In these financially uncertain times, with this quickly freezing mortgage market, it would be easy to think that there are few opportunities to finance a real estate investment.  While it’s true that there are considerably more restrictions than in the recent past, for the qualified investor, there is always a way to buy.  And so begins our Creative Finance Series, a brief overview on a variety of unconventional methods to finance your next real estate investment. 

Part I:  Equity

Equity is the value of the portion of your property that you own outright.  This amount is determined by the value of your property, compared to the amount of that property that you have paid off.  For example, when you purchase a piece of real estate, the 20% down payment that you made is also your 20% equity stake in the property.  As you continue to pay your mortgage, you gain more and more equity.  That is how equity works, at least in “normal” times.

We are not, however, in normal times.  Many Americans hold the vast amount of their wealth in the equity of their homes.  And many Americans have experienced a serious loss of wealth due to falling property values from foreclosures, short sales, etc.  From the perspective of a (responsible) homeowner, that loss of wealth is okay, because you have to live somewhere anyway, and you know that if you hold on to your home long enough, it will more than likely regain its value; this scenario obviously does not apply to those that may have bought more house than they could afford, and are now “upside down”.

From the perspective of a real estate investor, however, this loss of wealth is not okay, not so much for the loss of value in the property, but for the loss of unrealized potential.  Illiquid, equity does not equal wealth; it is merely a tool to acquire and generate more wealth.  If you are not using the equity you have (in a responsible way, of course), you are passing up an opportunity to acquire an valuable asset that can not only pay for itself, but can also generate some passive income.

Another reason to consider utilizing your equity to finance your next investment property is that it provides an opportunity to move your equity from a declining market (i.e. San Jose, CA) to an inclining market (i.e. Oklahoma City, OK).  In doing so, you may still be able to lock in a competitive and relatively attractive interest rate.

The method for pulling equity out of a property is called a Home Equity Line of Credit, or HELOC.  For more information on how this works, click here.  As with any action that involves your money, take the time to educate yourself before you do anything, and make sure you consult with your CPA and other financial advisors.

For related articles, click the links below:

The Home-Equity Loan: What It Is And How It Works

Home Equity:  Compare Rates

To read other articles in our Creative Finance series:

Part II: Seller Financing

Part III:  Partnership/Syndication

 Questions?  Comments?  Contact Us!

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Ofer Goldenberg is the Owner and CEO of Capital Growth Investment.