Andrew Carnagie was one of the richest men in America over 100 years ago. Today his wealth would be worth $4.6 billion dollars. He was a shrewd businessman. While he made most of his money in oil and iron, he understood the value and importance of real estate in building wealth.
Leveraging your money is the key. Leveraging is using someone else’s capital to make a larger purchase. Let’s say you have money to buy a house. You have 2 options:
1- You can use your $100,000 cash and buy a home for this amount free and clear.
2- You can use your $100,000 as a 20% down payment and borrow the rest and buy a $500,000 home.
A year later, if house values have gone up by 5%, a very reasonable amount for many Canadian cities and towns, what would you have?
If you took Option 1, you would have made $5,000 or a 5% return on your money. If you took Option 2 you would now have made $25,000 on your house purchase.
If you are like most Canadians, you don’t have $100,000. You can get into a home with only 5% down. Purchase a $300,000 home with a 5% down payment or $15,000. After a year, with property values going up by 5%, your house is now worth $315,000. You have made a 100% return on your money! Now you can see why people invest in real estate as soon as they can.
Are there any downsides to buying a home as an investment? Yes, if the main industry in your town is announcing layoffs, houses on the market could drop in price and wipe out your profit. But let’s face it, by buying a home you are making yourself your landlord. When you pay your mortgage balance down you are paying yourself. It’s like forced savings. You have to pay the mortgage, so you are forced to save for the future. If you were paying rent, you pay a similar amount of money what do you get in the end besides your damage deposit back? Nothing. We are not all going to become millionaires but we can become wealthier. It’s within the grasp of most Canadians to become homeowners.
If you are considering purchasing a home, be sure to speak to your favourite Dominion Lending Centres mortgage professional first to discuss what’s best for you.
By David Cooke