5 Reasons to Utilize Your Equity & How to Safely Invest It

by | BiggerPockets.com

Many of us have heard the question, “What is the rate of return on the equity in your properties?”  

Of course, the answer is usually zero, as most people aren’t investing it. However, the question we should really be asking ourselves is, “How can I safely utilize the equity in my properties, combined with other investing strategies, to build wealth without taking on any unnecessary risks?”

Let me start by saying that this is a widely debated topic that many people have strong feelings about. Its ability to stir up emotion makes it akin to subjects like the desire for wealth, debt, and the charging of interest.

Investing by tapping into your equity isn’t a one-size-fits-all strategy. It’s not for everyone. But if you’re going to do it, you need to be disciplined and strategic in your approach.

First, let’s be honest with ourselves. If we’re not disciplined with things like time and money, most creative real-estate or wealth-building strategies will not work. If you’re not organized and you don’t use a budget to track your income and expenses, these creative ideas won’t benefit you much (until you get your own house in order).

But let’s assume you have it all together. Why would you consider tapping into the equity that you’ve been building up through your properties? More importantly, how can you do so safely?

Related: Cash Flow v. Equity: Which Pays Off for Investors in the Long Run?

5 Reasons to Invest Your Equity

Personally, I decided to do it, not only because it made financial sense, but also because it gave me more asset protection and an opportunity to leverage my assets in a smart, strategic way. 

1. Asset protection through debt

Years ago, I heard an attorney speak at a real estate convention. She spoke about two concepts that I’m a firm believer in: asset protection through debt and liquidityWhen I first started investing, many of my initial properties were held in my own name, largely due to more favorable mortgage terms.The idea of using debt as a form of asset protection (beyond just using more liability insurance) made a lot of sense. At the time, I didn’t want to transfer these properties to an entity or trust, because transfer tax is expensive in my state of Pennsylvania. I also didn’t want to trigger the due-on-sale clausewhich would have given the bank the option to call my mortgage due in full should I transfer the deed. So, when I was ready, I was able to visit the well of equity via a home equity line of credit (HELOC).

2. Liquidity

The value of liquidity was the second take away from the asset-protection attorney’s speech. She said that if I had an equity loan or credit line attached to my properties for the majority of the equity, even if I had a zero balance on the line, it acted as a form of asset protection through debt: The county courthouse’s public records would show that I owed a lot of money against the property. In the case of the line of credit, not only did it give me access to money to do more deals, it also gave me a safety net should something happen to me personally (such as an illness or job loss) since banks would no longer see me as a favorable borrower.

Other reasons to utilize equity come from financial planning concepts that are frequently referenced from authors like Doug Andrew of Missed Fortune 101 fame.

3. Home equity is already at risk

Many people believe that equity that is left in the property is, in some way, safe. I think this is a myth. I’ve purchased multiple properties that depreciated shortly after, often for long periods of time. I actually believe it’s safer to separate the equity when possible, thus reducing the likelihood of foreclosure. If you think about it, equity has no true rate of return: It just grows as a function of real estate appreciation and mortgage reduction.

Home equity, in my opinion, is not liquid. If I can separate as much as possible, as frequently as possible, I’ll have reserves for emergencies and other conservative investment opportunities. For example, having a more liquid, safe, side fund can give you more flexibility in using your capital (whether you decide to pay off your mortgage or not), while still maximizing your tax advantages.

However, eliminating your mortgage interest deduction is not necessarily a good thing. Personally, I prefer to use the difference between preferred interest and non-preferred interest to invest.

4. Leverage

Another myth I hear quite often is that all debt is bad. Managing equity properly can be a very positive lever, especially if utilized to compound wealth rather than for consumption purposes. Having equity in your property doesn’t necessarily enhance net worth the way that accessing the equity can, especially if used to accelerate your other resources to cover your debts.

5. More opportunities

Many folks think if they put more money down on a property they’ll get better rates and terms with lower fees. This is true. But I put little-to-no money down on properties these days, thus enabling me to take advantage of more opportunities with the same capital. Translation: Closing more deals. In fact, generally speaking, in the years that I worked as a real estate agent, it seemed that retail sellers with higher mortgage balances seemed to get fewer low ball offers.

buy-first-property

Related: How to Invest in Real Estate Using Your Home Equity

Risk and Safety

Another controversial question is this: “Is investing your money in real estate really the safest place to invest your money?” For me, the answer was a flat, “NO,” as there were safer places to park my money. Two examples that come to mind are IRA types of custodial accounts and insurance contracts. Anytime I can sweep money from my business or properties and move it to safer vehicles, I do so. Especially with real estate.

