“Ninety percent of all millionaires become so through owning real estate.” – Andrew Carnegie

Last week we discussed how Thomas Anderson, investment banker, private wealth manager and author of bestseller The Value of Debt, summarized how mortgage brokers should discuss debt when working with luxury homeowners: “Swap the good versus bad debt distinction for the notion of intelligent debt.”

High-net-worth homeowners have been using intelligent debt for decades to increase their overall net worth and to minimize taxes. This article reviews an example of the power of building net worth using real estate.

Case study: Helping Luxury Homeowners Purchase a Rental Property Near McMaster University

Most of the students attending McMaster University live in a student dormitory the first year. Beginning in their second year, many students seek other housing options. The most popular option is for five or six students to get together and rent a house within walking distance of the campus.

The clients in this case study, who are successful business owners, viewed renting as essentially flushing money down the toilet. When their daughter finished her first year at McMaster, it was time to decide about where she was going to live the following year. Five other students committed to renting a house with her, so it was just a matter of finding the right place.

When the clients reviewed the rental agreement for a home that interested their daughter, they learned that students were responsible for paying for heat, hydro-electricity, T.V., telephone, internet, and that the rental agreement would be for 12 months, even if the students lived elsewhere during the summer. When they realized the rent would be $3600 per month, they spotted an investment opportunity.

The clients owned a $4.5M home in Toronto. To purchase a $500,000 home near McMaster would mean the clients needed to increase the mortgage on their principal residence by $125,000. With a $125,000 down payment, they could get a mortgage on the new property for $375,000.