I’m planning to use the equity in my home to buy a second property

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I’m lucky to know a handful of wealthy people, and one commonality I’ve noticed among them is real estate investing. While there are pros and cons to various types of properties, I’m interested in building my own wealth through a strategy that includes residential real estate investing.

So far, I’ve made small real estate investments through REIT ETF purchases and a modest investment at Fundrise. In the long-term, I’m looking to level up my real estate investing with the purchase of whole properties. That takes a bigger chunk of cash than I have in the bank, but that doesn’t mean I don’t have other means to get started. Here’s a look at my plan to tap into my home equity to buy my first investment property.

Why I want to invest in real estate

I have two finance degrees and took college classes on portfolio management, financial institutions management, international finance, and more. With most of my education focused on corporate finance and investments, it’s no surprise that nearly all of my assets outside of my home are invested in stocks, ETFs, and mutual funds.

One of the most important concepts I learned about in portfolio management is diversification. A diverse portfolio can help reduce your overall risk when set up correctly. For a portfolio of stocks, for example, it’s important to not only buy multiple companies, but also to diversify across industries and market segments. That way, if one part of the economy experiences bad results, your entire portfolio won’t be impacted.

I feel like I’ve done pretty well with this, but the next step is diversifying out of the financial markets entirely. Adding investment properties gives me another opportunity for appreciation and cash flow that may be immune to the ups and downs of the stock market.

In addition to diversification, one of the only places I’ve seen people build truly passive income is real estate. I’m lucky to have friends and family who can help me learn the ropes when I’m ready to dive into the real estate markets as a landlord for the first time.

Of course, there are big risks in real estate as well and a lot more money may be on the line. For example, during COVID, many landlords cannot evict tenants even if they don’t pay rent. I definitely don’t want to end up with a rental property where I’m paying someone else’s rent, so I’m planning to wait until at least 2021 before buying anything.

Calculating home equity

Home equity loans and home equity lines of credit are loans that use the equity in your home as collateral. It’s pretty easy to calculate your home equity in just a few steps if you own a home. Here’s how to calculate your own home equity:

  • Find your home’s current value: The most reliable way I’ve found to quickly estimate a home’s value is to use the average of the price estimates at both Zillow and Redfin. If you see a home valued at $240,000 on Zillow and $260,000 on Redfin, for example, you could use an estimated value of $250,000. This isn’t exact, but it’ll get you reasonably close.
  • Find your current mortgage balance: Next, look at your most recent mortgage statement or log into your lender’s website to find your balance. If you have other home loans, be sure to include those as well.
  • Calculate the difference: Last, subtract the total loan balances from your home’s estimated value. This gives you a rough estimate of your home equity. If you were to sell your home and pay off your loan today (not including fees), this is approximately how much you would have left.

I live in an expensive area in California and had to make a huge down payment to qualify for a mortgage. Now that it’s been a few years and I’m comfortable with my mortgage payments and I have several years of self-employed tax returns, I have more flexibility to tap into that home equity and put it to work for other purposes.

How to access your home equity

The two most common ways to get into your home’s equity are through home equity installment loans or lines of credit. Home equity installment loans are sometimes just called home equity loans or may be referred to as a second mortgage. A home equity line of credit is often called a HELOC.

In both cases, the loan is attached to the value in your home. If you stop paying the loan, you would lose your home just like with your first mortgage. It’s important to never borrow money without serious consideration, but the risks involved here make it worth extra scrutiny.

Interest rates are very low right now, so if there’s any good time to get a new…

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