If you’re looking to grow your rental portfolio but are a bit short on cash to invest in more properties, you’ve come to the right place. Sometimes, you don’t necessarily have to have a lot of cash at hand to invest in a new property as long as you already have equity to use from other assets you own. Here are some insights into how to leverage your equity to grow your rental investment portfolio and boost your income even more:
Getting a Home Equity Loan
A home equity loan is similar to a second mortgage. In short, these types of loans allow property owners to borrow against the equity they own of their homes. They are usually based on the ratio between your property’s current appraised value and the remaining balance due on your mortgage.
How Does a Home Equity Loan Help in Growing Your Rental Portfolio?
When you are trying to figure out how to leverage your equity to grow your rental portfolio and need cash for a downpayment on a new property, you can use a home equity loan to get the amount you need.
Once you start renting the property, you can use the money you get from rent to repay that loan along with the mortgage you took out to buy the home.
After you have paid off a good chunk of those loans, you can start the process again to buy your next property, and so on. Learning how to leverage your equity to grow your rental portfolio is a great way to build wealth.
What Is Needed to Apply?
In order to apply for a home equity loan to grow your rental portfolio, you need a few things. First and foremost, you have to own at least 20% of your current property’s total value.
As with any other loan, you must show that you will have no problem repaying the bank by providing proof of income for at least two years and having a credit score greater than 600. Proper credit is a large part of how to leverage your equity to grow your rental investment portfolio.
It is technically possible to get approved if you don’t meet these requirements, but it may not be worth it, considering the high interest rates you’ll probably be required to pay.
Home Equity Loan vs. Home Equity Line of Credit
A home equity line of credit is also a way to borrow cash against the equity you own on your home but gives you access to a sum over a period of time. You are able to borrow as needed during the draw period. In a nutshell, it’s like having a credit card with your home as collateral in the case you cannot repay.
What About Cash-Out Refinancing?
A cash-out refinance loan will pay off your old mortgage for a new one, typically at a lower interest rate if you can show a good payment history. Just like home equity loans, they allow you to take advantage of the equity built up in your home and give you access to the cash difference between the previous mortgage and the new mortgage.
However, they are only beneficial if you can find a loan offer with a lower interest rate than your primary mortgage.
So Which Option Is Better to Grow Your Rental Investment Portfolio?
One option may be better than another on a case-by-case basis. If you are planning on keeping your home for at least another year and the refinance offer has a lower interest rate than your original mortgage, it makes sense to switch.
On the other hand, home equity loans or home equity lines of credit are better suited for property owners who need access to cash over a period of time. However, remember that the collateral for these loans is your own property, which you may lose if you cannot pay.
With home equity loans, keep in mind you will also have to cover two loan payments: your initial mortgage and your secondary loan. So you need to take that into account when making your decision.
Figure Out Your ROI
Essentially, you want the option that will give you the highest return on investment. When you make your plan, you want to know how much your monthly payments will be across the board between your current mortgage, your equity or refinance loan, and your new property mortgage.
You may also want to include the variable and fixed costs of maintaining the rental property, processing rent, emergency repair, and other considerations. Then, figure out how much money you will make from your rental properties and make sure it covers all of the payments. Use our ROI calculator to learn more.
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