The question I get asked the most is this: how do you fund your first or next real estate investment deal?
Should you take out a loan, or should you use OPM (other people’s money)?
What if I told you there’s a way to invest in real estate without using a penny of your own money, and without using other people’s money?
No, I’m not pulling your leg.
I’m talking about pulling equity out of your own home to invest in real estate.
If you’re curious about this form of funding for real estate investing, keep reading!
What Does it Mean to Pull Equity Out of Your Home?
Pulling equity from your home means borrowing against the value of your home that’s above what you owe on your mortgage.
In other words, the amount of equity you possess is the difference between your home’s current market value and the balance left on your mortgage.
When you pull equity from your home, you’re taking that difference in the form of a loan, a line of credit, or even a cash-out refinance.
Understanding how to pull equity out of your home is crucial for leveraging your assets effectively.
This is ‘leverage’ in action, and it is most valuable as a tool for real estate investors.
Why?
It allows you to draw on the equity in your home in order to gain financing on a second or third property and expand your portfolio without an abundance of liquid cash.
Advantages of Pulling Equity Out of Your Home
Investing Without Using Your Own Money
By learning how to pull equity out of your home, you’re able to invest in other properties without having to use your current savings or liquid assets. It allows you to essentially use your current investment (your home) to fund the next investment, increasing your potential returns.
Potential Tax Benefits
You might also be able to deduct the interest you pay on a home equity loan or line of credit used to buy a rental property – check with your tax advisor or local tax office.
Depending on your circumstances, this could lower your net cost of borrowing.
Flexible Financing Options
You can pull equity out to finance investments in one of several ways: through a home equity loan, a home equity line of credit (HELOC), or a cash-out refinancing.
Each has different terms and benefits – and you choose which is best for your investment strategy.
Disadvantages of Pulling Equity Out of Your Own Home
Risk of Foreclosure
The main risk in taking equity out of your home is that your home becomes collateral for the loan. If the investment doesn’t pay off as hoped, or you run into financial difficulties, you could lose your home to foreclosure.
Increased Debt
However, taking out a loan against your home increases your total debt.
This has the potential to lower your credit score and reduce your borrowing power for future investments.
Market Risk
Real estate markets can also be volatile, and if property prices fall, you might find that you owe more on your mortgage than your house is worth.
How to Pull Equity Out of Your Home in 8 Steps
Step 1: Determine Your Home’s Equity
First, figure out how to pull equity out of your home by determining how much equity you have.
Deduct the amount you still owe on your mortgage from your home’s current estimated market value.
This will give you a rough idea of how much equity you can access.
Step 2: Decide on the Right Financing Option
Consider how to pull equity out of your home: a home equity loan, a home equity line of credit (HELOC), or cash-out refinancing.
Weigh the advantages and disadvantages of each of these options in light of your investment strategy, and select the one that makes the most sense for how to pull equity out of your home.
Step 3: Check Your Credit Score and Financial Health
Lenders will assess your creditworthiness before they approve a loan, so you should make sure your credit score is in good shape and you have a reasonable debt-to-income ratio if you want the best rates.
A good credit score is essential when learning how to pull equity out of your home.
Step 4: Shop Around for Lenders
Lenders differ in their terms.
Compare interest rates, loan terms, and fees. A lower interest rate on your loan will save you thousands of dollars over the lifetime of your loan.
Finding the best terms is critical when you’re figuring out how to pull equity out of your home.
Step 5: Apply for the Loan
If you have chosen a lender and financing option, fill out the application.
You will likely need to provide copies of your income statements, tax returns, and the value of your home.
Applying for the right loan is a crucial step in understanding how to pull equity out of your home.
Step 6: Undergo a Home Appraisal
Your lender will ask for a home appraisal to be conducted to confirm the current market value of your home.
This is done to ensure that the lender is not offering you more than is justified by current market value.
A home appraisal is a necessary step when you want to know how to pull equity out of your home.
Step 7: Review and Close the Loan
Once the loan has been approved, review the terms of the loan carefully.
Ensure that you understand the repayment schedule, interest rates, and any fees before signing the final documents.
Carefully reviewing the terms of your loan is a key part of successfully learning how to pull equity out of your home.
Step 8: Invest the Funds
With the loan in place, you are now able to invest the money in more real estate assets.
Make sure to invest in a manner that is in line with your financial objectives and yields you a return that is worth what you have to pay for the loan.
When You Should NOT Pull Equity Out of Your Home…
It can be a great tool to pull equity out of your home, but it is not a good move if:
- You’re Basing Your Investments on a Highly Speculative, Uncertain Return: If you’re putting money into investments that are speculative or have a very uncertain outcome, then losing your home in a down market could outweigh any return on the investment. Understanding when not to pull equity is just as important as knowing how to pull equity out of your home.
- You Are Already Over-leveraged: If you already owe lots of money, taking on more might push your finances to the limit and increase the likelihood you will default.
- You’re Moving Soon: Taking equity out might complicate a sale or reduce your profit from a sale.
The Bottom Line: How to Pull Equity Out of Your Home
Funding can be one of the hardest aspects of real estate investing.
If you don’t have a ton of money to spend … and you don’t want to use private money lending… what can you do?
Pull equity out of your own home.
However, it is important to tread carefully – as I explained in this article, if the returns do not outweigh the risks, this can be an expensive and burdensome strategy.
Take it from me: when done right, this can be a powerful funding addition to your real estate toolbox.
