is that you can pay it in full at any time. There's no mortgage prepayment penalties.

It's all included. You can pay everything. It still is an interest-only payment, just like the interest-only mortgage, which that is good. The cons, it is a higher interest than an interest-only mortgage because it's a line of credit.

The Core Idea

So, usually, they're at prime plus half to prime plus one, depending on the lender that you work with. Now, a line of credit that's secured can actually hurt your credit because what happens is anything that's deemed as revolving, so like a credit card, a regular line of credit, secured line of credit. You will be reviewed from Equifax using their credit utilization method. And if your utilization is above 75%, it can actually give you a negative credit score per month.

So, not a positive, even if everything's paid. I've seen clients that had multiple lines of credit maxed out, but they never missed a payment, but their scores were going down every month.

Okay? So, keep that in mind with a line of credit. You don't want to use the full available amount. And also, you can only get up to 65% loan-to-value.

So, we have to do a quick break, but when we come back, I'm going to touch on some extremely rare, but very much out there and very much used, not products, but strategies that are available to investors that many of you, I'm sure, are not aware of. All right.

Deep Dive

Welcome back. All right. So, these next strategies are really cool. And again, not many people know about them, but the people that do know about them are absolutely using them.

So, great stuff to know. So, the next thing would be a margin account. So, generally speaking, margin accounts are usually for investors that have lots of stocks or a high net worth. So, it wouldn't be something your regular banker would offer you.

So, you're probably not aware of this. So, depending on where you are in your investing cycle, you may or may not be able to get this. But a margin account ultimately is where a bank will give you money to buy stocks with. So, you're using the bank's money to buy stocks.

So, the great thing is that you're not using any of your money. It's the bank's. It's not tied to a property.

Practical Steps

It's just completely unsecured. It's there. The negatives, though, is you can expect to pay a higher interest rate of 5% to 6%. So, you just want to make sure the return that you're buying has a greater yield than that.

The other downside to a margin account is the bank can call in the money that you borrowed. So, when they call it in, they say, hey, give it back to us now. If they feel the stocks that you have picked are going down in value or the market crashes, they can call that back at any point in time. So, if you're not ready to pay that back depending on the amount that you've margined, that might put you in a not good scenario.

So, you want to be careful of the margin account in markets that are going down. Another investment that is pretty common would be an unsecured line of credit. The only pro I can think of is easy access to money. But the downside is you can't use it for a down payment on a home.

You'll only be able to use it for equities, that type of thing. But you also have a higher interest rate of between 6% to 14%. So, honestly, I don't think an unsecured line of credit is the way to go unless it's a rock-solid investment. And lastly, it can hurt your score because, again, it's a revolving debt.

Key Takeaways

So, any revolving debt can absolutely hurt your score. The next one is reverse mortgages for investors.

So, these are really cool. So, anyone who has a retired family member has probably heard of a reverse mortgage. Usually, reverse mortgages are for someone who is retired that lacks the income to pay a traditional mortgage. They'll give them money and then they can live off that and they never have to make a mortgage payment.

This is similar. However, this specific reverse mortgage lender will lend to investors. They don't care how many properties you own. It doesn't have to be your owner-occupied.

It can be a rental home and you don't have to be retired. You can be any age to do that. We have a lot of investors that have shown great interest because it is a newer product in Ontario.

Resources

It's been... I'm recording this in July. It's been out for maybe three months now.

July of 2021. So, three months in Ontario. It's been out west for quite some time now. But for Ontario, it's brand new.

You can get a reverse mortgage. So, what it is, you get the mortgage. You don't have to make any payments on it.

So, that's one of the benefits. No payments at all. You can do it on unlimited properties. Doesn't matter if it's rental, owner-occupied.

