Tapping equity brings pitfalls

[MoneyGuy]

Originally Posted by Red

Sadly some are using that money for risky investments like the stock market

Done correctly, this is not such a bad idea. I do it myself and have a few leveraged clients. But, I agree, proceed cautiously.

[Slava]

Originally Posted by MoneyGuy

Done correctly, this is not such a bad idea. I do it myself and have a few leveraged clients. But, I agree, proceed cautiously.

I agree totally! If you can borrow some $$ at 6% and let it get you %8-10 then you are far, far ahead of the game. (The %6 is tax deductible, so you are likely only paying 4.5%).

[Sylvanfan]

Originally Posted by MoneyGuy

Done correctly, this is not such a bad idea. I do it myself and have a few leveraged clients. But, I agree, proceed cautiously.

This along with the Slava's comments pretty much summarize the difference between the wealthy and the middle class people I know. The wealthy people I know use credit in a manner like this. They use it to invest, and in a way so that it is tax deductable. Many of them also use it quite significantly. When they do their profit taking, thats when they buy a nicer vehichle, go on a trip, or upgrade their primary home (after they pay the taxes too). But the key is that the investing part has to be correctly and the individual has to be very disciplined in terms of spending.

Realistically it's no different than not buying stuff you don't need and being fiscally disciplined. Difference is that you do assume some risk, but do so having a very calculated and proven way to get rewarded. If done properly (and with the help of a real professional)...rather than save $1000 every month above and beyond your RRSP's and stuff it in a bank account where you get zero interest or in another non RRSP investment thats going to be taxed as a gain or income, you used that money to pay interest on a much bigger chunk of money thats tax deductable and grows at the same rate. Plus you will get a tax credit on the interest that you can reinvest.

[Cowboy89]

Originally Posted by MoneyGuy

Done correctly, this is not such a bad idea. I do it myself and have a few leveraged clients. But, I agree, proceed cautiously.

Agreed as well considering that one peice of real estate in one market (especially one as commodity driven as Calgary) could carry more long-term risk than a well diversified investment portfolio.

[Tron_fdc]

Originally Posted by Sylvanfan

T When they do their profit taking, thats when they buy a nicer vehichle, go on a trip, or upgrade their primary home (after they pay the taxes too).

There are lots of ways around taxes....you just need to be creative, and be comfortable with the advice someone is giving you.

A friend of mine thought he was getting away with his flips, and just found out (while he's on a jungle trek in South America) that he's wanted by revenue Canada. We all think it's hilarious, but not paying taxes for over 5 years might get him into a little hot water with the guv'ment.

[I-Hate-Hulse]

Don't these HELOC's come with some sort of a "Cash Call" provision, that if the market value of the house drops below the amount of the line balance that you need to buck up and pay up?

Man, that'll be ugly here if that's the case.

[photon]

Originally Posted by I-Hate-Hulse

Don't these HELOC's come with some sort of a "Cash Call" provision, that if the market value of the house drops below the amount of the line balance that you need to buck up and pay up?

Man, that'll be ugly here if that's the case.

Woudln't mortgages come with the same provision then? They're both just credit secured against your home, one is just more accessable than the other.

And if that happened, which of the 300,000 homes in Calgary would the banks forclose on first?

[Slava]

Originally Posted by I-Hate-Hulse

Don't these HELOC's come with some sort of a "Cash Call" provision, that if the market value of the house drops below the amount of the line balance that you need to buck up and pay up?

Man, that'll be ugly here if that's the case.

Well as long as you are not borrowing right to the value of your home (which is not advisable for many reasons) then you should be relatively safe. If the market plateaus here and settles, or drops by 5% then its not a big deal. if the market drops so that home values are down by 75% then there could be an issue...but even then I'm not sure if that is the biggest concern.

[GrrlGoalie33]

I plan on taking out a (relatively) small HELOC to help with upgrades to my home. These upgrades are the likes of upgrading my 27 year old windows, putting a window in my windowless basement, adding a garage. But I am not going to do it until my mortgage renews in '09. Hopefully the housing market has settled a bit by then...

That being said, with the size of the HELOC I plan on taking out, and my original mortgage, it still doesn't surpass $200,000.

[Flame On]

All this is making me nervous about upgrading from a one bedroom condo to a house we just bought. But in this market I feel if we don't get on that boat it will sail away from us permanently.

[Sylvanfan]

Originally Posted by Flame On

All this is making me nervous about upgrading from a one bedroom condo to a house we just bought. But in this market I feel if we don't get on that boat it will sail away from us permanently.

Well keep in mind that housing is still a basic need. So long as you need a place to live a house is still of use to you. I lived in Prince George which is a one horse town thats completely dependent on Forestry. I moved there in 1996 and and left in 2001. In that 5 year span real estate prices went down about 35% and dipped to about 50% by around 2003 type of thing. But today prices have come back past the levels they were at in 1996. So as long as you stay employed and can continue to keep making the payments on your place and can ride out the cylce you'll be fine.

I also hold the opinion that a house with land is something thats more useful than a condo over the long haul. Eventually a good chunk of this echo generation who are currently buying condo's and driving up the prices in that market will get married, have children and want to live in a house with a yard and all that stuff they had growing up. And eventually there won't be enough 20 something singles and D.I.N.K. couples coming up behind them to keep the condo market as lucrative as it currently is.