I plan to use the equity in my home to buy a second property
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I am fortunate to know a handful of wealthy people, and one thing I have noticed in common is real estate investing. While there are pros and cons to various types of properties, I am interested in building my own wealth through a strategy that includes residential real estate investing.
So far, I have made small real estate investments via REIT ETF Purchases and a modest investment at Fundrise. In the long term, I am looking to improve my real estate investment with the purchase of entire properties. It takes a lot more money than I have in the bank, but that doesn’t mean I have no other way to start. Here’s a look at my plan to tap into my home equity to buy my first investment property.
Why I want to invest in real estate
I have two degrees in finance and have taken college courses in portfolio management, financial institution management, international finance, etc. With most of my studies focused on corporate finance and investmentsIt’s no surprise that almost all of my assets outside of my home are invested in stocks, ETFs, and mutual funds.
One of the most important concepts I have learned in portfolio management is diversification. A diversified portfolio can help reduce your overall risk when set up correctly. For a stock portfolio, for example, it’s important not only to buy multiple companies, but also to diversify across industries and market segments. This way, if one part of the economy performs badly, your entire portfolio will not be affected.
I feel like I’ve done pretty well with this, but the next step is to fully diversify out of financial markets. Adding investment property gives me another opportunity for appreciation and cash flow that can be shielded from the ups and downs of the stock market.
In addition to diversification, one of the only places I’ve seen people generating really passive income is real estate. I am fortunate to have friends and family who can help me learn the ropes when I am ready to enter the real estate markets as a first time owner.
Of course, there are also big risks in real estate and a lot more money can be at stake. For example, during COVID, many landlords cannot evict tenants even if they don’t pay rent. . I certainly don’t want to end up with a rental property where I’m paying someone else’s rent, so I plan to wait until at least 2021 before buying anything.
Calculation of home equity
Home equity loans and home equity lines of credit are loans that use the equity in your home as collateral. It is quite easy to calculate your home equity in just a few steps if you are a homeowner. Here’s how to calculate the equity in your property:
- Find the current value of your home: The most reliable way I have found to quickly estimate a home’s value is to use the average of the price estimates at a time Zillow and Redfin. If you see a house worth $ 240,000 on Zillow and $ 260,000 on Redfin, for example, you can use an estimated value of $ 250,000. This is not correct, but it will bring you reasonably closer.
- Find your current mortgage balance: Next, look at your last mortgage statement or go to your lender’s website to find your balance. If you have other home loans, be sure to include them as well.
- Calculate the difference: Finally, subtract the total loan balance from the estimated value of your home. This gives you a rough estimate of the equity in your home. If you were to sell your house and pay off your loan today (excluding fees), that’s about the amount you had left.
I live in an expensive area in California and had to make a huge down payment to qualify for a mortgage. Now that it’s been a few years and I’m comfortable with my mortgage payments and have several years of self-employed tax filing, I have more flexibility to tap into my home equity and use it for other purposes.
How to access the equity in your home
The two most common ways to gain equity in your home are: home equity installment loans or lines of credit. Home equity installment loans are sometimes simply referred to as home equity loans or may be referred to as a second mortgage. A home equity line of credit is often referred to as HELOC.
In both cases, the loan is tied to the value of your home. If you stop paying the loan, you will lose your home just like with your first mortgage. It is important to never borrow money without serious consideration, but the risks involved here deserve a closer look.
Interest rates are very low right now, so if there’s a good time to get a new home equity loan, it could be now. For my purposes, it only makes sense if I make more money with the investment property than I will pay in interest and loan fees.
It’s all about cash flow
With rates this low and over 50% of my home equity, maybe now is the time to take advantage of that equity to buy my first investment property. Once the new property pays us optimal rents each month, I can refinance the property with its own mortgage, get most of our money back, and pay off our home equity loan.
If everything works as expected, I will end up making money every month from our investment property in the future. If I make a good buy, the value could go up as well, which would be great if I decided to sell.
Much like the back of a shampoo bottle, I can repeat the process if it works well. Each time, I will increase my family’s monthly income without significantly increasing our workload. It’s a financial victory in my book.