Have you ever been thinking about investment options and wonder what type brings the highest returns? It can be argued that real estate provides the highest especially if you purchase a property that is “undervalued” and use funds to appreciate its value. There is even some professionals that make this type of turnaround in investment a full time career where they purchase a fixer up property, repair it and then resell it on the same market. CNN recently reported that from New Zealand to the United States, Germany, China and Peru, the same phenomenon has taken hold: home prices are skyrocketing, and many buyers are panicking. Its being said that the pandemic has brought a new value to “stand alone” properties especially with so much people having to work from home now or the constant lock downs that restrict you to your property. Its becoming ever so much more important for your residential property to be “All Inclusive”. This for sure will affect property values right across the world.
What if you are thinking about doing something like this but you are deterred by the fact that you don’t have that injection amount? Where will you find the funds in order to inject sometimes 10% to 20% of the purchase price of a property in order to make the initial purchase? Well you could consider using any of your existing real estate’s “equity value”. What is equity? How does one go about calculating this amount? Let us use a scenario to explain how you calculate how much equity you might have in a property you already own.
So in 2010 you purchased a property for $300,000 which required a number of repairs. In order to purchase the property you took a loan of about $290,000. Over the next five to ten years you do a series of repairs on the property. You then decide to get the property revalued and realize that it is worth $400,000 at this point your loan balance is about $190,000. How do you calculate the equity amount?
– $400,000 (Current Property Value) LESS $190,000 (Loan Balance) EQUALS $210,000 Your Equity Amount
You now have $210,000 in equity in this property to which you could utilize to purchase an investment property. Banks will allow you to take these funds as an injection amount for the new property you are looking to purchase.
But why use equity financing? Well equity financing is one of the cheapest form of financing. If you go and get an unsecured loan (this is never recommended) to fund the injection amount you are looking at an interest rate of between 12% to 15%. Equity financing can be priced as low as 4% to 6% depending on the bank of your choice. You can also get a longer tenor. Why is this significant? Well a longer tenor means a lower monthly payment and therefore more cash flow to do any needed renovations.
Local & Non-Resident Financing for High Net worth Individuals
In RBC you can be on-boarded into Private Banking once you have at least $1,000,000 in investable assets and/or reportable annual household income of $300,000 USD. For single income homes this would be $150,000 USD. Once on-boarded into Private Banking you can have your bank accounts open and also get assistance with financing any property purchases you do in the Caribbean. We open bank accounts in every major currency and provide First Class service to our clients. Below I have detailed what we are currently offering Non-Resident Clients”-
- Maximum Loan Tenor is 15 years @ 4% interest rate with financing of 65% of the purchase price or project cost
If you have any questions you can reach out to me directly – I can be reached at Sherryann.Bourne@rbc.com or 12468261504.
In order to ensure that you are managing your funds properly ensure that you have an experienced and professional finance advisor and Realtor. Good Realtors show you ideal properties – Take it away Rosey!
Rosey’s Input:-
One of the first questions every real estate agent gets asked regardless of the times we are in is “How’s the market”. I’m sure every agent now can agree you’re getting asked that question more and more these days.
Here’s my take on it. Right now the market is VERY interesting (in every segment) and I am pleased to be a member of a team that studies the transactions and growth of the market quarterly. We knew that with COVID this question would arise more so than ever. Whilst purchasers are being mindful of their expenditure during these times, they are also looking at where they can find the best deals. That’s where we step into play with the knowledge of the market and insights on the ‘hot’ investment deals.
Fig 1, above covers Q1, 2020 vs. Q1, 2021.
With this is mind, we can assure you that by tracking market data of achieved sale prices, we are able to assist both buyers and sellers when it comes to putting in the right offers and listing at the right prices.
Here is one aspect of equity financing Sherry didn’t touch on. This would be the fear purchasers have of ‘doing the work’ to get the property turn key ready. In reality, what we see HGTV vs. what is available on island budget wise is incomparable and so actualizing your dream can be daunting. Use your equity financing to fund these repairs and factor this into your loan. Your agent will be able to put you in touch with their trusted contractors to handle any reno you’d like to tackle to make the property your ideal ‘vision’.
I always like to ask if you could wave a magic wand what would this property look like for you? There will be times where your budget and your vision don’t align but chances are, we can find the right fit for you.
If you have any questions please do not hesitate to contact us at support@afbconsultingservices.com