For homeowners looking to expand their investment portfolio or generate additional income, leveraging home equity to buy an investment property can be a the right strategy. By tapping into the equity built up in your primary residence, you can potentially unlock opportunities for building financial freedom and generational wealth.
Even if you think you’re not able to qualify for a mortgage to buy an investment property, keep reading or contact us any time. You may be surprised that you are ready to become a real estate investor before you expected. We will explore the concept of leveraging home equity for investment property purchases and provide insights into how to approach this strategy wisely.
Understanding Home Equity
Home equity represents the portion of your home’s value that you truly own—the difference between your home’s current market value and your outstanding mortgage balance. As you make mortgage payments over time and as your property appreciates in value, your home equity grows.
When you understand what home equity is and how much you have, you open up the doors to new financial opportunities.
How can you access your home equity to fund an investment?
After you realize what home equity you have at your disposal, you need to understand how you can access that money. There are a few ways to do it.
A home equity loan (HEL) and home equity line of credit (HELOC) are two similar tools that allow you to borrow against your home’s equity. A home equity loan provides a lump sum, while a HELOC provides a line of credit that you can draw from as needed. Interest rates for these are generally lower than those of other loans, so that they become a more affordable means of borrowing the funds you need for the investment.
Another option is a cash-out refinance. Refinancing your primary mortgage at a higher loan amount can free up cash that can be used to purchase an investment property. This approach may also offer lower interest rates compared to alternative loans.
Why should you leverage your home equity to invest?
Leveraging home equity to buy an investment property offers several advantages. Using home equity as a source of financing provides you with a substantial amount of capital to invest in a new property, potentially allowing you to diversify your investments and increase your overall wealth.
There are also tax benefits involved. In some cases, the interest paid on home equity loans or lines of credit used for investment property purchases may be tax-deductible, potentially reducing your overall tax liability.
Another benefit or choosing to invest in real estate is diversification. nIvesting in real estate diversifies your investment portfolio, reducing risk compared to having all your investments tied up in the stock market or other asset classes.
And of course, rental properties generate income. This is true both in the short term, through monthly cash flow that will cover or even exceed your monthly mortgage payment, and in the long term as the property inevitably appreciates.
What if I don’t have the income to qualify for another mortgage?
Even after leveraging your home equity for the down payment, closing costs, and expenses associating with getting your property ready for tenants, you may still be unsure about how to qualify for the mortgage in the first place.
One of the best tools available to you is a cash flow mortgage. This is a type of mortgage that is approved based on the income potential of the property you are buying, not on your tax returns or W-2s. It is the perfect loan for those who want to get into real estate investing. With good credit, you can qualify to borrow the money you need for the investment property based on the estimated rental revenue, which is found by an appraiser reviewing comparable properties in the area.
Want to learn more or find out if you qualify? Contact us any time.