Five ways to use home equity to build your family’s wealth

BY CLEVE DeSOUZA

You’ve always heard that buying a home is a better financial move than renting one. But do you know how to make your investment in your home, work for you? Today, I’ll unlock that mystery.

First, you need to understand home equity. Equity is the difference between the value of your home and how much you owe on your mortgage. So, let’s say your home is worth $500,000 and your mortgage is $300,000. That gives you $200,000 in home equity.

There are more than nine million homeowners in Canada, and nearly 30% do not have a mortgage. Another 30% have built substantial equity by paying down their mortgages while their home’s value rises. That means more than five million people could access the equity in their homes.

If you’re one of them, here are five ways to use that money to build your family’s wealth.

Invest in your high interest debt
Many homeowners are house rich and cash poor. They ignore the thousands they have in home equity while struggling to pay 20% interest rates on a mountain of credit card debt. Tap the equity and pay off those high-interest credit cards to reduce your debt. Then, invest the money you were using every month to pay off credit cards.

Renovate for profit
The value of your home appreciates naturally or forcefully with renovation strategies. Let me share with you a story to illustrate how renovations build wealth. I worked with a client to develop a strategic plan for leveraging her home equity to provide monthly income and increase the value of her home. We spent $100,000 (including interest) to convert her naked basement into a rental unit.  Renting the basement generates $30,000 per year perpetually. The value of her home raised $200,000. This forceful strategy appreciates the property value and creates positive cash flow at the same time.

Invest in a second property
Adding a second property to your portfolio can be a smart move. Say you put 20% down on a home where the upstairs and downstairs can be separately rented. The equity in your home is now working in a new property. Both your net worth and your income increased. Moving the equity from one property to the other is relatively cost neutral.  Depending on how much of a sweetheart deal you get, the cost to buy, refinance, and buy can be offset by the cash flow and equity building up over time.

Invest in mortgages
Private lending is an increasing trend in real estate and lenders make a lot of money. While this area is heavily regulated, you can educate yourself and get legally set up to lend money and secure properties with mortgages. Let’s say you take out equity at 4% upon refinancing and you lend a private mortgage at 15%, the spread is 11% net. Your equity will be working much harder than it is sitting still under your roof.

Start up a business
Many business ideas are dead on arrival because there is no seed capital. Furthermore, a business loan is likely to carry higher interest than your mortgage rate. If you have equity in your home and a viable business plan, you can self fund your new business.

Equity-Take-Out is the term used when you increase your mortgage and reduce your equity position. The trick is to ensure that the money you take out will work harder than it would have it you left it stagnant under your roof. We strongly recommend you do your homework and have strategy before pulling equity out of your home and losing it. We know that every dollar matters and what we imagine for you is to make that dollar work hard, as opposed to you working hard for it.