In this episode of Get Real Wealthy Season 4, Quentin D’Souza discusses the five golden rules of borrowing against equity.
Quentin starts by sharing that borrowing is a common financial tool for real estate investing. It is used to buy investment properties and can help grow and diversify a portfolio. Equity in one’s home can be used as collateral. If you’re investing to build a portfolio, it’s a valid financial strategy. But whether you’re considering borrowing against equity for investment or other purposes, make sure you follow these five rules. Number one, beware of low-rate offers from banks and other financial institutions. Banks and financial institutions can make borrowing appear cheaper than it is, but be wary of low-rate offers. You should check the rates, including how they could rise, to avoid any financial shock to your investment portfolio.
Number two, always read the terms carefully. Borrowing can be a financial necessity for real estate investments, but it’s essential to use it correctly. When considering borrowing, be wary of banks’ low-rate offers and read the terms carefully. The terms may include penalties for early payment or balloon payments at the end of the term. Number three, credit could harm your credit score and reduce your score altogether. Borrowing against equity can harm your credit score and decrease your ability to get a new mortgage on an investment property in the future.
Number four, remember that all borrowing is risky for both lenders and borrowers. Accessing equity in your home can reduce risk for lenders, but increase risk for the borrower as they risk losing their home. Make sure to have a safety cushion in case of any issues. Number five, examine the alternatives. Before borrowing, one should be aware of its risks and examine the alternatives. Borrowing should only be used to create assets and income, not for spending on non-essential things, adding “the risk of borrowing badly is something that I really want to you to consider. You could lose your home, your family, your livelihood; it does happen.”
In conclusion, Quentin says that borrowing for investment in real estate is necessary for most people but must be done carefully. Five rules to follow include: be wary of low-rate offers, read terms carefully, understand how it will affect your credit score, remember that all borrowing is risky, and examine alternatives before making a decision.
Important Links and Resources
Quentin D’Souza is the Chief Education Officer of the Durham Real Estate Investor Club. Author of The Action Taker's Real Estate Investing Planner, The Property Management Toolbox: A How-To Guide for Ontario Real Estate Investors and Landlords, The Filling Vacancies Toolbox: A Step-By-Step Guide for Ontario Real Estate Investors and Landlords for Renting Out Residential Real Estate, and The Ultimate Wealth Strategy: Your Complete Guide to Buying, Fixing, Refinancing, and Renting Real Estate.