Investment properties can be a great way to generate passive income and diversify your investment portfolio, but getting into real estate investing requires a lot of change. If you don’t have cash and don’t want to wait to save it, can you use a mortgage on an investment property?
Key points to remember
- Rising interest rates led to a slight slowdown in the housing market.
- A home equity loan puts your home at risk if you can’t pay it back.
- You can make money in real estate in a slower market, but it takes skill.
- Know the risks before borrowing against your home.
Using a home equity loan to invest in real estate
Proceeds from a home equity loan can be used for anything you choose, including investing in real estate. To use a home equity loan to invest in real estate, you must have some equity in your existing property, decent credit, and proof of income sufficient to repay the loan.
Once your home equity loan is closed and you have chosen an investment property, you can use your home equity loan proceeds in any way you choose for your investment property, or anything else. The money is yours to use as you wish after the loan closes, but just because you can use your home loan to invest in real estate doesn’t mean you should.
Risks of using a home equity loan to invest in real estate
Using a home equity loan for an investment property comes with risks that you need to consider before taking out one.
Home Equity Loan Risks
Home equity loans are loans that allow you to borrow against the equity in your home for a lump sum payment that you repay over time with a fixed interest rate and fixed monthly payments. They carry two main risks
- You could default on your loan and lose your home if you can’t meet the payments.
- Your home’s value could decrease and you could go underwater on your loans, which means you can’t move or sell your home without paying your lenders money.
Real estate investment risks
No one can predict the future of the housing market with 100% accuracy, but it looks like the wild growth rate of the past few years is starting to slow as interest rates rise rapidly. Investing in real estate while the market is slowing means it could be difficult for you to make money in the near future after factoring in closing costs, high interest payments and renovation expenses. that you might have.
Although real estate investing has been a relatively easy way for people with even minimal knowledge to achieve fantastic gains over the past few years, don’t confuse someone else’s luck investing in a market. booming with real success. Learning to analyze real estate markets, rental markets, and potential return on investment requires specialized skills and knowledge that have taken decades to build.
If you are looking to invest so you can flip houses, it may be harder to make a profit right now. If you are interested in purchasing an investment property to let to tenants, you should be very thorough in your research of the rental market and the rules and regulations in the area in which you are investing. You should especially familiarize yourself with some of the eviction moratoriums introduced due to the coronavirus pandemic.
Ask yourself how long you can afford to pay the mortgage and equity loan in your primary residence in addition to any loans you may have on the investment property. If you can’t afford to sustain those payments without any rental income for more than a year, taking out a home equity loan to invest in rental real estate could cost you your home. Make sure you are comfortable with this level of risk for the potential reward of passive income before taking out a home equity loan.
Can I get a tax deduction for my home equity loan?
You can only get a tax deduction on the interest portion of your home equity loan on the amount used to buy, build, or significantly improve the borrower’s home on which the home equity loan is based. If you use a home equity loan to invest in a separate property, you cannot claim a tax deduction.
Is investing in real estate risky?
Any investment is risky, but real estate investing comes with its own risks. The property you have invested in could lose value over time. If you invest in a property and rent it out, your property could be damaged by tenants or you could face long periods of non-payment while you go through the expensive process of evicting someone.
Can I use a home equity loan to invest in a REIT?
You can use the proceeds from your home equity loan for anything you want, including investing in a real estate investment trust (REIT). Investing in REITs can be a way to mitigate some of the risks of individual property investing, but they have recently come under fire for buying up properties in areas and contributing to the housing crisis. Plus, eroding your home’s equity for investing carries the risk of foreclosure if you can’t afford to pay off your home equity loan.
Which is better for investing, a home equity loan or a HELOC?
It depends. If you only intend to invest in one property and you know the exact amount needed, a home equity loan will most likely have a lower interest rate over time than a home equity line of credit. home equity (HELOC). If you intend to invest in many properties over time, a HELOC allows you to withdraw equity and repay it multiple times with one product and is more convenient than taking out and repaying multiple loans on net worth over the same period.
Investing in real estate has been easier to make profitable in recent years than it likely will be in the future. While someone on TikTok may have doubled their money flipping houses over the past two years, anyone who invested through the early years housing crisis will tell you that it’s not easy in a slower market. Learn as much as you can about real estate investing and make sure you have the cash to cover downturns or long periods without rental income. If you can’t, don’t risk the roof over your head with a home equity loan to invest in real estate.