by Taylor J. Kovar – CEO/Founder, Kovar Wealth Management

 

–Hey Taylor – I’m considering getting a second property as an investment. Is it a good or a bad idea to take out a home equity loan to make the purchase?

 

–Hey John – Well, it’s not a bad idea. There are a lot of pros and cons to consider, so it’s something you need to be very sure about before going through with it. Let’s analyze the world of home equity loans a little bit.

 

  1. How home equity loans work. The nice thing about these loans is that they close pretty quickly and you usually get a decent interest rate. That’s because, to secure the loan, you’re essentially putting up your house as collateral. The lender has the security of knowing they’ll either be repaid in cash or in property if you can’t meet the loan terms. In this sense, it’s relatively painless to access this type of loan. As long as you own 15% or more of the home you’re borrowing against, you should be eligible. How much you’re able to borrow will depend on your existing debt, the value of your home, and any number of other factors.
  2. The second home. An investment property is a good option when thinking about taking on more debt. If you were going to borrow against your current home to buy a secondary residence, I would have more concerns. A lot of home equity loans function like second mortgages, which would effectively means you have three mortgages after buying the second property. However, if you buy a house that can generate wealth through rental fees or reselling, you can quickly reduce those liabilities. It’s a pretty common practice for people with multiple rental properties to leverage one house or building so they can buy another; you just need to know how it all works.
  3. Is it worth it? As long as you don’t have too much debt and aren’t taking too much of a gamble on this next property, I think the home equity loan is definitely worth considering. A significant downpayment is usually required for a second property, and your home equity loan can make a big difference there. The main thing is to make sure you’re not becoming overleveraged. If you end up falling behind on multiple mortgage payments, you run the risk of going from two houses to zero. Home equity borrowing is a great tool, but only when you can afford to use it properly.

 

Two things can be true: debt is problematic, and it’s a necessary part of real estate investing. As long as you don’t have too much debt already, borrowing against your home could help you double your wealth in the next 10-20 years. Just make sure you’re considering all the variables and then make a thoughtful decision. Good luck, John!