When it comes to investing, property is a popular option. It’s relatively low risk and a great long-term investment option. And for homeowners with equity, one of the best ways to invest that home equity is in properties.
What is Home Equity?
Home equity is the value of the property that you actually own. If you have a mortgage or a loan, you don’t technically own the entirety of your home. So your home equity is based on the percentage of your personal ownership. For example, if you put a downpayment on a house and got a mortgage or loan to cover the rest, you only own the amount that you actually contributed to it - in this case, the amount of the downpayment.
How Can I Build Equity?
Having a higher equity stake in your home is valuable, and building your equity is pretty simple. The amount of equity you have in your home increases as you pay off your loans and mortgage. It can also change based on your home’s value; in this case, while the amount of money that you invested in your home may not necessarily change, your equity stake does.
How Can I Use My Home Equity?
Because equity is an asset, it’s part of your net worth. One of the most popular ways to use your home equity is to borrow against it - that is, get a home equity loan that you can use to invest in more property. You can choose to invest it in a second home like a cottage, or buy a property that you rent out.
There are several benefits of using your home equity for a loan versus taking out a traditional mortgage. Getting a traditional investment mortgage can be inconvenient and potentially more expensive. You can also use your home equity as a downpayment, then get a mortgage to pay for the rest of the property. In this case, you’re not spending your own money to buy an investment home - so your returns are purely profit.
Know the Risks
Like any kind of investment, there are certain risks associated with investing your home equity in a property. If anything happens to go wrong with your investment, you risk losing ownership of your home. It’s important to identify all the risks and have a contingency plan in the event that something goes wrong, before you enter into any kind of investment.