Equity in real estate doesn’t benefit the owner until it is put to work and produces an income.
Many people do not understand that real estate equity produces absolutely zero return. Unless you do something with real estate equity to produce income, it makes less money than a savings account paying 0.01% APY.
Why is Equity in Real Estate Dead Money?
Equity in real estate is dead money because it does not generate any income. To illustrate this point, let’s look at an oversimplified example of how putting equity to work generates profits.
Imagine a real estate investor with five rental properties.
- Each property is valued at $100,000 and paid in full; therefore, the investor has $500,000 in real estate equity.
- Each property generates monthly cash flow, after all expenses, of $1,000, resulting in a total cash flow of $5,000 per month.
Now, imagine the investor does cash-out refinancing to convert half his equity to cash ($250,000) and uses it to buy another 5 properties for $100,000 each. He put $50,000 down on each property and finances the balance at 4% APR.
- He owns 10 properties valued at $1,000,000.
- His total monthly payment for all financing is $2,500.
- His cash flow on the 10 properties, after all expenses except financing, is $10,000. Therefore, his cash flow after financing is $7,500.
- As a result, the investor generated another $2,500 of monthly income by putting half his equity to work.
Though this example is very simple, it demonstrates how putting some of your equity to work can greatly increase your bottom line. In the example above, the investor put half his equity to work and increased his income by $30,000 per year.
How to Convert Equity in a Home to Cash
If you have a home and you are interested in converting some of your equity into cash, here are a few of the more popular options:
- Home Equity Loan. One of the most popular options is a home equity loan. With a home equity loan, homeowners take out a second mortgage (usually at a fixed rate). Although the mortgage is paid out in one lump sum, the homeowner pays back the loan in installments.
- Home Equity Line of Credit (HELOC). Although it’s technically a second mortgage just like a home equity loan, there are significant differences with a HELOC. A HELOC has two periods: draw and repayment. Unlike the home equity loan, homeowners can take out a HELOC in installments over a certain period of time up to the maximum limit.
- Cash-Out Refinance. With a cash-out refinance mortgage, you can take equity out of your home in the form of cash.
- Reverse Mortgage. Designed for borrowers ages 62 and older, a reverse mortgage allows homeowners to draw from their equity. This loan is paid back when the home is sold or the occupant is no longer living there, and the value of the loan can never exceed the value of the home.
How to Access Equity in an Investment Property
Real estate investors can also convert equity in their properties to cash with cash-out refinancing, but they also have the advantage of using a 1031 Exchange.
- Cash-Out Refinance. Just like homeowners, investors can also refinance their properties and take cash out.
- 1031 Exchange. A 1031 Exchange does not allow investors to take cash out of the property, but it allows them to “swap up” their properties indefinitely. Investors can exchange one property for up to three properties, and realize an increase in total value to a maximum of 200% of the exchanged property.
Related: Harvest Tax Free Profits From Your Rental Properties
Graystone Investment Group
Graystone Investment Group is an experienced real estate wholesaler in Tampa Bay, helping real estate investors grow their wealth by putting equity to work.
Unlike other wholesale groups, we provide clients with a turnkey process at no extra charge. We find properties that we resell to investors at discount prices, while also connecting them with private financing. We also coordinate with rehab and management companies we’ve worked with for years.
To learn more about profitable real estate investments in the Tampa Bay area, fill out our Investor Profile or contact us direct.