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There are lots of great reasons to apply for a home equity loan. Some of the more popular ones are renovations or a medical emergency. One of the lesser known reasons that people look to a home equity loan is to buy investment properties.

Is this a good idea? It’s not a straightforward answer so let’s look at the pros and cons.

Should People use their Home Equity to Invest?

A property owned for the sole purpose of being flipped or rented can be a great investment especially in a market like the GTA. Using a home equity loan to fund this type of venture is a hit or miss proposition based on the competency of the applicant. Most industry professionals will tell you that using your home equity to fund a side business or investment is a good idea.

Pro: If you have the Right Experience and Personality then you could find Success

Rental properties can provide a steady income and even pay for themselves if you put in the proper work and buy in the right neighbourhood. If you focus on the numbers and not the emotion or delusions of grandeur you could experience a very healthy return on your investment.

Pro: One of the more Stable Markets

The housing market in the GTA has proven to be strong year over year. Very few markets can make the same claim of stability so if you’re looking for a sound investment and the chance to put in a little elbow grease than an investment property is might be your calling.

Con: Every Market has some Volatility

There’s always volatility within the market and you must be prepared for the long haul. Whether you’re flipping or renting, it’ll take time to make your money back. With all investments, a realistic approach is best.

Con: There could be Trouble if you don’t Flip or Rent Fast

Not only will you have to pay the down payment you’ll also have to cover all the costs associated with buying a home. If you can’t flip or fill it fast you might be paying for two homes which for most can be strenuous.

The best thing to do is sit down with a trusted professional and decide if a home equity loan for an investment property is right for you.

Flipping houses is a popular real estate investment, where the investor buys the home with the goal of quickly reselling it for profit. Often, they make improvements to the property to maximize its value.

Flipping houses in the GTA real estate market can be a smart investment and a positive experience if the investor knows what they’re doing. The biggest aspect that many don’t consider are the tax implications that come with flipping a property.

How to Flip a House

There are different ways that one can go about this. Some prefer to hold onto the mortgage for the shortest amount of time possible by flipping them as soon as the market heats up. They might not maximize value but they should yield a profit.

Other investors play the longer game where they invest in the property through renovations and improvements. This can result in a greater return on investment but it means the investor will be responsible for the mortgage for longer, and must finance the renovations. A greater financial commitment can lead to a much greater reward.

What’s the Risk?

There is risk with any investment. Each property comes with some problems, which could affect how quickly the house can be sold. In addition, markets fluctuate fast and if it happens to cool before an investor can resell the property they could have to financially carry it for longer. This could reduce the profit margin.

Any unexpected delays in renovations or construction could also result in less profit.

Restrictions and Tax Implications

When the GTA market heats up, one suggestion to cool the rising prices is to tax house flippers. This would impede speculative purchases and allow more residents to buy a home. Restrictions and tax implications could hinder some investment opportunities, but in conjunction with the new mortgage rules could protect borrowers, lenders and investors.

Another idea being considered is a graduated tax system. This means that an owner who buys and sells a home shortly after purchase would pay a higher tax rate.

These ideas do come with the contrarian viewpoint that it would take value and money out of the market, driving down the price of homes.

Flipping a home isn’t for everyone, but savvy investors who understand a specific market could yield a huge return.

In 2018, Canadian homeowners had an average of 75% home equity available to them. Little surprise then that one-in-ten decided to take advantage with a home equity loan, up from 9% the year before. With the average Canadian home equity loan valued at $75,000, Canadian homeowners are increasingly taking advantage of the available cash tied up in their property. 

Renovating and Repairing Your Home

Using equity tied up in your home to improve the overall value of your home is a sensible way to invest in your own future. The most direct way to increase the value of your property is to renovate it periodically and keep on top of any required repairs.

A standard kitchen refit can add over 70% of the cost to the value of your home, as can upgrading the exterior panelling and features. Energy-efficient renovations, such as the installation of new insulation, provide a trifecta of potential cost benefits; lowering taxes, lowering monthly energy costs and increasing property value.

Investing in New Opportunities

By far the most common reason for taking a home equity loan in Canada is to create further investments or to take advantage of an investment opportunity. 

While the long-term goal of investing is always to get back more than you put in, you need to compare the timeframe of your loan with the expected timeframe of returns from your investment. Where possible, monthly/quarterly/annual returns on your investment are preferable to help with the repayments on your loan. If it’s going to be several years before you see a return from your investment take extra care to ensure that you can accommodate the additional repayments from your monthly budget before you take them on.

Consolidating and Repaying Debt

With the standard Canadian household debt now exceeding 170% of household income, home equity loans have increasingly become a route for consolidating debt under a single arrangement. Providing a better interest rate than the individual loans, debt consolidation gives homeowners more control over their debt. It also allows them to maximize the ratio of their repayments, increasing how much of each payment goes towards the principal debt, rather than interest on that debt.

Defaulting on a mortgage risks the loss of that property. Using the equity tied up within it to help get your finances in order, so that never happens, is a sensible option to protect your assets. 

Buying a Second Property

A second property can have many benefits, not least of which is the opportunity to open up a new line of monthly income. 

Buying a second property with the explicit intention of renting it out long-term can provide enough monthly income to cover repayments on the initial loan. It’s always worth considering in advance what additional hidden fees there might be with becoming a landlord. Whether you go down the traditional private renting route or a more modern option such as Air BnB, there can be additional costs such as insurance and tax status changes to be mindful of.

When Not To Take A Home Equity Loan

While the reasons given here are some of the most common, and the most beneficial to your personal finances, there are of course many reasons that people take out home equity loans that aren’t as beneficial. The two we see most often are luxury items that will depreciate in value and, conversely, everyday expenses such as groceries, gas, utilities and bills.

Taking a home equity loan out to pay for a luxury holiday, buy expensive clothes or the latest technology removes value from your home and places it in something that won’t grow that value. If your budget doesn’t stretch to paying for groceries and utilities, a home equity loan isn’t going to fix that (unless it’s used to free up monthly cash by restructuring debt.)

Getting a Home Equity Loan

Extracting value from the equity in your property and finding effective ways to maximize your use of that cash can sometimes be tricky.

At Canadalend our experts are independent. That means they’re focusing on what is best for you, not what’s best for the bank they work for. The advice they give you, and the products they suggest, are for your benefit, not so they can meet a monthly KPI.

With access to hundreds of different lenders, and a multitude of different products, such as home equity loans, our experts can help you find the product you need to achieve the aims you have for your future financial wellbeing.

To find out more, contact Canadalend.com today and start a conversation about how a home equity loan can improve your future.