No matter how much money one has, at some point they will run out of their own money to invest in real estate. It happens to everyone, both big time investors and first time house hackers. The difference in those who continue to grow their real estate empire and those who don’t or can’t, is the ability to execute creative financing or use other people’s money by raising capital.
Today we’re going to talk about a unique way to unlock capital you may not know you had. You may have a surprising amount of capital you didn’t even realize. This capital is in the form of home equity (or equity from a rental property). Yes, you can unlock this equity and use it to invest in another property. In fact, it’s prudent to do so.
This process is called a cash out equity refinance. Let’s look at how this works in an example.
Let’s say you buy a property for $60,000, and put $15,000 down, leaving a principal balance of $45,000. You put some work into the property and and after 3 years this property is now worth $100,000. Your principal balance on this property has been paid down from $45,000 to let’s say $40,000. You can refinance the property at the new value of $100,000, keeping 20% equity. This leaves you with $80,000 from which you pay off your first loan of $40,000, and are left with the remaining $40,000 in cash to invest.
And just like that you have unlocked capital that was invisible to you at one point.
Now there are a couple things to consider in this scenario. You’re new principal & interest payment will increase due to the ncreased loan amount. This new mortgage must be supported by the rents, in order to maintain cash flow positive. Additionally, some of your expenses may increase. You’ll need to insure your property for an increased amount, and inevitably your taxes will increase.
So if you’re searching for capital for your next deal, it may be right under your nose… or feet. Stashed in the walls around you. Unlock your equity and put that money to work for you.