How to use HELOCs to invest in Canada (Toronto) ?

Question

I’m a beginning investor in Toronto, Canada. One strategy I’ve read people recommend is: Buy, rent, refi. Re-financing once equity builds and then using those funds to purchase however I’m not understanding the finances behind it.

Here’s a hypothetical example (Actually based on a home purchase by one of my friends in the junction):

Original purchase price: 450k

New value: 950k

HELOC available: 280k

Even if you took the HELOC out for the next property (ex. a 500k purchase) you’re now paying interest on the mortgage and HELOC simultaneously. Rental income in the GTA will rarely cover both. You’ll be cashflow negative equivalent to the interest of the HELOC.

Purchase price: 500k

Heloc: 120k (20%) - approx $500 monthly interest

Mortgage: 380k - Approximately approx $2000 monthly interest and principal

All other operating costs (condo fees etc.): $1000

In this scenario let’s imagine that you might be able to get 3k (doubtful but lets dream!) in rent, that HELOC puts you -$500 monthly as your total costs are $3500k. In summary I’m not comprehending how using a HELOC as downpayment works financially as you’re hit with interest on all capital in the property.

Jacob Perez · Answer

@Jan Walczak at 500K you should be able to find 3K per month in rent pretty easily. The challenge is you're borrowing to invest & expecting your investment to cover the borrowed funds as well. That can work but you'll likely need to go further from the GTA.

HELOCs however are great not only as a source for down payment or renovation but you can also privately lend for 2nd mortgages off of your HELOC.

Lend out borrowed funds at 4.5% & receive returns of minimum 11% right there you can make 6.5% return on money that isn't really yours in the first place.

Adam Narbon · Answer

Quibian, definitely. If you can get re-fi’d In such a short time then go for it. I just find it tough to get refinanced unless the market has significantly gone up.

Also, as long as the negative flow doesn’t affect your other obligations.

Kris Bucci · Answer

@Adam Narbon sorry I will have to disagree with you.  I don’t see a negative CF ever being a good idea.  It’s not scalable... What happens if you buy another property like that.. now you are in the hole $1000 a month.

Sure your net worth would be higher in the end, but what happens if you lose your job, get injured sick etc... you now likely lose that property.  Or just the simple fact that buying that house lessons your quality of life today!!

There is no reason to buy a CF negative property.  If it means looking outside your immediate area then do so...

my two cent recommendation.

Kris Bucci · Answer

@Jan Walczak I can’t speak for the Toronto market, but you are correct that based on using a Heloc for DP and a conventional mortgage you need to take into account two sets of lending payment in your calculations.

In my are (Victoria BC) you are able to cash flow, but you pretty much need a small multi-family (duplex) or more to make it work.  Example

-Purchase price of about 600k which required a DP of 150k (3 bed up/2 bed down duplex)

- Rent for two units $2500 + $1500 = $4000

- Operating expenses $800 (likely less)

Depending on your heloc interest rate let’s say your heloc payment is $600

Mortgage payment $2200

Gives you about $400 in positive cash flow.  Do it on your own, or with a working partner you can bring the Operating expenses down a few hundred $ as well.

If you can reduce the Heloc payment with own capital etc you increase your cash flow even more, but remember if you are using 100% Heloc you are basically buying this house with none of your own money, so your ROI is infinite.

Adam Narbon · Answer

Even with  a negative $500 cash flow,  you are way better off than the alternative, no rental property investing.  The mortgage payment alone on the rental property is much more than $500 a month paid off on principle.  Plus you then have the appreciation value. At the end of five or 10 years your net worth will be substantially higher, even with 400 500 or 600 in negative cash flow per month on each property.  I’m living proof.

Quibian Salazar-Moreno · Answer

Would it be worth it to go negative if you can earn some equity and refinance in six months, then take the cash out to pay back the HELOC?

Adam Narbon · Answer

Kris, it all depends if that neg cash flow is affordable. You’re correct. If it creates a possibility of loosing the property, then in my opinion, you shouldn’t be investing period.  if you are that close in possibly losing everything, then just keep working until you have more of a DP saved, to create a cash flow neutral situation.

If you have several properties, as in my case,  the positive cash flow ones carry the negative cash flow ones, so it all works out in the end, and 5 to 10 years can create a lifestyle of pure freedom.

Kris, I disagree with you on this: Outside your area does Not make sense to everyone. Plus the appreciation really suffers if you do that.

How to use HELOCs to invest in Canada (Toronto) ?

Most Popular Reply