Discover how to turn your home equity into monthly cashflow. Whether you have a nearly paid-off home, own single-family rentals, or simply have untapped home equity, this video is for you! We’ll cover what home equity is, how to access it, and how to incorporate it into your commercial real estate investments.
What is Home Equity?
Before diving into strategies for turning your equity into monthly cash flow, it’s important to understand what home equity is. Home equity is the difference between the fair market value of your home and the outstanding balance on your mortgage.
For example, if your home is valued at $700,000 and you owe $300,000, your home equity is $400,000. It’s that simple. What more, your home equity can be taken out tax-free and it can be used it can be used to buy income-producing real estate.
Responsible Use of Home Equity
However, just because you have equity doesn’t mean you should use it. Using home equity responsibly is crucial. Here are two critical pieces of advice:
- Either learn how to use it properly or leave it alone. For those over 40 considering using equity to invest in commercial real estate, don’t do it by yourself or solely with a broker. The stakes are too high and you may not be able to recover. Help from an experienced mentor is essential so you don’t make unnecessary mistakes and risk losing your equity.
- Owning your home outright doesn’t mean you’re free of costs. Taxes, insurance, utilities, and maintenance still need to be paid. Many believe that once their mortgage is settled, they’ve achieved financial freedom; however, this isn’t the case. Why not leverage that equity to create an income stream that covers these ongoing costs? As Warren Buffet famously said, “If you don’t find a way to make money while you sleep, you will work until you die.”
How to Tap into Your Home Equity
Here are 4 ways to convert your home equity into cash flow:
1. Home Equity Line of Credit (HELOC)
A Home Equity Line of Credit (HELOC) allows you to borrow against the equity of your home. Typically, lenders let you borrow up to 75% of your home equity. Using the earlier example, your home is valued at $700,000 and you owe $300,000, your home equity is $400,000. With $400,000 in equity, you could potentially secure a HELOC of up to $300,000. This additional loan can be used for any purpose, including investing in commercial real estate. However, it’s important to note that this option is available only for your primary residence, not for a single-family rental property. For a more in-depth look at how to use a HELOC to buy real estate, check out this video: Unleashing Your HELOC Power
2. Cash-Out Refinance
This method involves refinancing your existing mortgage to obtain a new, larger loan. The new loan will consist of your current mortgage balance plus 75% of your equity. The difference between the new loan and your existing mortgage is given to you as cash. In our example, a cash-out refinance could turn your $300,000 mortgage into a $600,000 loan, giving you $300,000 in cash to invest (75% of your $400,000 in equity). We often recommend this technique to our students as it is an effective way to leverage into financial freedom. For additional training, you can view my video titled: When to Refinance Commercial Real Estate?
3. Sell Outright
You can sell your home or rental property to access your equity directly and use the proceeds to buy income-producing real estate.
4. 1031 Tax Deferred Exchange
This method only applies to rental or investment properties, not your primary residence. By selling your property and using a 1031 exchange, you can defer paying capital gains taxes and reinvest all your equity into a larger investment property. This is probably the most powerful way to gain wealth as a real estate investor, and the process is outlined in this comprehensive training: 1031 Exchange Step by Step Case Study.
Once You Have Your Equity, What’s Next?
Now that you know how to tap into your equity, what the next step?
Get Educated
Don’t go it alone. Educate yourself or find a mentor before making any moves because mistakes can be costly. Here at Commercial Property Advisors, we offer several valuable resources:
- Get started by reading my book Commercial Real Estate for Beginners.
- Enroll in our free on-line course to educate yourself further.
- When your ready to take the next step, apply for our coaching program: Protege Program.
- Text PETER to 833-942-4516 with any questions you may have about getting started in commercial real estate.
Select a Property Type to Master
Focus on one type of property, whether it’s apartment buildings, mobile home parks, storage units, RV Parks, or Flex Space. As a beginner, specializing will help you master the market and then once you get experience, you can try a second property type. But for now, master one property type.
Analyze Deals Thoroughly
Once you’ve chosen a property type, the next step is to learn the basic and start evaluating deals. It’s like playing basketball: you need to learn how to dribble, shoot, and pass before you can get in the game. Similarly, understanding the basics is crucial before you begin making offers. In fact, our students go through four phases of training before they start making offers, and the same approach should apply to you.
A crucial aspect is ensuring your new property can cover all related expenses, including any HELOC or loan costs. For example, if you have a HELOC on your single-family home that costs $600 monthly, your income property should generate enough cash flow to cover this $600, in addition to the mortgage, insurance, taxes, and maintenance costs. This means you’ll need to find a good deal, likely off-market, to make the numbers work.
Start Making Offers
Nothing happens until you start making offers. Getting in the game requires taking action, so don’t waste time! The best time to invest in commercial real estate was five years ago; the second-best time is today.
Investing Equity in a 12-Unit Multifamily
Let’s examine how to turn your home equity into monthly cash flow with this example using the HELOC method. Again, you have a home worth $700,000 with $300,000 remaining on the loan, giving you $400,000 in equity. You take out a HELOC for $300,000 (75% of the equity) and use it as a down payment for a $1,000,000 apartment building with 12 units:
Rental Income: Each unit rents for $1,100, totaling $13,200 per month or $158,400 annually.
Vacancy Factor: Allow for a 5% vacancy rate, reducing annual income to approximately $150,480.
Expenses: Subtract $48,000 (average $4,000 per unit) for taxes, insurance, repairs, and utilities.
Net Operating Income (NOI): After accounting for vacancies and expenses, your net operating income (NOI) is $102,480.
Mortgage and HELOC Costs: Subtract your annual mortgage payments of $55,884 ($700,000 at 7% interest rate) and HELOC interest costs of $24,000 ($2,000 monthly). As you can see, a HELOC isn’t cheap, which is why your property must be able to afford the cost.
Cash Flow: Your remaining cash flow would be approximately $22,596 annually or $1,883 per month, which is a 7.5% return on investment.
For a comprehensive breakdown on these and other commercial real estate terms you must know to determine cash flow and analyze potential investments, check out this training: 18 Commercial Real Estate Terms You Must Know
Benefits of Investing in Commercial Property
Knowing how to turn your home equity into monthly cash flow is a game-changer! And turning your home equity into cash flow by following a responsible and educated approach, is a smart way to make your assets work harder for you. Your new investment provides:
- Monthly Cash Flow: Your equity, when invested, generates cash flow.
- Tax Benefits: Commercial real estate offers significant tax advantages.
- Loan Paydown: Your tenants help pay down your loan, creating more equity.
- Appreciation: Potential for forced appreciation through rent increases. Over time, you may have the opportunity to do a cash out refinance, pull out $300, 000 and pay back your HELOC. And then repeat the process over again.
Questions or Comments? Text PETER to 833-942-4516.
Every Successful Commercial Real Estate Investor Has a Mentor
Every successful commercial real estate investor has a mentor. Get your mentor here: Commercial Property Advisors Protege Program
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