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October 28, 2022

Repositioning Home Equity to Generate Passive Income

In this episode I discuss how to take advantage of rising interest rates by investing in rental properties with money that is sitting in your home. Interest rates have caused quite a stir over the past nine months in the real estate market here in Colorado Springs, as well as across the nation. If you have equity in your home from the past surge in housing prices, there’s a way to take advantage of this doomsday mentality through equity repositioning. Passive income makes a huge impact in people’s lives and there’s many people who have created wealth programs to develop passive income.

Steps to Reposition Your Home Equity in Order to Gain Passive Income

During the recent COVID years, home interest rates dropped significantly and gave many individuals the opportunity to buy homes due to low mortgage payments. Many Americans also refinanced and were able to cashout money from their homes, lower their monthly mortgage, and even shorten the life of their remaining home mortgage. In a short time, a lot of people gained a lot of equity in their home due to vast jumps in appreciation. If you have available equity in your home with a very low interest rate, there are some key steps that you can make to take advantage of buying an investment property:
  • HELOC/HELoan/Shared Equity
  • Buy Investment Property (Higher Rates=Lower Costs)
  • Build Equity
  • Refinance into DSCR/2nd Home mortgage

Obtain a Second Mortgage Equity Loan: HELOC, HELoan, or Shared Equity

If you have a very low interest rate on your current mortgage, but lots of equity, you can access that equity without touching your current interest rate. To pull out that cash, you will need to obtain either a Second Position Line of Credit or a Second Position Loan. This second lien will most likely have a higher interest rate, but when the amount is smaller than the first lien, it usually means the monthly amount due remains affordable. Many people use Lines of credit and equity loans to consolidate debt and/or finance home renovation projects as well.

Buy an Investment Property at a Lower Cost

We humans tend to have short-term memory when it comes to money. This means that many sellers forget that over the past 25 years, current interest rates are quite par. The advantage that buyers have with rising interest rates includes, but is not limited to:

  • Price Negotiations
  • Seller Paid Rate Buy Downs
  • Seller Paid Improvements
  • Additional Time to Discern
  • Inspection Negotiations
  • Longer Contract to Close

These are just a few advantages of buying in a high interest rate market which in some cases can lower the purchase price in buying a home. So when you obtain equity from your current home, you can use that money as a downpayment on a rental property property because previous home values may have been largely overpriced.

Why a DSCR Loan is Crucial for Buying a Rental Property

A DSCR loan is a great tool for buying an investment property because an Income Appraisal is used for valuing the price of the home. When you borrow equity from your home, you increase the Combined Loan To Value of your home and also increase your personal Debt-to-Income Ratio. A DSCR basically uses the DTI (Debt-to-Income) ratio of the home. Click on the DSCR link to understand more. Since a DSCR loan doesn’t consider your personal DTI, it gives you the ability to purchase a home even though your personal DTI may be too high.

HOME EQUITY IS IMPORTANT

This entire strategy is based on Home Equity and therefore you must be wise in how you approach it. Don’t expect to buy and sell the same home on a dime, in fact, there may be a chance that your home loses value before it appreciates in value. However, the rental value of the home may remain intact. Therefore building equity in both the investment property and your current property will help out significantly when it comes time to sell or refinance either home in the not too far off future.

Coming in Clutch with a Home Refinance

There are two consistent aspects of the real estate industry that will probably never change. 1. Interest Rates fluctuate and 2. Home prices appreciate. This is key because what goes up is probably coming back down again. A mortgage refinance is such a clutch tool because it allows you to change the Interest Rate and Term of your current mortgage. I analyzed the effect of differing interest rates on June 15th 2022 and realized that interest rates can vary hundreds and even thousands of dollars when it comes to a home mortgage. Individuals who can be patient with their home investments and income can essentially buy homes cheap at a higher monthly cost and then down the line significantly lower that monthly cost while retaining an increase in their home value. Once interest rates lower, any kind of refinance may enable a rental owner to cashout the newly gained equity and pay off the original HELOC, HELoan, or Shared Equity Loan.

The Equity Reposition Strategy

This equity reposition strategy entails removing your home’s equity and investing it as a down payment into rental home purchase. Remember that you must be willing for time to pass in order to build enough equity so that you can take the original equity back out of the rental home and put it back into your primary home, which pays off the Second Position Equity Lien. After a certain number of years, you may be able to find yourself with a bonus rental property bringing in passive income that you otherwise could not afford. Remember that there are many Juicy Solutions waiting for you and real estate is a great opportunity to sow and reap generational wealth. Feel free to take a look around the website to understand more about the mortgage industry and remember that if you are in Colorado or Texas, I know many incredible real estate agents that would love to help you with your home sale or purchase.
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