The Equity Optimization Manoeuvre
AJ Hazzi, REALTOR®
After becoming a Realtor® in 2002, AJ Hazzi noticed a gap in the real estate market...
After becoming a Realtor® in 2002, AJ Hazzi noticed a gap in the real estate market...
Creating a Cash Cow
According to our latest census, 67.8% of Canadians own their own homes. If you’ve worked hard enough to count yourself amongst Canada’s homeowners - congratulations - because you now own one of the most desirable assets in the world.
As we approach the end of this decade, interest rates are all all-time lows with the US Federal Reserve and the People’s Bank of China racing to out print one other to avoid a cataclysmic debt default. This means the era of ‘easy money’ is not quite over. In an easy money economy, hard assets like commodities, precious metals, and property become increasingly valuable.
With major equities trading at all-time highs, corporate earnings in decline, and Trump’s ongoing trade shenanigans, it’s never been riskier to enter traditional financial markets. While your financial advisor would just love if you bought more commission-generating stocks, this article introduces a better strategy to capitalize on the low-interest era and generate passive investment returns through your golden years.
The Equity Optimization Manoeuvre
If your home is valued around $1 million and you’ve paid off at least half of that, you’re now sitting on a $500K home equity nest egg. And now is a good time to put your biggest asset to work.
This article explores a real-life case study about a lower mainland couple who realized their dream of retiring comfortably in the Okanagan using just $500K in home equity.
Case Study: Realizing Gord and Cathy’s Retirement Dreams
Gordon and Cathy own a Coquitlam property valued at $1.2 million with $300k left on their mortgage. Since their kids moved out, Gordon and Cathy no longer need a 3000 square foot house on a quarter-acre property - and they’ve always had their minds set on retiring in the Okanagan.
They found a beautiful new 1800 square foot townhouse in the vibrant South Pandosy Village asking $750K. Using the $1.2 million sale proceeds from their Coquitlam home, they paid off their remaining $300K mortgage balance and moved to Kelowna with $900K in cash.
By negotiating a cash discount on their new townhome, they took possession with $200K cash left in the bank.
So far so good - they made it to the Okanagan debt-free. There’s just one problem: their monthly cash-flows were inadequate to live the lifestyle of their dreams. Owning their own home felt nice, but they were left wondering if there was a better way forward.
Cathy read an article by a local real estate consultant named Adrian Hazzi who specializes in helping people maximize home equity returns and enrich their lives. They sat down together to map out their options.
The plan
The first step was to unlock the huge chunk of equity tied up inside their largest asset - their home. Owning your own home is great, but it produces zero cash flow. In fact, home ownership costs you money in property taxes, home insurance, and upkeep.
Gordon and Cathy were a little old-school; they didn't like the idea of using leverage, but eventually decided that investing a piece of their home equity in high-yield instruments made good financial sense. This way, they would still own their home, benefit from housing market appreciation, and still be free to make cash-producing investments.
Given the Okanagan’s growing population, low mortgage rates, and the strength of the local housing market, they decided to buy an investment property in Kelowna.
The problem
Gordon and his wife were no longer working, which means they couldn’t qualify for a new mortgage or a bank line of credit. Was this a dead end?
Adrian introduced them to a lending product through the chartered HomeEquity Bank that was created specifically for Canadians looking to improve their lives in retirement.
The CHIP program lets Canadians access up to 55% of their home equity without paying any monthly payments. You’ve read correctly - zero monthly payments until the property is either sold or passed on through the estate.
They qualified instantly for a $250K loan at a deferred 5% interest rate, which they used to purchase an income-generating property in Kelowna. Here were the three options Adrian mapped out for them.
1. A vacation property
They set their sights on a short-term rental property for $375K at Playa Del Sol, just down the road from their Pandosy townhome. They bought the property at 65% down using the $250K loan. Net of expenses and management fees, their vacation property generated over $30K in cash per year.
A side benefit of owning this vacation property was that they could list it for rent on HomeExchange.com in the shoulder seasons of early June and late September, which lets them earn credits towards stays at member vacation properties anywhere in the world.
2. A small apartment building
The advantage of multi-unit investment properties is that they are financed using the bank’s commercial lending department. The decision to lend has much less to do with the borrower’s income and more to do with the income potential of the asset.
Typically these properties are leveraged at 25/75 meaning their $250K loan provides $1 million in investment capital. In this range, a turn-key building like a 6-plex can easily rake in $80-90K per year in rent for an 8-9% cash-on-cash return.
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3. A hands-off investment
A private equity fund called Cash Offer Canada buys distressed properties, fixes them up to force appreciation, and then markets them as rent-to-own opportunities for purchasers that need a hand-up towards homeownership. The fund targets 18-20% annual returns with a consistent hurdle rate of 12%.
They appreciated the idea of a steady $30K annual cash flow and watching their capital grow in the diversified fund. But what they liked most about this plan was not having to take out a new mortgage or do any property management on their part.
A dream come true
Armed with knowledge and a willingness to do the uncommon, Gord and Cathy moved to their dream retirement spot with enough cash flow to enjoy life in the Okanagan. And if you were following along, you may remember that they still have that $200K left over in the bank. And it’s a good thing because their kids just called, and they’re asking for a loan to make a down payment on their first home.