Can I use my home equity to invest in
real estate? There's a lot of people that have this question but a lot of people
don't even think it's possible because like, "I don't know,
I'll take equity out of my home. It'll increase my mortgage. Does it even make
sense? Can I put it in real estate that'll work?"
Today, we're going to explore whether that's possible if it works. And if it does, how
you would do it? So, people asked on a pretty frequent
basis. What if I have equity in my home? Can I use that to invest in real estate?
Let's talk about what home equity is and then let's talk about how yes you can
use it to invest in real estate and what does that actually look like.
So, for many
people, they're not putting money in 401ks or IRAs, maybe they are but due to
time, the value their home goes up and then they get equity. Here's what equity
is. "Well, Kris. I bought my house. When I bought it, it was valued at $200,000. I
put a small down payment and I owe $180,000." The
difference here between what you owe and the value, that 20,000
difference is what's called equity. But you wait 5 or 10 years and all the
sudden it's like, "Just kidding. The house has gone up in value."
Now, it's worth $280,000 But guess what I've
also been paying it down and now I only owe $160,000.
Well, we had a $20,000 equity here. Now, the difference between 280
and 160, is $120,000. Do you see the big gap there? So,
the question is, "Wait a second? Are you saying that if I sold my house today for
280,000 and paid off my mortgage that after closing costs
I might have $120,000 left over?" Yes, you would.
And could you
invest that? Yes. But you don't have to sell your house to get the money out of
it. You know, as long as you still have
relatively some good credit, these are some options that you actually have: You
can go to the bank and do either a cash out refinance or you can do what's
called a home equity line of credit. Now, this costs nothing. And a cash out
refinance, if you're going to sell the home in three or 4 years do this option. If
you're going to hold it long term, this is usually a better locked-in rate option.
But basically there are 2 different loan options for getting money out. And
what the banks will typically do is say…
"Well, because this is a primary residence,
meaning, you live in it. It's not an investment property then we're only
going to allow you to take out up to maybe 90% of the value of the home
or maybe 80%." So, let's just say that we owe 160 and let's say
we have a value of 280. Some banks might say you can go up to 90% of the value
but let's just say more conservatively, you can only go up to 80% of the value.
So, what's 80% of $280,000? Well, it's roughly just a little more
than 220 grand. Now, by the way, I did that in my head real quick. It's something
like, "How'd you do that?" Well, 10% of $280,000 is 28 grand.
rounded up, 30. But that's just 10%. So, another 10% to make 20% is 60 grand. Well,
280 minus 60 is to 220. I owe 160, the bank will let me borrow up to 220. What's the
difference between 160 and 220? That right there my friends is $60,000. So,
either through a cash out or a HELOC, I now all of a sudden have $60,000. If I do
a cash out refinance and I take this money out, guess what how's my payment? It
goes up. So, you need to put the $60,000 into real estate that produces enough
cash flow that is bigger than whatever your payment went up. There's a general
rule of thumb. As long as interest rates are under 8%, you can almost always
borrow money and put it into the right cash flowing real estate and have it be
more than the cost of borrowing.
Just be aware that you're borrowing money and
there's a cost and we go to put it in real estate that produces more than the
rate at which you borrowed. If it's a home equity line, it's different than a
cash out because it's like a revolving line of credit. If I don't use it, I don't
pay. So, that is a benefit of the home equity line. Because you might find a
property that only takes 30 grand. And be like, "Oh, I'm only going to use half of my
HELOC and I'm only going to have half a payment to make. And the other money is
available I could use it but I don't have to use it. That makes sense? So, all
of a sudden, it's like, "Okay, well what can I do with this money?" Well, if I were to
go into one of my cash flow markets…
For example, I've got markets where I can
purchase properties that average closer to a 9% cash on cash. Now by the way, that
is a really high return in the game of real estate. Because in addition, let's
say that I'm also picking up 5% appreciation. And then I'm also paying
the mortgage down. When you get a third of your mortgage, your 5% your pay
is actually going towards principal reduction. So, you have another 5%. All of a sudden, that's at 19% I on average get up to 25 plus
percent. So, I want to give you an understanding that if the cost of my
money here is let's say it's 6% and my cash on cash is 9%, meaning
the cash that I actually get as long as this number is bigger than this number,
then I'm always gonna have more money left over at the end of the day. Does
that make sense? Number 2, when I factor in these
benefits, I'm borrowing money at 6% and I'm putting it in let's say 2 homes
where I'm now earning let's just call it 25%.
There's going to sound stupid but I
promise it's not condescending. Which number is bigger 25% or 6%? The 25% is
bigger and because the cash flow component can cover the overall cost of
the monthly cost here, the difference in the arbitrage here, there's a 19%
difference. You'd be crazy not to do this. Taking money out of equity in your home
and putting it to work is a super smart thing to do. And for some of you it only
makes sense if you can have a professional team that will do it all
for you, take care of it, take care of the loan.
Find the best deals, manage it all
and that's also an option that you have. In fact, if you click the link below, you
can actually talk with my team and say, "Hey, I have some equity in my home and I
want to put it into investment grade real estate that can really get me ahead.
Because right now, I'm not going to get where I want to go in life and I want to
get there a lot faster." And if that's you, if that resonates, if that makes sense,
this could be honestly a perfect strategy for you. When I bought my very
first house, I bought it with equity. And I took a home equity line out a 20 grand
and I put it in my next property. Friends, this is how I created wealth. And then I
use the equity in that house and guess what I did later? I put in another one.
And then I moved out of my primary residence and rented it out as its own
cash cow and bought a new primary residence for very little down that came
from money from my investments that equity bought more.
Like, it was just an
awesome never-ending cycle. And so, even though real estate can be overwhelming
at first, if you have a team of experts take you by the hand and help you, you
can figure it out or you can read some books or be a loyal subscriber and watch
your daily videos here. Eat your Wheaties and basically get smarter every
single day. So, those are options that you have available. If you want to tap into a
team that can give you instructions so you can do it yourself or even do it for
you you'll find that in the link below.
Can you take home equity and turn it
into more real estate? Yes. Should you? Likely. If you're ready to take action,
you know how to do that. Subscribe and I will see you on tomorrow's video..