In an interview on “The Stacking Benjamins Show,” Prosper CEO David Kimball discussed home equity and how real estate investors can use it.
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He proposed two ways investors can tap into that equity, using financing offered by Prosper. Even those only scratch the surface of how creative real estate investors can tap their equity.
Home Equity Loan
Often referred to as a second mortgage, home equity loans (HELs) let you take out a new mortgage loan. Technically these could be a first mortgage if you’ve already paid off your original mortgage loan.
Kimball noted that investors can use these loans to upgrade their homes. That could include adding an accessory dwelling unit (ADU). Homeowners could then rent out that extra unit to cover some or even all of their mortgage payments.
Alternatively, investors could use the money as a down payment for a flip or rental property.
“The interest rate is fixed, as is the monthly payment,” explained Michael Micheletti of home equity lender Unlock Technologies. “But it puts up your home as collateral, so if you can’t keep up with payments, you face foreclosure.”
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Home Equity Line of Credit
Unlike HELs, which are fixed installment loans, a home equity line of credit (HELOC) is rotating credit more similar to a credit card. Borrowers can draw on it as needed and pay it back at their own pace — at least until it enters the repayment phase of the loan.
Kimball pointed to the flexibility of HELOCs, the ability for investors to tap them or repay them as they like.
That flexibility could prove useful to flippers, for example, who might tap their HELOC to pull out a down payment for a flip and then pay the entire balance off as soon as they sell it. Rental investors could take a similar approach, funneling every spare dollar to pay off the HELOC balance. Then they could do it all over again to add another rental to their portfolio.
The current high interest rates could make HELOCs more attractive than refinancing. “Many homeowners right now have rates below 5% on their primary mortgage,” said Mason Whitehead of Churchill Mortgage. “For them to do a HELOC at 8% or 9% still carries a blended rate below what a new refinance mortgage rate would be.”
Just beware that HELOC rates float with current interest rates. If interest rates rise, so too would your HELOC rate.
Other Ways To Use Home Equity for Real Estate Investing
HELs and HELOCs aren’t your only options for using home equity to invest in real estate.
You could refinance your home entirely to cash out equity, of course. But for many homeowners with low fixed-rate first mortgages, that doesn’t make sense.
Homeowners with equity could also offer a second-position lien against their home as additional collateral when they borrow money to buy an investment property. That can replace the down payment, so they wouldn’t need to come up with any cash out of pocket. The same risk applies: If you default on your investment property loan, the lender comes for your home too.
If you don’t mind selling your current home, it opens up several other options. With the equity you cashed out, you could make a down payment on a multifamily property and move into one of the units. Ideally, the rents from the other units would cover your mortgage costs, and you could save up a new down payment.
Or you could take another house-hacking angle and do a live-in flip. You could buy a fixer-upper using a renovation loan and rehab it at your leisure. Once completed, you could sell it for a profit, and rinse and repeat.
Get creative, and you have many ways to tap home equity to build wealth from real estate investing.
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This article originally appeared on GOBankingRates.com: The Smart Way To Use Home Equity for Real Estate Investment, According to David Kimball
