Leverage your home's equity into rental property

There are many reasons homeowners aspire to have their homes paid for. These include no mortgage payments, financial security, debt reduction, lower expenses, retirement planning, financial freedom, legacy planning, no risk of foreclosure, and reduced stress.

All those things have a cost attached to them, which is the loss of earning power tied to an asset that only benefits the owner through appreciation. In the past few years since the pandemic began, homeowners have experienced a dramatic increase in equity due to appreciation.

As an example, let's compare how the yield on equity decreases as the property appreciates. A homeowner has a debt-free home worth $400,000 that is expected to appreciate at 4% a year for the next five years. The future value of the home would be $486,661, and the owner would earn a 4% return on his investment in the property.

In scenario #2, the homeowner refinances the property today for 80% of its value at 7% interest for 30 years. At the end of the five years, the property is still worth $486,661, and his unpaid balance on the mortgage would be $338,874. The $80,000 equity would have grown to $147,787, earning him an annual return on investment of 13.06%. The leverage of the borrowed funds caused the owner in this example to triple his yield.

Let's not forget the $320,000 cash out that the owner received when he refinanced the home.  If that was invested in rental real estate, he might be able to buy three to four more properties with 80% mortgages and increase his yield even more.

There is much more to a total analysis of a situation like this because rental properties have income and tax advantages that are not relative to a principal residence.  What is possible for the homeowner with this type of asset in their home is to free up a major portion of the cash and reinvest it.

Having equity gives a homeowner many benefits, including financial freedom and security, peace of mind, and the option to pull money out, tax-free, to invest in rental property to increase their wealth position.

To learn more about rental property, download our Rental Income Properties and then schedule a time to meet to explore options. We can start with a Home Equity Review to see what kind of funds may be available based on the current value of your home and its unpaid balance. Then, we can discuss how rental property could help you with your financial goals.