Using Home Equity To Buy Investment Property

Tapping into home equity helps capitalize on standing assets with minimum risk.

Using home equity to buy investment property. A general rule of thumb is between three and four times your useable equity. It is possible to use your existing home to buy an investment property without dipping into your savings. The maximum loan-to-value LTV on a home equity loan varies by lender but typically tops off between 80 and 85 percent.

Buying a second property is a popular option and in buoyant property markets the financial benefits of the rise of the value of a second home will almost certainly far outweigh the investment potential of say a savings account or shares. A HELOC allows you to purchase property using no money out of your bank account. When you first buy a house it is straightforward to calculate equity using the formula above.

Using the equity of your own home to buy an investment property carries some risks. A HELOC Home Equity Line of Credit is a line of credit that is established on a property with the property itself securing the line as collateral. Using the equity in your home is a smart way of building your property portfolio without feeling the pinch.

Once you know how much useable equity you have you can roughly calculate the purchase price you can consider for an investment property. Beware of the traps when accessing your equity. You can even use a home equity loan or line of credit to invest.

The Tax Cuts and Jobs Act of 2017 changed the deductions homeowners can take for interest paid on home equity loans and lines of credit but loans used to. By accessing the equity to pay for part of the investment property you are borrowing more money and increasing the amount you owe on your home loan therefore your repayments will also increase. Using the equity in a home or investment property to pay for home upgrades or cover unexpected expenses in the form of a HELOC can be a great option for financially healthy individuals.

Here are some tips to help you maximise the power of your equity safely. But home improvement is not the required use. Heres how to calculate and use your available equity.