Introduction

The cons, though, is the interest is higher than a traditional mortgage and they do add the interest to the amount that you borrow and it's payable upon death or if you refinance it with another lender. And the other con is it goes to only 40% loan-to-value. But if you're a real estate investor and you've owned property for quite a few years and you haven't taken the equity out of it, you may actually be around or below the 40% threshold. So, this is ideal for an investor who's owned a property for quite a few years that hasn't refinanced it.

Amazing product. And like I said, it's a very simple application process as well.

They don't need much documents. It's really easy. They mainly, they want an appraisal and a home inspection. So, if you're going to do a reverse mortgage for investors, let us know.

We'll introduce you to the lender because it is a new lender so it might be hard to find online. So, let us know. We'll introduce you and then you can start that process. The last investment that we wanted to touch on would be an RSP loan.

The Core Idea

Now, this is not the type of loan where you would get a loan to buy RSPs although that is an option. I'm referring to RSPs that you already own. You can take out a loan on them and have your RSPs be collateral and then you can use that loan to buy other investments. So, this is a really cool strategy because you can do a couple things with it.

First, your RSPs stay intact. You're not cashing them out.

You're not removing them. So, any return that your RSP would get, you'll still get that return. It's just now you have a loan that's secured to the RSPs.

Okay? And then, you use that loan to buy additional investments. Now, you can do, like I said, you can do a couple things. So, you can lend out that money as a private mortgage.

Deep Dive

So, there are some RSP lenders that will allow you to lend it out as a private mortgage. Now, if you're doing that option, then your RSPs, you do have to cash them and put them with them so you wouldn't get the return on them. It would just be the private mortgage. But if you do the loan and you buy equities with it, you can keep your RSPs intact.

You don't have to cash them based on the providers of this that we've researched. And again, you use that loan and you purchase investments. So, the cons to that would be you're going to have a loan payment now. So, depending on your monthly budget, you have to factor in that loan payment, make sure everything's okay there.

And the rates for those types of loans range from 4% to 8%. So, it's definitely a little on the higher end side, but you also have to consider that if you can keep your RSPs intact and you're getting a return on them as is, and then with the loan money, you're buying more investments and if you've picked them right or you worked with the right people and you get a good return, you're double ending, you're getting the return from the RSP and the loan. So, even though the loan is at 4% to 8%, depending on the investment, it should cover itself.

But again, that's why you've got to speak to an expert that handles stocks and those types of loans. We don't do that at LendCity. We only cover the mortgages like the reverse mortgage, the line of credit, interest-only mortgage, that type of thing. That's what we can help with.

Practical Steps

But as far as the margin account, you're going to have to deal with a stock professional to get the margin account. Your unsecured line of credit, you'd have to deal with your regular bank and the RSP loans.

Some banks will do them, but not many. Usually, you have to go to a trust company who will allow you to leverage them, leverage your RSPs to buy investments. So, there's many different ways that you can get started. The slowest and hardest way is obviously saving your money.

So, ideally, saving your money is a great thing, but when you use other people's money like this, which is what some of the world's wealthiest people do, they leverage and they use other people's money to grow. But the key to all of this is you really have to work on the right, with the right partners to make this a success. I do not recommend you leveraging your home and picking stocks yourself. The likelihood of success would be quite low.

If you're going to leverage your home for stocks, right, you want to deal with a professional who has a track record of solid returns within our club, we can introduce you to them and you can chat with them and meet with them and invest with them. It's really cool. I'll leave that today as is. The next episode, we're featuring a special guest.

Key Takeaways

He's one of Windsor's top real estate agent teams. He runs the team and he's going to tell you how he went from being in cell phone sales to a top real estate agent team in Windsor. So it doesn't matter if you're an agent or you work at Best Buy.

It doesn't matter. He's going to share some things with you that will help you to grow and develop into a better person and stronger financially and with your business overall. So make sure you tune in next week and I look forward to chatting with you then. Thank you so much for tuning into the show today.

If you found value, please follow the show and rate it five stars. It would mean the world to me. And lastly, all the resources that we spoke about are at the bottom of the show notes. Looking forward to seeing you in the next episode.