For many people, high rents and rising home prices mean they will have to wait, at least, ten years before they can start the journey to homeownership.
If you have been considering the possibility of investing in rental properties, this is terrible news. It means you have to cross the hurdle of making a down payment on the property twice. The first time, you have to do it to save up money to buy your home.
While this may be an oversimplified or exaggerated scenario, the point is clear. Saving money to buy a home is not easy, and if your dream of becoming a landlord hinges on that, it will take years for the plan to come true.
But what other alternatives are there? Is there any way to get around the problem of saving money for the down payment on an investment property? The good news is there is, and if you already own a property, your situation may already be solved. Upkeep Media agency explains how this is possible.
Understanding home equity
But beyond these, most homeowners do not understand the power of the equity in their property. They know they can borrow from their home equity to finance a home renovation or some other project. But most homeowners do not understand that they can leverage their home equity as a tool to get ahead financially. Rather than tap their home equity to purchase liabilities, homeowners can use it as a down payment to fund the purchase of a rental property. How does this work?
How to access your home’s equity
Example:
If the initial purchase price of your home was $180,000 and you made a 20% down payment to buy it, your equity in the house would be $36,000. The bank would own the other $144,000.
If, after years of owning the property, you have paid-off $50,000 of the mortgage, your equity in the property would have grown to $86,000, and the bank’s ownership would have shrunk to $94,000. However, if the home has appreciated and its market value is now $220,000, that additional value would push your equity to $134,000.
- That amount of $134,000 is what is available to you for financing a rental property. And you can access it through either a: Home equity loan or second mortgage, or Home Equity Line of Credit (HELOC).
Banks like this type of loan because it is secured against a safe asset, your home. The advantage of a second mortgage is that you can pay back the loan in monthly installments, the same way you repay your primary mortgage.
A home equity line of credit (HELOC) is more similar to a credit card than to a mortgage. It is a revolving line of credit that allows you to borrow money and repay it for as long as the line of credit is open. HELOCs are ideal for investors who are interested in property flipping. The HELOC gives them access to a pool of funds they can use to buy and renovate a property, and then repay the loan after they sell the home.
Using your home equity to finance your investment property is a safe way to maximize your existing resources to grow your assets. As long as you do your due diligence before you purchase a property and you are consistent in repaying the loan, you cannot go wrong with this strategy.