Leverage is a powerful tool when used correctly. One common way to leverage equity is through the purchase of investment property.
This strategy can allow you to grow your real estate portfolio without depleting your savings. However, it’s important to understand the risks involved. Here’s how to leverage equity for your next property purchase: 1. Use a home equity loan.
1. Use a Home Equity Loan or Line of Credit (HELOC)
Buying investment property using home equity is a way to leverage your investment capital, and you may also qualify for tax benefits. However, leveraging equity isn’t the right financing strategy for every investor and it’s important to understand how to use home equity responsibly.
Home equity is the difference between a home’s current value and what you still owe on your mortgage loan. Lenders determine your equity during the mortgage approval process by analyzing a variety of factors, including credit score and history, income and employment information, debt-to-income ratio (DTI), home improvement costs and any other relevant expenses you’ve incurred.
If you have substantial home equity, you can borrow against it to purchase investment property or other investments. A HELOC is a popular choice for investing, as it operates much like a credit card, with a draw limit and repayment schedule. To get a HELOC, you’ll need to apply with a lender in person or online. You’ll typically be required to provide your property and mortgage statements, verify your identity and give consent for a credit report pull. Many lenders prefer homeowners to have a credit score in the mid-600s or higher, but your approved amount may be higher or lower depending on your lender’s criteria.
Purchasing investment property with a HELOC is a good way to leverage your capital because it offers a low interest rate and you can pay it back over time with fixed payments. In contrast, investing money in stocks and bonds often requires high minimum investments and may have a lower return on your investment.
Leveraging equity is also a great way to save on your mortgage interest by consolidating debt through a refinance, which can reduce the number of monthly payments you need to track and offer a lower interest rate than unsecured debts such as credit cards. Depending on your circumstances, a refinance can even allow you to break free from PMI, which is typically only available when you have sufficient equity.
2. Buy an Investment Property
Investing in real estate is one of the most common ways to build wealth, and leveraging the equity you already have in your home can help you expand your portfolio without spending all your cash savings, all the more with Texas real estate loans. In this week’s episode of The YVR Remo Show, we explore strategies and processes for tapping into your existing home equity to buy an investment property.
To determine how much equity you have in your current home, you’ll need to know the value of your home as well as what you owe on your mortgage (if applicable). This will give you an idea of the amount of funds available to you for investing purposes. The next step is to compare your property’s value with the market value of other similar properties in the area. If you’re not familiar with comparing property values, you can hire a real estate professional to issue a broker price opinion on your home and provide you with some insight.
Once you’ve determined how much equity you have, you can start shopping around for lenders who offer HELOCs on investment properties. These are typically less widely available than HELOCs on primary residences, and it may take some legwork to find a lender that’s willing to lend you money this way. However, for investors who meet the strict requirements and don’t mind doing some extra work, an investment property HELOC could be a great option.
When leveraging your equity to purchase an investment property, be sure to budget accordingly for any potential expenses. This includes things like vacancy rates, a declining economy, and even unexpected repairs or renovations. If you don’t have the cash on hand to cover these expenses, it could be financially disastrous.
Using your equity to purchase an investment property is one of the most cost-effective ways to leverage your investments, but it’s important to understand the risks and do your homework before making a decision. As always, if you have any questions, please don’t hesitate to reach out to me. I’m happy to help! Happy investing!
3. Make Renovations
Home improvements and renovations are a great way to improve your quality of life. They can also increase your property value, if done correctly. But leveraging equity to make these kinds of improvements is not without drawbacks, and weighing those benefits against the downsides is essential before pulling on your ownership stake to pay for a redo.
First, you must be able to qualify for the amount you’re seeking, which is determined by your lender’s assessment of your credit profile and debt-to-income ratio. In addition, your lender will use the loan-to-value (LTV) ratio to determine how much of your equity you can borrow. Typically, lenders limit your borrowing capacity to around 80 percent or 85 percent of your total home ownership stake.
Next, you’ll want to create a budget for your renovation project. This should include costs for materials, labor, permits, and a contingency fund. It’s also important to consider whether your renovations will actually add value to your home, assuming that you’re planning to sell it later on. Returns on home improvement projects vary widely, with the most cost-effective upgrades increasing a property’s value by more than they cost to complete.
Finally, a major risk associated with tapping into your home equity is that you could lose your house if you are unable to keep up with your mortgage payments. To minimize this risk, you should always make sure that the value of your property will increase more than the amount of your outstanding mortgage balance when you’re ready to sell it.
Leveraging equity to purchase a new investment property, or make renovations on the one you already own, can be a savvy financial move. It’s a good idea to explore all of your financing options, though, and be sure to carefully evaluate each lender’s rates, fees, loan terms, customer service, and reputation before making any decisions. And remember: When you’re ready to buy or renovate, start by prequalifying with a top-rated lender. This will give you an idea of the loan amount, rates, and terms you may qualify for, without impacting your credit score.
4. Refinance
If you have built up a lot of equity in your home, using it to invest in another property may seem like a good idea. However, it’s important to consider the risk involved before making a purchase with leveraged funds.
Leverage is the use of borrowed money to make an investment or purchase more valuable than it would otherwise be. When used wisely, leveraging can help you achieve your real estate investing goals faster and more efficiently.
When it comes to leveraging, the most common way is through a home equity loan or line of credit. These loans are based on the difference between your home’s value and your outstanding mortgage balance. The figure can rise and fall depending on market fluctuations.
Once you have reached 20% equity in your property, it’s time to consider refinancing. By doing so, you can take advantage of a lower interest rate and reduce your monthly payments. Additionally, you can shave off some of your principal and cancel PMI, which is required when the percentage of your equity dips below 20%.
You can also utilize a cash-out refinance. With this option, you replace your existing mortgage with a new primary mortgage and withdraw the amount of equity you want. This can be an effective way to leverage your equity if you plan on staying in your home for the long-term or turning it into a rental.
Refinancing a home loan will have costs associated with it, such as appraisals and closing fees. But if you can find a lender that charges low or no closing costs, it could save you money in the long run.
Using your home’s equity to buy an investment property is a great way to diversify your income and improve your financial security. Just be sure to carefully assess the potential risks of being a landlord and have backup plans in case your investment doesn’t work out. Luckily, there are many resources available to help you successfully navigate the world of real estate investment. The YVR Remo Show is an excellent source of information and advice that can help you get started in this rewarding career.