Over the years, not only have I seen prices fluctuate dramatically in up-and-down markets, but I’ve also seen dramatic changes in financing, which is crucial in a finance-driven business like real estate. So for me, tying up capital in real estate was risky, and my money was better utilized elsewhere. For me, the best aspects of owning real estate over the last 30 years have been cash flow, appreciation, and tax advantages. Notice I didn’t say using my real estate as a savings account.

Thinking Bigger but Doing it Safely

Over the years, I was able to make twice as many investments using my equity than if I hadn’t. This enabled more tenants to buy me more properties and more borrowers to pay me interest. All kidding aside, if I can invest in what I know — what I’m good at — and it’s a high-yielding vehicle with collateral, then why not use equity to do more deals? When buying real estate, my strategy was to use little (or none of) my own cash. With notes, I do use my money, but I don’t mind since notes are not only an asset backed by real estate, but they’re also much more liquid in the event that I need to access the cash.

So, if you want to think bigger and leverage your equity safely, perhaps using notes and hard money, along with more real estate deals, will make sense for you, too.

What are some of the ways you safely work the equity in your property? Tell me in the comments section below!

About Author

Dave Van Horn

Dave Van Horn is President at PPR The Note Co. - an operating entity that manages several funds that buy/sell/hold residential mortgages, both performing and delinquent. Dave has been in the Real Estate business for over 25 years, starting out as a Realtor and contractor and moving onto everything from fix and flips to Raising Private Money.

19 Comments

    • Darin Anderson

      Not if you are using it to buy investment properties. Then you don’t deduct it as an itemized deduction against your primary residence, you deduct it as a business interest expense on Schedule-E against the properties you bought with it. Furthermore a HELOC on your primary residence is only going to work on that one property. This works best when you keep using lines of credit against all your investment properties as they appreciate, not just a HELOC on your primary residence.

  1. Christopher Giannino

    Thanks for the great article, Dave! When accessing equity in a property do you lean more towards using a cash-out refinance or using a HELOC or is it more of a case-by-case basis? I’m fortunate enough to have instant equity on a property I purchased and I’m trying to determine how to best leverage it.

    • Dave Van Horn

      Hi Niti,

      None specifically, it’s really a hit and miss thing. Besides, a place that turns you down today might accept you a year from now. You really have to look around, do your due diligence, and most importantly not give up!

      Best,
      Dave

  2. Hi Dave, do the variable interest rates that come with Helocs give you any pause to use them as money down for the next investment property? Do you have a way to mitigate the risk of the int rate rising, Or do you somehow structure as fixed??

    • Dave Van Horn

      Hi Ned,

      Good question!

      In the beginning I had similar concerns when I was using the HELOC money for real estate deals.

      What’s creating the interest rate risk is what investment you’re using the HELOC for. The problem with acquiring buy and hold real estate with a HELOC is that you’re using what is essentially short term money for an investment that’s long term. If you’re using it for a quick flip that’s different, and limits that interest rate risk/cost. It took me a while to figure that out, but today I actually only use HELOC capital for fairly liquid and/or short term investments like private lending and institutional notes.

      I no longer use HELOC capital for my hard real estate deals. For those, I use private money because it’s a lot less risk. The term for private and hard money only tends to be around 6 to 12 months long, plus it’s only tied to the potential investment property (and not a real estate asset I already own).

      Best,
      Dave

  3. Ben Raygor

    Thanks for sharing your experience Dave. That’s valuable insight. I like the benefits you highlighted about holding properties in a separate entity for asset protection and flexibility purposes – definitely something to weigh against the lower interest rate somebody might get when purchasing a property in their own name. Everyone needs to seriously consider those factors. Sometimes a 2% discount now and for the next few years isn’t going to be worth the much bigger potential headache that might come later on when a person no longer wants that property in their own name.

  4. Robert Steele

    To answer your opening question; what is the rate of return of the equity in your property; it is the interest rate I would otherwise be paying on it if I had a loan against it.

    Good luck finding a bank that will give you a HELOC on an investment property!

  5. Scott M.

    Hi Dave-
    Can you ( or anyone ) maybe give a little more clarity into how pulling equity out acts as asset protection? For example, if you used a HELOC or cash out refi on a primary residence with a lot of equity, is it asset protection because there’s a higher balance on the property thus less attractive to foreclose upon if something should happen?

    • Ruby Rodriguez

      i believe most states have your primary residence protected already if it is your homestead. so what they are talking about is investment properties mostly for that type of protection, meaning it is owed on so whoever tries to sue you can’t get anything out of it, because it is not free and clear.

  6. Ruby Rodriguez

    i believe most states have your primary residence protected already if it is your homestead. so what they are talking about is investment properties mostly for that type of protection, meaning it is owed on so whoever tries to sue you can’t get anything out of it, because it is not free and clear.

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