How would you like to buy a house for free? This isn’t a get-rich-quick scheme, it’s the personal story of our President, Jeff Devlin, and an example of implementing the recommendations we provide.
In this article you will learn:
- The importance of having clarity of what you want in life
- The importance of having a clear investment strategy
- Working with the right professionals, to get the results you want
- The advantage of holding cash-like investments within your portfolio
Now back to how Jeff bought a house for free.
Jeff and his wife bought a house in May 2020. By November 2020, that property’s value had grown in 2 ways:
- They updated the basement by adding a rental suite.
- The house was located in a desirable part of B.C., and the property value had increased significantly since purchase.
When Jeff and his wife had the house re-appraised, its value had risen by $230,000. Their original down payment gave them 20% equity in the property. But after this appreciation, they now owned more than 20% equity. This allowed them to refinance their mortgage and pull-out cash, which combined with the balance from Jeff’s investment life insurance contract, helped create the down payment for their next property purchase.
Side Note – the importance of working with the right professionals
Jeff’s mortgage broker, Dave Lacusta, was instrumental in making this strategy work. Dave was able to produce 60% more cash from the mortgage re-finance than another mortgage broker through private banking that Jeff spoke with. This was a difference of about $90,000.
The lesson here is to work with the right professionals, to get the results you want.
With this financing in place, Jeff and his wife started searching for a suitable investment property. To their benefit, they already knew exactly what they were looking for, as they had outlined their ‘ideal property’ in a goal’s conversation they had 6 weeks prior. A clear investment strategy allowed them to act fast, giving them an advantage in a competitive real estate market.
Did we underline acting quickly? Well, that is exactly what Jeff and his wife did. As their ideal property came on the MLS during the refinance process. So as soon as the refinance was complete, Jeff and his wife put a sight unseen, over-ask, subject-free offer on the house. They added enough premium to the asking price to ensure the owner didn’t hold an open house.
The total time from approved refinance to accepted offer? 24 hours.
Ultimately, Jeff bought this house for free by using cash from existing assets. Below is the picture of the house:
Making the money work
For the new mortgage, Jeff and his wife were required to make a 25% down payment. The mortgage refinance only covered a portion of the capital they needed. To cover the shortfall, Jeff used the investment balance from his investment (whole life) contract.
Jeff accessed this investment balance by borrowing against it with a contract loan with the insurance company. The benefit of using a contract loan is that it does not affect Jeff’s debt-service ratio (this is not a debt reported to the credit bureau). Another benefit of this type of debt is that the original investment continues to appreciate in value regardless if there is a loan against it or not.
This is an example of how you can add assets to your portfolio by leveraging existing assets. By using this strategy, Jeff now has 2 assets growing inside his portfolio instead of just 1 asset.
Investors also use leverage to take advantage of market declines, which helps them increase the value of their portfolio (without using their own money). You can read more about leveraged investments here.
Let’s compare the ability of different assets to be used for collateral financing:
- Real Estate: generally speaking, the best loan-to-value could be up to 80% on the first $2 million, which will change and vary depending on location of the property, and 50% thereafter. Real estate is also generally considered a non-liquid asset due to the time to find a buyer and transaction closing.
- Stock Market: if you have money invested in the stock market (stocks, mutual funds, ETFs, etc.), it could be hard to find a lending institution to use the portfolio as a collateral asset in the first place. Additionally, due to market volatility, the maximum loan-to-value is likely 50%. GICs: While you could likely use it as a collateral asset, an institution is likely to set up a line of credit, which is reported to the credit bureau thus impacting your total debt service ratios (TDS). If you have money invested in GICs, they are usually non-redeemable, and if you were to redeem early, you will likely forfeit any interest earned. Alternatively, you could sell your stock market investments. The disadvantage is that you might need to pay tax or realize a loss. Worst, you have now also stopped this asset from appreciating on your balance sheet.
- Investment Whole Life Insurance: the loan-to-value is 90%, you can generally access the cash in 2 weeks or less with a contract loan. Accessing via contract loan does not impact your debt service ratio, as it is not reported to the credit bureau. Like other utilized collateral assets, the original investment continues to earn a rate-of-return regardless if you borrowed against it. Investment Whole Life Insurance is also the only asset that provides a death benefit. This means that the contract loan will be paid off by the death benefit in the future if you never decide to pay back the loan.
You can read more about investment whole life insurance here.
Investment whole life insurance highlights our 4th lesson, holding cash-like investments in your portfolio. Jeff’s Investment life insurance contracts gave him the ability and liquidity to act fast. Even better, he did not get penalized for accessing these funds. Each insurance company operates differently, some companies allow you to do a contract loan without having to pay a monthly or annual interest payment. This makes it important to work with a professional who understands how these investments work.
Moral of the story
Jeff used the investments that were already working for him, to work even harder. This may have increased his overall debt, but he also increased the total number of assets in his investment portfolio. Now Jeff has 2 assets appreciating as opposed to 1.
Would you like to set yourself up for success and have the opportunity to buy free houses?
If you answered, ‘yes’ this strategy may work for you too. Speak with our team to learn more.
You can follow along with the restoration of this property on Instagram @rebuildingcharacter