You can start investing for your future sooner (and with less cash) than you think.
Since the cost of simply existing in Canada is climbing by the day, many Canadians are feeling forced to focus on today, rather than prioritizing building wealth for their futures. Buying groceries should take precedence over investing, right?
But, believe it or not, there are actually several ways that you can do both. With a little planning and a lot of creative strategizing, you can start compounding your growth for your future self now. Here are some of my favourite strategies to get you on a growth path sooner.
Rent where you want to live, buy where you can afford.
If are you renting your home, but been dreaming about building your wealth in real estate (or following the crowd of savvy young investors on social media who have done just that) then it’s likely that you’ve also ruled yourself out of the running for now. For a lot of us, the idea of buying an investment property is a more advanced step, reserved for experienced homeowners who have spent time in the housing market, built equity and made the decision to take that next step to start generating income. But not only is this not always the case, but there is a growing trend toward young Canadians making their first property purchase with the sole intention of growing their wealth - making the more “advanced” step into a first step in building wealth, and getting a momentous head start. And for a lot of these investors, this first purchase doesn’t even happen in their own back yard.
Even as property values have been trending down this winter, young buyers are still finding themselves priced out of the urban centres they call home. Toronto, Calgary and Vancouver are not ideal places to invest in your first property - but places like Oshawa, Lethbridge and Kamloops are still more affordable.
For example, the average 4 bedroom single family home is going for around $650,000 in Calgary right now - so you’d need roughly $42,000 (down payment and closing costs) to purchase. In Lethbridge, on the other hand, a 4 bedroom home will run you about $350,000 - so you’d only need about $19,000 (down payment and closing costs) upfront! With the busy post-secondary community, the demand for rentals in Lethbridge will always be high. So, you could invest some of the cash you’ve been working so hard to save now, start collecting rental income to not only offset your mortgage costs but even net you cash flow positive each month, and start growing your wealth by way of equity and appreciation sooner - all from the comfort of your rental in the big city.
If you want to check out how I crunch numbers on cash flow on a home in Lethbridge in real time, I broke one down here. And of course, if you want to break down the numbers on a potential income property in a city that you can afford now, schedule a call below!
Real Estate Investment Trusts (REITs)
Want to get some of the cash you’ve been saving for your down payment into the real estate market sooner, but not feeling like you want to be bogged down by the responsibilities of becoming a landlord? Then you might consider a real estate investment trust. A REIT, as they are generally known, is essentially a company that buys low-risk properties using cash from investors just like you, and then redistributes profits when they sell. There are several types of REIT classifications, from residential to commercial, to office and even retail as well as more diversified ones that mix it up. Generally, as long as a REIT isn’t directly tied to an industry that could take a significant hit during a downturn (ie: hotels) then returns when these companies sell their properties is reliably pretty healthy. There are many different ways to invest in REITs - including investing even very small amounts of cash in REIT mutual funds or ETFs. This means investing in a REIT can be as simple as purchasing $1000 or even $100 of REIT stock on an online investing platform such as Wealthsimple.
What are the benefits of investing some of your cash in a REIT now? First, and probably most importantly to most of us, most REITs regular and frequent cash distributions. This means that you could be getting cash put back into your portfolio to reinvest sooner. Many professionally managed REITs can be invested in via a registered account such as an RRSP or TFSA - if you choose to invest this way, then any potential gains earned would be tax-sheltered, saving you more over the lifetime of your investment.
Of course, as with any investment, the decision to invest in a real estate investment trust should be well-researched before jumping in. But if you’ve been sitting on the sidelines of real estate for a while, hungry to get your feet wet, then this could be just the ticket.
Invest your equity, maximize your tax refunds and grow your wealth with The Smith Manoeuvre
If you are just starting to look into investing or if you, like most Canadians, don’t have much disposable income at the end of each month, then it’s likely that you’ve glossed over anything you’ve ever read about The Smith Manoeuvre. On the surface, this tax strategy can seem like it is built for experienced investors with a ton of wealth to spare - with lots of talk of tax deductions and debt transfers it can seem a bit hairy. But in reality, with a little planning, a little equity and a lot of purpose, you can start building your long term wealth faster and expediting paying off your mortgage far sooner than you think.
The Smith Manoeuvre has a lot of moving parts, which is why it can look kind of overwhelming. But it essentially boils down to this:
Get a readvancable mortgage.
This special mortgage product combines a mortgage and a HELOC into one account, and each time you make a payment toward your mortgage principle, the available credit on your HELOC increases.
To be eligible for a readvancable mortgage with most lenders, you’ll have to hold at least 20% equity in your home.
Invest your HELOC funds
Next you’ll invest your HELOC funds into non-registered, return-generating such as stocks, bonds or mutual funds.
Unlike the interest you pay toward your mortgage, the interest paid on loans used for investing (in this case, on your HELOC) is tax deductible (this is why you will hear the Smith Manoeuvre referred to as the “tax deductible mortgage” strategy)
Decrease your taxable income, increase your refund
Your tax refund is calculated based on your marginal tax rate, which we learned in our last blog
Your marginal tax rate is determined based on your taxable income, and determines the amount of interest you pay on each additional dollar of income earned over the previous tax bracket, and it will differ between provinces. You can find your marginal tax rate here and learn more about how your rate affects your return here.
Here’s an example: If your marginal tax rate is 30% and you have $10,000 in interest deductions, then you can expect an additional $3000 on your return.
Re-invest your refund back into your mortgage
This part can be a struggle, because getting that refund in your bank can feel like a big, fun pay day.
But paying it back into your mortgage means increasing your HELOC limit, freeing up more cash to re-invest and grow faster.
Do it again!
Repeating this process until your mortgage is paid off is the Smith Manoeuvre’s superpower - becoming mortgage free without stumbling upon a big cash windfall, and getting yourself accustomed to investing so you can put all your newfound cash into growing your wealth faster, sooner!
I know, even boiled down to its simplest parts this strategy can seem daunting. But I promise, once you get set up, and with a professional on your side to guide you every step of the way, it is truly simple and one of the most powerful ways to grow your wealth faster.
The moral of this story? Any time our team makes mention of investing or growth in 2023, we are met with some pushback, citing the generally overextended state of most Canadians. And we get it - we are right there with you! But if you are truly focused on your growth and are willing to make some small changes, then setting yourself on the path to meaningful growth this year is not only possible, it could be the perfect time!
If you’re ready to start yourself on a path to financial freedom, let’s chat. Schedule a no-obligation call below!
