Leveraged Real Estate Investing: What are the Benefits of Borrowing to Buy?

Borrowing to invest in property is a very popular and efficient way to create long-term wealth. It is almost always employed as a means to acquire real estate.

The government will allow you a tax deduction up to 100% of the interest you pay to lenders, yet the taxes on your capital gains are minimized and paid only when they are triggered by the sale of your investment property, and dividend income is receiving progressively preferred treatment.

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When borrowing to invest, most of the investment amount is used as security for the loan you procure from the lender.

The significant benefit of leveraged investing for individuals is that the interest costs of the borrowing are 100% tax deductible, yet only 50% of the capital profits are assessable - the government is virtually paying you to invest in capital assets. If you buy a positive net rental propety, which I strongly recommend, the investment will also earn some income which will provide you with additional revenue and offset the cost of leveraging.

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Canadians borrow money all the time to purchase, cars, boats, and a whole host of durable goods. In most cases, we borrow money to buy consumer goods that may be liabilities. However, we justify these purchases because they alleviate certain needs.

It can be both exciting and scary to consider borrowing for an investment property or a home. Borrowing to invest, or using "leverage," can create numerous benefits. Let's review some of the benefits to determine if this financial planning strategy makes sense for you.

The benefits:

There are five key benefits generated by borrowing money to invest in various tax-efficient investment vehicles:

1. You can build your wealth using other people's money. This is similar while purchasing a home or an investment property, where the mortgage provided by the bank allows you to purchase the house with the bank's money.
2. As a result of the additional funds borrowed, you may be able to diversify your investment portfolio holdings further.
3. Given the fact that you now have a monthly loan payment, in essence you have created a forced savings plan. This is especially helpful for investors who have found it challenging in the past to stay the course on monthly savings plans.
4. Borrowing money to invest may create a deduction for interest costs incurred. However, it is always best to consult a professional advisor for any tax or legal advice.
5. Leverage can magnify your effective after-tax returns.

As you can see, the potential benefits are exciting.