If you’re interested in investing in rental properties in Tucson but don’t have the cash for a down payment, you’re not alone. Fortunately, there is a way for you to leverage the existing equity in your home to purchase one or multiple rental properties. In this article, we’ll walk you through how to use equity to buy rental properties in Tucson and grow your investment portfolio.
What is Home Equity?
Home equity refers to the market value of your home, minus the balance owed on your mortgage—essentially the portion of your home that you truly own. As you make mortgage payments, your equity increases, and it can be further enhanced by making mortgage overpayments.
The dynamics of the real estate market where you live are important. If your primary residence is in a rapidly appreciating market, your home equity may rise considerably. This increase can be pivotal; it serves as a potential source of funds that you can use to buy rental properties in Tucson (for example), which may offer better investment opportunities.
Home equity can be leveraged in various ways, including home equity loans or lines of credit. However, you should approach this option with caution, as borrowing against your home can increase your debt load, and you risk losing your property if you cannot keep up with repayments.
Maintaining a healthy level of home equity can act as a financial safety net. In times of economic uncertainty or personal financial hardship, having substantial equity in your home can provide peace of mind. It can be a fallback option for securing loans or can be sold to generate cash if necessary.
Pros and Cons of Using Equity to Buy Rental Properties in Tucson
Pros
Access to a Large Sum of Cash: Using your home equity can provide you with significant cash when you need it.
No Need to Dig into Savings: You can avoid depleting your savings account for an investment down payment.
Opportunity to Purchase Cash-Flowing Rental Properties: Owning rental properties can generate a steady stream of income.
Tapping into your home equity also offers the flexibility to fund various projects or investments that may enhance your financial portfolio. For instance, you might consider using the funds for home improvements, which can increase the value of your property and subsequently boost your equity even further. This creates a beneficial cycle where your investment in your home not only improves your living space but also positions you for greater financial gain in the long run.
Leveraging your equity for educational purposes, such as funding a college education for yourself or your children, can provide long-term benefits that extend beyond immediate financial relief.
Cons
Risk of Leveraging Your Primary Residence: If rental investments do not go as planned, you may place your home at risk.
Affects Your Debt-to-Income Ratio: Using equity can impact your borrowing capacity for future loans.
Variable Interest Rates: If you use a home equity line of credit (HELOC), you might experience variable interest rates that can increase over time.
You should consider the potential emotional toll that comes with leveraging your home. The pressure of managing additional debt can lead to stress, especially if the rental properties do not yield the expected returns or if market conditions shift unexpectedly. This financial strain can be aggravated by the responsibilities of being a landlord, such as dealing with tenant issues, property maintenance, and fluctuating rental markets. While the allure of using home equity for investment can be tempting, it is crucial to weigh these emotional and financial risks carefully before proceeding.
Types of Equity Loans
Consider the various types of loans available:
Cash-Out Refinance: This option involves refinancing your existing mortgage to take out a lump sum of cash. This amount can be used for purchasing rental properties, and your repayment consists of a single monthly mortgage payment.
Home Equity Loans: This is essentially a second mortgage on top of your existing mortgage. It provides a fixed lump sum amount with a fixed interest rate and fixed monthly payments, making it easy to budget.
HELOC (home equity line of credit): This is a revolving credit line that sits atop your existing mortgage. You can draw from it as needed, up to a predetermined limit. However, be aware of the potential for variable interest rates that might fluctuate during the loan's lifespan.
Refinance After You’ve Secured a Resident & Repay Your HELOC
Once you’ve successfully purchased a property, completed any necessary repairs, and placed a resident, you may want to revisit your bank to refinance the property into a conventional 30-year mortgage. This allows you to repay your HELOC while potentially reducing your monthly mortgage payment.
This strategy is beneficial because it keeps the appropriated funds as equity in your primary residence, or you can reinvest it into another rental property. However, it’s advisable to proceed cautiously as you use equity to buy rental properties in Tucson. As you gain more experience, you will learn how to manage your investments more effectively. Consider enhancing your knowledge through additional educational resources or expert videos.
At Evernest, we help real estate investors find and renovate properties, as well as manage their properties and find tenants. Learn more about how to use equity to buy rental properties in Tucson in this video.
Wrapping Up: How to Use Equity to Buy Rental Properties in Tucson
The decision to use equity to purchase rental properties in Tucson can be transformative. By knowing what home equity is, understanding its advantages and risks, exploring different types of loans, and planning your refinancing strategy, you can set yourself up for successful investments.
Ultimately, the more informed you are, the better your chances of building a solid rental property portfolio. Take time to do your research, understand your financial situation, and consult with financial professionals as needed. With careful planning and execution, you can enter the Tucson rental market confidently and with a well-thought-out strategy.
Ready to get started? Contact our local team today!
