Options to Tap Into Your Equity if You Already Have a Low-interest Rate Mortgage

Options to Tap Into Your Equity if You Already Have a Low-interest Rate Mortgage

Across the country, real estate values in most areas have gone up at least 40 percent since 2019. For those who had the foresight, resources, courage, and gumption to buy and hold real estate prior to 2022 – congratulations! You probably have a lot of equity. If you obtained a mortgage loan or refinanced one before 2022, you are probably sitting pretty with a historically low interest rate. We may never see interest rates below 4% again in our lifetime. To tap into your equity, you would either have to sell your asset or borrow against the equity (at a higher interest rate).

If you wish to expand your real estate acquisitions, your equity is a great resource. Here are some options for you.

  • Sell (and use a 1031 tax-deferred exchange). In many places, it is still a strong seller’s market. If you sell, you will give up your low interest rate and there could be capital gains tax implications. Yet if the new deal is lucrative enough, then it can be worth it. If you’re selling an investment property to buy another one, consider a 1031 exchange. Read our blog on it.
  • Conduct a cash-out refinance. There are lenders out there who may give you 75% or more Loan-to-Value. For example, if you own a property that appraises for $800,000 and owe $400,000, at a 75% LTV your bank would lend $600,000. The $400,000 existing loan would be paid off, leaving you with $200,000 (not counting loan fees). You keep the asset, have around $200,000 to invest, and over time your tenants will pay down your $600,000 loan. Your new loan may come with an interest rate of 7% or more. If your property’s income well exceeds the debt service, it can make sense. If you invest the $200,000 from the refi into an asset that produces a Rate of Return (ROI) of greater than 20%, you’ll grow your wealth more than if you did nothing. If interest rates go down significantly in the future, you can always refinance to lower your rate.
  • Keep the existing loan and obtain a line of credit against the equity. Maybe it doesn’t make sense to give up a 3 or 4% interest rate. You could keep that loan in place and obtain a Home Equity Line of Credit (HELOC) against the remaining equity. For example, my own home has a 3% interest rate and a lot of equity. A bank appraised our property and gave us an 80% LTV interest-only HELOC at a fluctuating interest rate (currently 8.5%). We used that HELOC to buy a rental property in cash. We then paid off the HELOC a few months later. We can use the HELOC again and again for the next decade.
  • Obtain a commercial loan against the equity in your investment properties. Your investment properties may have lots of equity, yet your bank may only approve a HELOC against your personal residence. You could obtain a commercial loan against any number of your investment properties. For example, let’s say your investment portfolio is worth $2 million and you only have $1 million in debt against it. Your bank might give you a commercial loan up to 75% LTV (75% of $2 million is $1.5 million). That means the bank may loan you $500,000. That loan may have a term of around 20 years with a balloon payment due in 5 to 10 years. The interest rate would be higher than a traditional residential loan. Let’s say the interest rate is 9%. If you can invest the $500,000 and earn a 20% ROI or better, you will dramatically grow your wealth over time.
  • Obtain a private loan against your equity. There are affluent people with excess cash who want to achieve a higher ROI than the 4 to 5% offered in savings accounts and Certificates of Deposit (CDs). The safety of real estate can be alluring, as real estate is stable, insurable, simple to evaluate, and easily controlled with proper systems and maintenance. A private lender could loan you the money you need and place a lien against a property of yours. When you pay back the investor, they will mark the lien as satisfied. Private investors could receive 7% or more in interest to make it worth their time. There may be little to nothing in terms of fees. A loan from a private investor won’t show up on your personal credit report or your company’s credit report.
  • Borrow from an Internet lender that gives you a credit/debit card against your equity. Some innovative new lenders are providing a card with a limit based upon equity in your property.
  • Sell your property and lease it back. The sale-leaseback is not ideal yet it can work. You sell the property to someone else to receive cash that you can invest elsewhere. You simultaneously lease the property from the new owner so you still can control and enjoy the benefits of the property. Of course, you won’t have the taxable benefit of depreciation as the new owner reports that on their tax return. I’m a big fan of owning assets, so I don’t like the leaseback option.

If you want to grow your real estate business, borrowing money is a key component. Wealthy people are skilled at moving money around. They increase the velocity of their money rather than have it sit there. Equity looks good on paper and can make you feel good, yet if you aspire for more then tapping into it makes sense. Let me know what you’re doing to grow your real estate portfolio!

Tai DeSa is a graduate of The Wharton School of the University of Pennsylvania.  He became a full-time real estate investor in 2004 after serving in the U.S. Navy.  Tai made colossal mistakes in investing (and learned some things along the way).  Tai has coached hundreds of entrepreneurs, real estate investors, and real estate agents on how to increase their income and net worth. He has helped hundreds of homeowners avoid foreclosure through successful short sales. Check out Tai’s books on Amazon.com. Tai may be available for coaching and speaking engagements on a variety of real estate topics.  Send an email to tai@investandtransform.com.

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