To use home equity or not...?

5 Replies

We bought for about $363k. Put down 80k on the house to avoid mortgage insurance.

We have now put about 50k into developing an apartment above garage as our "1st property" rental. The area is growing so I assume it will have risen accordingly with our developments. Recent city valuation puts house value about 60k+ from what we bought at.

Question: I would like to use equity from our home to pursue a second investment. My wife sees this as a second mortgage. Any advice, numbers or light anyone can shed on my scenario?

@Jonny Morris
I would recommend getting a line of credit (HELOC). They are low cost and low risk. If you don't need it, you just don't draw from it and don't make payments until you need it.

Then you can pay it off in the future, and rinse and repeat.

I would compare the monthly expense of the HELOC to the expected monthly cash flow from the new investment. If it is significantly positive (I'd say at least $200-$300) then it's a green light.

The other option is the use the HELOC as a revolving credit line to fund value add deals (either flips or BRRRR's). This gives you an exit strategy for paying off the HELOC. And you can keep re-using it in the future.

@Jonny Morris I agree with Kyle M. . You should get a HELOC and buy a cheaper property with that money. The income from the new property should cover your HELOC payment and some more positive cash flow. Use BRRRR method and keep going. Good luck

Listen to your wife.  Disagreements about money are one of the top marriage killers. If you're not both on board, you're itching for problems. Besides, I think she's right.

Cashing out equity is basically asking for credit. Let's say you have $100,000 in equity on your home and the bank lends you $60,000 of that using a High Equity Line Of Credit (HELOC). You take the money and purchase an investment property. What happens when things change and your investment doesn't work out? You could lose the investment property AND your primary residence that you borrowed against.

Wise investors make every deal stand on its own merit. Borrowing equity from Property A to fund Property B sets you up for a domino-effect failure. There are probably hundreds of thousands of "investors" in this country that are broke because they tried borrowing their way to wealth and fell flat on their face.

You were able to put $130,000 into your current home which means you must have the ability to earn money and save. That's a proven technique so rinse-and-repeat as you build your investment portfolio. And listen to your wife.