Using Home Equity - How to Buy Two Homes For The Price of One
Tags: sushma khinvasara realtor, home equity, equity take out, home equity line of credit, heloc, refinancing, home line of credit, buying an investment property,buying a second home
USING ACCUMULATED HOME EQUITYIf you are a home owner, do you know that you can use your home's equity to build wealth? Purchasing a home is a major investment in one's lifetime but using the equity that gets accumulated in your home can be used to fund a significant portion of your retirement plan.
If you understand how to use it to purchase additional real estate, you can potentially reap huge benefits. More and more savvy homeowners realize that their home can be transformed into a wealth-building juggernaut if everything is planned wisely.
So, how can you use the equity in your home to buy more real estate? It all depends on how much your house appreciated over the years. Let go right into how you can use your home not only as your private refuge but as a powerful investment vehicle.
1. The Magic of AppreciationMost Canadians only think of their home as their primary shelter as it comfortably builds equity. But property values in the Greater Toronto Area have shown stunning appreciation rates over the last few years.
Here is one example of this. The average Toronto condo prices were at $793,000 in May 2022. Now compare this with May 2017 condo prices at $565,000. That is a $228,000 appreciation which works out to 40% gain in value. This type of appreciation would give you a substantial amount of equity to invest in an income-generating rental property or two. If you own a single-family home, this amount of appreciation is even greater. That's a lot of value stored within the four walls of your home.
If you don’t know how to use that locked-in appreciation, all of that equity is essentially "dead money," meaning that other than making your net worth statement look fabulous, it doesn't do you any good as a wealth accelerator.
So long as the property you purchase has a positive cash flow, meaning the rent you collect is greater than the total of mortgage loan payment, condo fees, property tax and insurance, you allow time to improve your balance sheet through additional equity appreciation, mortgage paydown via your monthly payments, annual rent increases, depreciation, and interest deductions off your tax bill.
2. Using Home Equity as LeverageEssentially, there are two ways to tap into your home's equity. The first is by qualifying for a fixed-term home equity loan. In simple language, you borrow money from a bank or finance company at a fixed rate for a fixed length of time, usually at 5 years’ term and at a fixed monthly payment.
Fixed-rate loans are a straightforward way to borrow money for real estate investments. Payments and interest rate remain fixed over the term of the mortgage but they're also the least flexible when it comes to paying off the mortgage before maturity. There can be significant pre-payment penalties for paying off mortgage sooner or breaking the mortgage.
The second way to access the equity in your house is through a HELOC, which is short for home equity line of credit. HELOC works much like a credit card or an unsecured line of credit because it's a revolving credit line that's secured by your home. You can borrow against your approved line of credit as you like and you only pay interest on the outstanding balance. Once you pay off the balance, no interest is due, but the HELOC remains in place until you're ready to make another investment.
HELOCs can be a bit confusing, so let's walk through a practical example. Suppose your approved line of credit is $50,000, and you borrow $20,000 to purchase real estate. In that case, you'll only pay interest on the $20,000 of borrowed funds, not the entire line of credit, and you'll still have $30,000 of credit available should you decide to make additional purchases.
If you pay off $5,000 of your balance after six months, you'll only pay interest on the remaining $15,000 and your available credit increases to $35,000 of the total credit line for which you're approved. Each month that you make a payment over and above interest, the outstanding balance is reduced, you pay less interest, and your available credit increases.
The HELOC is a highly flexible financial instrument that’s wildly popular with homeowners. There was a research study done by the Financial Consumer Agency of Canada and it says that the HELOC is the second-largest source of consumer debt, which is surpassed only by home mortgages.
3. Market OpportunitiesPrecisely what kind of investments can you make using the equity in your home? Several, actually.
Home improvements and renovations are a leading use of borrowed equity funds for many homeowners. Reinvesting where you already live can potentially increase your home's value.
However, think of investing in condo units for rental income and capital appreciation. Pre-construction condo units have historically performed very well over the last ten years as an investment. Of course, past performance doesn't guarantee future profits, but it's certainly a strong indicator. As long as the number of available buyers, that is demand, exceeds the available real estate supply, prices are more likely to rise.
You can also invest in detached housing with your home equity if you can withstand the more volatile nature of that market. Some investors with nerves of steel patiently wait for housing bottoms and use price fluctuations to their advantage by jumping into the market after panic selling begins and snapping up properties at bargain-basement prices.
So in conclusion, using the piled up equity in your home can be a lucrative proposition for the real estate investors by unlocking its value. But this method of financing investment only works if properties are chosen cautiously with the guidance of skilled real estate professionals such as an experienced real estate agent and real estate lawyer as your support team. They can help you avoid making bad decisions when choosing an investment strategy by ensuring that it’s the right one for you.
Interested in learning more about how to use your home equity to invest? Give me a call at 647-834-9928. You can also drop a line with your best contact number. My email address is firstname.lastname@example.org