How to Invest in Real Estate Using Your Home Equity

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I am sure that many investors read through real estate blogs and forums pertaining to real estate investing and wonder where the investment dollars will come from. They want to know how to invest in real estate, especially when they have no money. I know that many young professionals have stocked away savings accounts and retirement plans, but are uneasy about depleting these funds to buy investment property.

Down Payments Can Be Hard To Find

The mortgage environment simply isn’t what it was in 2005 when investors could get 100% financing on an investment property. These days, investors are typically putting 20%-25% down to obtain financing and this doesn’t even include closing costs, repairs, vacancy, leasing fees, etc.  For many young investors, pulling this kind of money from their hard-earned nest egg is unsettling and often times a deterrent from investing in real estate at all.

While many people have seen the equity stripped out of their home over the last several years, there are still countless others who do have equity that can be borrowed. I realize the notion of borrowing against your home is taboo in certain circles, but I still adamantly believe in maximizing your dollars to achieve higher returns.  This doesn’t mean that it makes sense to pull equity out of your house to redecorate or buy a new boat – I am talking about using your home equity as a vehicle for investment, not for consumption.

Why Borrowing From Your Equity Makes Financial Sense

If you look at it analytically, what is your home equity doing for you if it’s sitting untouched in your property?  It’s not doing anything to help build your net worth and it’s not helping your property appreciate any faster. The question to ask yourself is what COULD this money be doing if it were invested elsewhere?

How to Invest in Real Estate with Your Home Equity

I would suggest that while the credit markets are tight right now and home values are down (meaning less available equity), there has never been a better time to borrow against home equity.  This is because it’s never been cheaper to borrow mortgaged dollars and there have never been better real estate opportunities.  With interest rates lower than 4% right now, it doesn’t take a mathematician to figure out that higher returns on leveraged real estate investments provide a very healthy net return.

As a very simple example, suppose you were able to pull $20,000 out of your home via an equity loan at 4% interest.  You then took this $20,000 and used it as a down payment to buy a $100,000 property that was producing $300 a month in monthly cash flow.  At $3600 a year in income on $20,000 of invested funds, you would be earning 18% interest. If you back out the 4% interest you are paying for the equity loan, you are still earning a 14% net return with your dollars.

Another Benefit Of Using Your Equity to Buy Real Estate

In addition to this, you now have another asset that has the potential to appreciate.  This 14% net return doesn’t even include prospective gain from the investment property increasing in value. To take the example a step further, let’s say the market appreciates at 2% per year. In this example, the $100,000 property would gain $2,000 in value in the first year. If you add this to the $3,600 in rental income, you’ve got a first year return of 24%! ($5,600/$20,000=28% and then 28% – 4% for equity loan = 24%)

To me, the opportunity to earn 24% using some of my home equity versus doing nothing with it is a no brainer.  I can understand an investor’s hesitation with risking a large portion of their savings (or liquidity) to invest in real estate … but I believe maximizing the availability of home equity and leverage to acquire real estate is an incredible way to build wealth.

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About Author

Ken Corsini G+ is the founder of Georgia Residential Partners, LLC - a real estate investing firm based in Atlanta, Ga focused on creating turn-key investments for investors all over the country. He's been investing in real estate since 2005 with hundreds of real estate transactions.

16 Comments

  1. What methods do you suggest for accessing your home equity? Refi, HELOC? Something else? I have tried using equity from my home and a couple of rental properties, but have hit roadblocks because I’ve only been offered a percentage of a percentage of the value of the property. I have a good amount of equity in a couple of properties but I may be able to access 25% of the equity after restrictions and closing costs. I’d be very interested in a follow up post on this topic!

    • Ken Corsini

      Hey Eric – honestly, I think it depends on the situation and what you plan to do with the funds. The advantage of refinancing and pulling out money is that you can lock into an interest rate. If you plan on refinancing the property anyways to get a lower rate, it may make sense HELOC’s are nice if you need more liquidity or only need the money on a temporary basis … however, they typically float with prime and could go up in the future.

      Borrowing against investment properties is definitely more limited now than it used to be. I’m not even sure if banks are allowing seconds on investment properties, but you can typically do a cash out refi up to 75%. However, You can get second mortgages for upwards of 85-90% LTV on your primary residence right now.

