Rockford and Belvidere area real estate services.

Real Estate investment 101

When you’re getting started in real estate investing, one of the first realizations most people have is, "You need money to do this." Only, you might not have $20,000 in savings or a rich uncle that can loan you a fortune. So you think, where can I find the capital to buy my first real estate investment? Then it occurs to you: your home.

Maybe you invested all of your savings into a large down payment, your neighborhood has appreciated, or you’ve been diligently paying down the principal over the years. So, you have some equity. Instead of just letting it sit there, you can put it to work for you and buy another real estate investment. But should you go deeper into debt by pulling a second mortgage or equity line?

Yes! Here are some tips for pulling the equity out of your home without overly jeopardizing your finances:

Use an Interest-Only Credit Line

The biggest risk for pulling the equity out of your home is over leveraging yourself. You want to avoid increasing your payments to a point where you can’t afford to make them. It’s also wise to structure your financing so that you are only making payments on the money as you’re using it.

The most appropriate financing option becomes the interest-only credit line. Because you’re only pulling money out as you need it, you’ll reduce your debt service. You should also make sure it’s an interest-only credit line, meaning you only have to pay the interest every month, not the principal too.

That way, you’ll reduce your total monthly expenses for using the money, hopefully making it a manageable risk.

Go for Cash Flow or Short-Term Flips

You can also combat the risk by investing in rental properties or short-term flips. Rentals are a great option because you receive a payment every month. If the financing and lease are done properly, you should make enough money from the tenant to pay the interest on your credit line and have some left over.

Short-term flips are also viable. If you can buy a house and quickly flip it to another investor, then you’ll get your money back and be able to pay off the credit line, plus pocket some profits. As a result, you’ll only have to pull money out for a short period of time, reducing the chance of you being unable to make the interest payments.

Consider Selling after Two Years

After living in a home for two years, the IRS allows individuals to sell it and pay no taxes on up to $250,000 of profit. Married couples can claim up to $500,000 of profit without paying any taxes on it. So, if you’ve been living in your home for more than two years, you might consider selling your home and putting the profits into a larger home or another real estate investment.

Because think about it. You can use a credit line to access the equity in your house, but you’re still paying interest on it. If you sold your home, you could use that money without the headache or expense of monthly interest payments. Since most credit lines only go up to 90% of the value of your home, selling might also give you access to more money.

Of course, you might not want to sell. Packing and moving offer their own headaches, not to mention the unpleasant thought of relocating your family, if you have one. You might be willing to deal with the interest payments for your credit line. The tips above should allow you to do so without putting too much stress on your finances.

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