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Skillful Investing or Insanity: Equity Stripping & Your Nest Egg

Published on Thursday - December 27, 2012

The National Association of Realtors estimates U.S. homes have seen a $760 billion windfall in equity in 2012, probably a lot more. So should you consider tapping this nest egg to invest in real estate?

Many are wondering whether they should tap into this new found wealth to get started in real estate investing or milk equity from investment properties they paid cash for. So what’s the best move?

First it is crucial to differentiate your own residence from your other investments. While many tapped their home equity to get started in real estate investing in the early 2000s and made a ton of money it may certainly be wisest to leave your personal nest egg alone, especially when it is providing the roof over your head.

For those with equity in income investment properties ‘delayed financing’ can be a dangerous tactic if relied on and that money is needed for other things. There is never any guarantee you’ll be able to get a loan and refinance after you buy a home.

On the other hand leverage can be powerful tool and this is certainly an opportune moment to use it to expand holdings, especially while interest rates and property prices are low and home values are growing.

It is understandable that many real estate investors want the bargaining power that cash can give them as a buyer but there are likely other ways many can act as cash buyers or get fast loans without having to strip the equity from existing properties.

With that said, having a modest mortgage on an investment property isn’t necessarily a bad thing if there is still plenty of cash flow, but always leave an equity cushion for maximum flexibility.

Also make sure to watch the bottom line.  What do these numbers really look like when all is accounted for from closing costs to net income, additional management and if the mortgage interest deduction goes away? Plus keep an eye on the housing cycle and timing of your exit.

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