Should you use your home as an ATM?
That is, pull out the equity and either put it in the bank or invest into more income property?
Let’s summarize the pros and cons of making an equity transfer out of your home and into income properties:
Pros:
- Diversification into multiple real estate markets
- Own more property overall
- Potential to increase income
- More leverage
Cons:
- Immobility if you fall “underwater” on your home
- Variable interest rate risk
- Tenant vacancy risk
I use my home equity this way, harvesting it as soon as it accumulates in my home.
So does Grammy Award-Winning Music Producer and my Get Rich Education podcast listener, Blake La Grange.
I sat down with Blake in San Diego. We discussed why we do this:
You might remember Blake because we discussed this on GRE Podcast Episode #182.
But not so fast.
Don’t forget what happened to some mortgage-holders during The Housing Crisis of 2007-2009.
When property values fell, their mortgage balances were higher than their property values.
This isn’t always a problem.
But if they wanted to move and weren’t “liquid” enough to cover the shortfall, they couldn’t sell. They were immobilized. They had to stay in their home.
Conversely, how much would you invest in something that can never go up in value, but only go down? Well… zero.
That’s exactly what home equity is.
Understand that home equity is unsafe, illiquid, and its rate of return is always zero.
Your home is a terrible bank. Homes are meant to house families, not store dollars.
In fact, if you make an extra $100 principal payment on your home mortgage, here’s basically what you’re saying to the bank…
“Hey Mr. Banker! Here’s an extra $100. Don’t pay me any interest on it. If I need it back, I’ll pay you fees … plus I’ll try to prove to you that I qualify again.”
Though that’s all true, borrowing against your home equity also levies an interest rate expense.
Now it’s your job to beat that expense out in the market.
For example, if you borrow at 6% and invest at 10%, that 4% difference is your profit.
This profit from borrowing at a lower rate and investing at a higher rate is known as positive arbitrage.
Buying more cash-flowing real estate with your home equity provides a more stable income stream than many investments.
You can also diversify into multiple markets this way, with sound income properties you can find at www.GREturnkey.com.
All your life, you will either invest borrowed dollars and earn a return, or retire your debt and pay an opportunity cost.
Being financially-free beats being debt-free.
If you transfer your home equity into a cash-flowing rental down payment, your debt payments are 100% outsourced to your tenant.
If you think real estate will appreciate over the long-term (it always has), rather than owning $1M of paid-off real estate, you can own $4M of real estate with 25% equity.
Consider putting your home equity to use, but only if you understand the risk.
Is using your home’s equity like an ATM a good idea or a bad idea?
It’s similar to withdrawing $300 cash from an ATM.
It depends on how you use it.
