If used properly you can take your home equity and transform it into an investment. Many people make the mistake of accessing their home equity for the wrong reasons. For example, using your home equity so that you can go on a lavish vacation or purchase an expensive car is just about the worst thing you can do. However, there are ways that you can leverage your home equity and put it to work as an investment. Specifically, if you use your home equity to invest in real estate, you can generate extra cash and set yourself up for retirement. Keep reading to learn more.
Line of Credit or Loan
When most people think of home equity, they think of home equity loans also known as second mortgages. Loans are popular options due to their low rates and favorable terms. However, there isn’t much flexibility with loans. You’re given the loan amount, and then you have to start paying it off. On the other hand, a home equity line of credit gives you more control. There is a maximum amount available to you, but you decide how much to take at and when. This way you don’t owe interest on money you don’t withdraw.
There is risk associated with every investment. Using home equity debt to invest in a property is no different. If there are issues with the investment property that cause you to miss payments on your home equity loan, you could end up losing both properties. Before you take out a home equity loan, make sure you are aware of the risk and you have a plan to continue paying even if something goes wrong.
Home equity loans and lines of credit can usually be categorized as itemized deductions. As long as you don’t have to pay the Alternative minimum tax, you will be able to deduct up to $100,000 of your debt. When you use your home equity to purchase a rental property, though, you can list your debt and the rental property price on Schedule E. To learn more about Schedule E take a look at this link.
Buying Investment Property
Before you purchase an investment property make sure you have a plan to take care of potential home repairs. You should also have a good amount of money saved up to deal with such expenses. Having extra money saved up also comes in handy when you have trouble finding tenants to rent your property. While it is tempting to buy a cheap fixer-upper, sometimes they can be more work than they are worth—especially if you are inexperienced with rental properties and repairs.