You might think of home equity and see Kurt Browning, the Canadian Olympic figure skater from the CHIP reverse mortgage commercials. You may also think that it’s something retired folks use to top up their living expenses. But did you know you can use your existing home equity to invest in another property to buy a house?
A home equity loan is a type of second mortgage and allows you to use your equity now rather than waiting until after you sell. A second mortgage can also be useful if you choose to use invest your equity in a second property.
Basically, home equity is the money your home makes for you. So if you bought a house for $200,000 and now it’s worth $600,000, that $400,000 increase is due to the increasing value of your home over the years and that is your home equity. The appraised value of your home can impact the amount you receive as a lender and affect the lump sum you get.
“It’s really dead money,” said Matt Elkind, Managing Director and partner at Connect. “If you put it into real estate, you’re dealing with a much different situation where you can now make that $400,000 grow into another million.”
As interest rates climb, your purchase price becomes a smaller fraction of what your home is actually worth. If your home’s value climbs by as much as 80%, you’re in a great situation to consider using home equity as a down payment to purchase a second home as an investment property. All-in-all, home equity loans can be useful if you want to make an investment that you’ll be able to cash in on later.
A vacation home or rental properties?
Buying a second home can open a few different doors in terms of what you’re looking to do with your investment. You could purchase a log-cabin in cottage country and turn it into a family getaway for generations, or you could buy a home or condo and turn it into a rental opportunity in order to make money to pay back your home equity or mortgage loan.
Each option has its perks, but it’s important to consider what type of investment you want to make before looking into using your home equity to buy a new home. The question is, which type of loan will be best for you to make more profit, and which housing option do you want to invest in? For example, investing in condos in Canada is ideal for people looking to invest in a rental property that has value.
“For the most part, the price of a freehold home is what makes it challenging,” Elkind said. “In most areas like Toronto, if you pay a million and a half dollars for a home on the rental market, you will not have positive cash flow whereas in a condo in a normal rental market, you have that opportunity [to make more.]”
Written by Taylor Pipe