      Hope this helps!

      • Not sure about elsewhere, but here in Los Angeles, its near impossible to get any sort of refi or HELOC without full income verification. The problem for most full-time investors like myself is that there is no “regular income” unless you are paying yourself from a corporation that you’ve setup for your ventures and are paying income taxes (oh and you better have been doing that for several years).

        Tapping into home equity is definitely a “no brainer” as you’ve stated… if only it was possible.

  2. Great post! I’ll admit I went the route of closing my 401k and using that to get started. But accumulated home equity is a good place to seek investment capital especially these times.

  3. Admittedly, I used this method previously. I bought property #1 with 10% down, property 2 with a bit of equity from property #1, and property 3 with a little equity from property #2, and property 4 without any money down. However, what happens when heavily leveraged properties go down in value… you get stuck. You can’t refi, You are underwater. You can’t sell without a short sale. Thankfully I shifted things to a much more conservative approach before it got me in trouble. If I hadn’t realized the the potential trouble I could be bankrupt .

    In my opinion this is a very risky method. I now have fewer properties, but more equity in all of them (even after the market drop). Let me tell you, life is much more comfortable and I can sleep better at night. The last thing you want to do is risk your own home (and your personal life) for investment property.

    I fully realize the return on investment is higher the more you put down. However, If you can’t afford to put some money in the deal, you probably aren’t in a position to get into investment property. Just my personal opinion. I know many people don’t agree.

    • Ken Corsini

      Keith – thanks for the post. Yup, your story isn’t an uncommon one considering the loose credit markets and bubble real estate markets from a few years back. You absolutely want to be cognizant of where you are at in the real estate cycle before you leverage yourself to an uncomfortable level.

      I personally believe that now, specifically, is a good time to pull out equity b/c most markets are at historical lows and aren’t likely to decrease any further. Also, most banks aren’t going to let you borrow more than 90% LTV (max) against a property – which does leave some equity remaining in the property. Also, with such low interest rates, even if a property does decrease in value, the carry on it isn’t overwhelming.

      At the end of the day, any investment should be approached with a worst case scenario fully identified and prepared for.

  4. Well, honestly home equity really gives anyone an opportunity to invest in Real Estate although a lot of us are afraid to take the risk or on the other note not aware of this scenario. I’m glad that this blog presents the possibilities as well as opportunities that we can consider, however, if there are risks involve I as a reader would like to know it well to create a clear picture of the things that might be an advantage or disadvantage.

  5. I recently went to an investment seminar in which he said the same thing (ownership in stocks actually). In fact that’s what we are doing. We have an apartment under contract and have no home mortgage and will take a 30% LTV to use as part of the equity for the apartment purchase. We’ll probably pay off the mortgage then repeat the process.

  6. I used Margin loans on my brokerage account for my accumulation stage (9% interest ~). Then I took a home equity loan on my free and clear home to pay back the margin (15 year / 3.25%!!!) — To help me sleep, I have 3 rental properties free and clear to make up for my home NOT being free and clear. Despit the psychological “coolnes” of having my resident F&C, I cannot get 15 years / 3.25% on any rental property so it just makes TOO much sense to do what I did.

  7. Another HUGE benefit for tapping into your home equity is for the purpose of ASSET PROTECTION.

    Think of it this way. If you have a rental property X which you hold under an LLC and one of the tenants sues the LLC because she tripped on a broken step, all the equity in the property is potentially at risk.

    Imagine though that the tenant hires a lawyer who does research on the LLC and discovers that the only asset in the LLC is the investment property, and that it has NEAR ZERO equity… he will likely advise the tenant not to waste his time! After all, there is not enough meat on them bones!

    :)

  8. What options can you offer for someone that owns a property (free & clear), but does not have the credit score to be able to qualify for an equity loan?

  9. If I own two houses with no mortgage that are at a combined value of $200,000 and take a home equity loan of $100,000 to use a down payment on a new property. Would it be better to buy a $100,000 home or use that money to buy a $400,000 home? Any pros or cons would be appreciated.

  10. Nicholas Jasmine on

    This is exactly what I’m thinking about doing to buy my second rental property. I appreciate this article as it help me make up my mind about that. Thanks.

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