First Time Investor Advice

[stuntman2625]

I recently read Real Estate Investing in Canada and like everyone else who reads the book, I'm all gung-ho to buy my first property now! I've been doing quite a bit of researching looking into properties and finding one that's suitable for what I'm looking for (making sure it has a positive cash flow, etc.). My question is regarding the initial down payment. Right now I have zero available funds for a down payment. I know it's perfectly acceptable to use a PLC or HELOC to come up with this money, but I'd like some opinions on whether this is a good idea or not for a first time investor. I own my current principle residence with about 40k equity in it. So basically my questions are:



1. Is it a good idea to use borrowed money for the initial down payment or should I wait until I have the cash available?

2. Would a HELOC be a better idea than a PLC? Or should I re-finance my existing mortgage and use the equity from that?

3. I was only planning on putting 5% down. Would it be better to go for 20% for a first investment property?



I apologize for these very basic questions and I realize this information is all available online. I'm just looking to get the opinions from some experts since searching online for this information returns a broad range of opinions.



Thanks

 

[Thomas Beyer]

You need 20% down for an investment property. It used to be 5% up to about a year ago when CMHC changed the rules.



40K equity is not enough equity to free up some cash or borrow against.



It is usually not a good idea to be too leveraged, i.e. borrow the down payment, especially in this wobbly market unless the cash-flow vastly exceeds all expenses which is very rare. Go slow. Research an area well. Become an expert in a very small area with one property type, say town-homes or small houses or up/down bungalows with 3 rental income streams (up, down, garage).



Save some money first, then buy a 2nd and third property the conventional way. Then sell one to show you actually made some money. Then invite others to participate with you in a JV. Some useful blogs on "5 ways to make money" or "How to get started" here in this forum or on my blog.

 

[distasi]

Keep in mind that if you are looking to go the HELOC route that most financial institutions require 20% equity remaining i.e. if your primary residence is appraised at $300K and you have $200K left on your mortgage you would only be able to get an HELOC for $40K ($300K x 20%= $60K in remaining equity required; $100K of real equity - $60K of required equity = $40K HELOC) Hope this makes sense.




As a fairly newby investor myself I really enjoy checking out this forum and soaking up as much info as I can. You can also learn a ton of stuff by checking out Thomas' blog (see link above)- it's awesome! I would also recommend finding an expert in the industry that wouldn't mind you running questions or deals past- it's truly invaluable.



Best of luck to you.
Happy New Year to all!



Mike Di Stasi

Regina, SK.

 

[MooseHead]

Hi there and welcome to the forum. Banks (as far as I know) will only offer a HELOC at a LTV (loan to value) of 80% of the appraised value of your home minus the amount you owe on the remaining mortgage. Depending on what your home is worth, it may not leave you with much if anything for a heloc with only 40K in equity. In either case, as others have mentioned, unless it is your primary residence, you will be required to put 20% down. Here is a link to a calculator which shows you how much you can borrow:



http://www.free-online-calculator-use.com/heloc-calculator.html





The nice thing about a LOC vs refinancing is that if you don't purchase a property right away, your LOC won't cost you anything until you use the money and once you do, the interest will be tax deductible. With a refinance you will be making higher payments with higher interest immediately and the interest will not be tax deductible if I am not mistaken.



I know the feeling you have as I was in your situation not so long ago. The best advice I can give you is take your time and plan things out before jumping in to it. If you run into trouble with your first one because of rushing it may slow you down from acquiring your next one if that is your plan. You may end up walking away from REI all together if it goes bad. However, if you take your time and start on the right foot organized and prepared.. you stand a much better chance of growing your empire!



Cheers,



MH

 

[MarcoChim]

1. Is it a good idea to use borrowed money for the initial down payment or should I wait until I have the cash available?

Both options can be good idea, as long as you found a property that provides good cash flow. If you use borrowed money, your cash flow will be less due to extra interest payment but your ROI will be higher.

However, the interest on your borrowed money is tax deductible if you use it for investment.

2. Would a HELOC be a better idea than a PLC? Or should I re-finance my existing mortgage and use the equity from that?

HELOC is a better idea than PLC, because HELOC always have lower interest rate(usually prime +0.5% or 1%) and lender don't like PLC as down payment.

If you have conventional mortgage for your primary residence, you will have to change the mortgage to re-advanceable(different bank have different name on this product) before you can use HELOC

3. I was only planning on putting 5% down. Would it be better to go for 20% for a first investment property?

20% down payment is a requirement now for any investment property.



I used 100% heloc on my first investment property.

Hope this help.

 

[invst4profit]

In light of the fact that you do not yet own a property now would be a excellent time to learn the regulations governing your intended business venture. Regrettably this is something most investors fail to do and often pay the price.

As you are in Ontario you should learn as much as you can in advance as this is a very pro tenant province.

The following links should be of assistance and it is advisable to read up in advance of screening your first tenant applicant. Be careful in believing advice from western investors applies to Ontario regulations.

Two links are strictly regulations and enforcement the third is a Ontario specific landlord site.



http://www.e-laws.gov.on.ca/html/statutes/english/elaws_statutes_06r17_e.htm



http://www.ltb.gov.on.ca/en/index.htm

 

[Thomas Beyer]

[quote user=invst4profit]In light of the fact that you do not yet own a property now would be a excellent time to learn the regulations governing your intended business venture. Regrettably this is something most investors fail to do and often pay the price.

As you are in Ontario you should learn as much as you can in advance as this is a very pro tenant province.


Great advice !



In addition, much of Ontario will likely see FALLING real estate prices for 3+ years for seven reasons .. Elaborated further here:


http://myreinspace.com/public_forums/Real_Estate_Discussion/62-23645-117394-Why_Ontario_real_estate_prices_will_FALL_to_2014.html

 

[housingrental]

Very possible

Much like other provinces

[quote user=ThomasBeyer][quote user=invst4profit]In light of the fact that you do not yet own a property now would be a excellent time to learn the regulations governing your intended business venture. Regrettably this is something most investors fail to do and often pay the price.

As you are in Ontario you should learn as much as you can in advance as this is a very pro tenant province.


Great advice !



In addition, much of Ontario will likely see FALLING real estate prices for 3+ years for seven reasons .. Elaborated further here:
http://myreinspace.com/public_forums/Real_Estate_Discussion/62-23645-117394-Why_Ontario_real_estate_prices_will_FALL_to_2014.html

 

[stevegwhite]

You might want to look into an owner occupied plex unit. I'm not saying it's the best way to go for everyone, but you should look at it.



If you live in the unit that you're buying you can get in with less than the 20% down and it's much easier to qualify for. Personally I regret not moving the family into a 4-plex for a few years and hopscotching my way up the ladder.



In my opinion it offers the benefit of having tenants covering your living costs while you save up for your next plex unit.

 

[stuntman2625]

Thanks very much for all the replies! Very helpful!

 

[davidajones]

Stuntman: That handle sounds like a risk taker to me !



I love Steve's advise. Sell the house, move into a duplex or triplex. I begged my son to move into a triplex instead of a condo.



If your open to hamilton you could go into a triplex with 40-50 k, and live there rent free which makes it easier to save more for your next purchase.

Or you could get a duplex triplex closer to Toronto with 10% down .



Or rent out a room in your house or basement. Anything to generate some cash flow for investment.



Good luck !

 

[chrisbinder]

I think its not a good idea for you to buy a property.You must have atleast 40k as an initial payment.