Investment properties can be expensive, and it can take several years to save up money for a down payment. Saving enough can be even more difficult if a property needs repairs or renovations before it can be rented out or sold. If you own a house and you have accumulated equity, you might be tempted to use some of that money to purchase an investment property.
How Can You Use Home Equity for Real Estate Investing?
If you take out a home equity loan, you will receive a lump sum and will have to make regular monthly payments at a fixed interest rate. That can be a good option if you want to buy one investment property and you know exactly how much money you will need.
With a home equity line of credit, you will be able to draw from your equity at different times and in different amounts as you see fit. That can be a better option if you don’t know how much money you will need to buy and upgrade an investment property or if you’re planning to purchase multiple properties at different times.
A HELOC has a variable interest rate. During the initial draw period, you might be able to make interest-only payments, or you might be required to repay part of the principal. If you only pay interest, your payments will jump later, when you enter the repayment period.
You can also consider a cash-out refinance. That will let you receive a portion of your equity in a lump sum and will increase your mortgage balance.
Why Is It Risky to Use Home Equity for Real Estate Investing?
If you purchase an investment property, many things can go wrong. You might discover that it needs more work than you anticipated, you might go for a long period of time with no renters, your tenants might not pay their rent, or they might cause damage. You might purchase a house intending to fix it up and flip it, pay a lot of money for renovations, then struggle to find a buyer.
When you take equity out of your home, the house is used as collateral. If you use equity to buy an investment property and can’t cover your expenses, you might lose your primary residence, as well as the investment property.
Before you decide to use home equity for real estate investing, carefully consider the potential benefits and risks. Look for other ways to get the funds you need to purchase an investment property that won’t put your home in jeopardy.
