Using equity from primary property for future investments

2 Replies

Podcast listener here, hoping to get some advice.

Bought a house just outside of Denver 2 years ago, have $198k left on the loan and have a good 60-80k in equity, according to a handful of real estate "website estimates".

I'd like to use the equity to invest in real estate. Rental property, fix and flip, or maybe even invest in my older property. Sell and buy fixer upper?

What is the smartest thing to do here? What would you guys do if you were in my position?

@Ernesto Diaz welcome to BP and congrats on wanting to start down your own REI path. These forums are a great way to gain perspectives on just about every related topic you can think of.

If I were in your position, I'd certainly look at a HELOC. On your primary residence you should be able to get a HELOC for up to 95% of the current value of your home, subject to DTI restrictions of course (typically 50%). HELOCs are a great way to participate in real estate because they offer inexpensive access to very liquid funds. I personally have a HELOC on my own home, which I use for flipping.

But there are two big risks with HELOCs. First, realize that at 95% of the current value of your home, if you've fully utilized your HELOC funds, you now have only 5% equity in your home. If something big happens and home values fall, you can get into trouble very quickly. Second, don't use HELOC funds for long-term REI activities (e.g. buy and hold). This ties up your HELOC and further subjects you to the previous risk. Rather, HELOC funds are perfect for short-term activities like BRRRR or flipping where you can relatively quickly recoup your investment, pay off your HELOC, and generate profit.

I hope there are a few helpful nuggets in there.  Best of luck to you!

@Ernesto Diaz Welcome to Bigger Pockets! You really have three main options to access your equity in your home:

1. As stated above you could use a HELOC. The advantage of a HELOC is that you can likely access a greater amount of your equity and have a revolving feature. In other words, if you were going to flip or do any other type of REI with a shorter time-frame, you have the option to draw money from the line repeatedly. This also allows you to choose how much you want to draw at a given time. The downside is that the rates are generally going to be higher than a standard conventional mortgage (aside from an introductory teaser rate) and the rate is probably variable and will increase as rates continue to move up.

2. Cash-out refinance. This would likely be your best option if you're looking to lock in a low interest rate over a long time period. This would give you access to 75-80% of the value of the house depending on if it is your primary residence. So the advantage is you likely get better lending terms than a HELOC. The downside is that you'll have to choose how much equity you want to pull out and stick with that because you won't have a revolving line.

3. Sell the house and re-invest the equity. This might be an option if the house is in very poor condition and you can't justify the investment to fix it up. Or maybe the house isn't in a good area of Colorado and you believe there are better options to invest your equity. 

Ultimately, the smartest thing for you to do is identify your goals for REI. Then focus on the 1-3 strategies that can both accomplish your goals and incorporate your experience level. Also think about how hands-on you want to be. The strategies you listed can have a wide range of time input from you depending on how you approach them.

The podcasts are a great resource, but dig into the forums if you haven't already. There are many people on these forums who have had the same questions as you.

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