A lot of people have been wondering how they can buy a second property without having to wait another 5, 10, or 20 years. First, let’s assume you already have your house, a house you bought a long time ago, and you either finished paying it off, or maybe you’ve paid off most of the mortgage, and there’s very little money left, and you’re not doing anything with it.
You are trying to find creative ways to generate more capital because you’re actually interested in getting a second property.
First, we need to know some concepts that are going to help us understand the big idea of how to buy a second property.
Strategies To Buy A Second Home
What exactly is equity? It’s whatever you have, or whatever value you have acquired in an asset. In this case, we’re talking about a house. There are a couple of ways that you can get equity:
- One is through the down payment, which will give you some level of equity because you have to put a certain amount of money down in order for you to acquire a house.
- The other one is through debt paid off. Because as you’re paying off that debt, you get more and more equity on your side, because you’re owing less and less money to the bank everytime you pay
- Appreciation: There are two ways to get appreciation.
- One is to let the property value grow organically. Maybe you invested in a really good neighborhood, and over time, the housing prices just started to go up.
- The other way is by forcing it.
How do you force appreciation? Let’s say you buy a house and you fix the deck, you fix the kitchen, you make it look very nice, you put a nice luxury bathroom with heated floors, and you just bring up the value of a property. That’s how you force appreciation.
Let’s say you have a house that was worth $200,000 at the time that you bought it, and you put down 20% down. That means you ended up putting $40,000 and then you managed to pay off a good chunk of money. Let’s say you paid off $50,000 over time and that was added to the mix. If your house appreciated 20% over time, that means $40,000, and you would have a total equity of $130,000.
How do you use equity? How do you leverage this equity to buy that second property? It’s very simple, you can do it two ways. You use your house and you can apply for a cash-out refi, or a cash-out refinance, or you just simply do it through a HELOC.
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What is a cash-out refi? It’s just another mortgage. You can either acquire a new mortgage, but if you still owe money on your existing property, that means you’re going to take out a second mortgage, call a cash-out refi that it’s willing to give you cash for the equity that you have. You can take $130,000 as a cash-out refi and you can buy a property cash or utilize that money as a down payment for another property, all through the concept of other people’s money. You, at no point in time, utilize any of your money, nothing out of your pocket, you just simply leverage an asset that you have.
What about the closing cost? you can actually lump it into the $130,000. Let’s say the closing costs were $5,000.
Now, the total value of your cash-out refi will be $135,000 out of all of which is going to be paid by your tenant because this is a strategy that we’re utilizing to purchase a second property to invest in real estate. You can actually take all of this money, and you can put it in a property, generate cash flow, generate income and have your tenant pay for the loan and for the closing costs.
Buy a second home: Heloc Strategy
If you decide to go through a HELOC, that’s also another strategy that you can leverage. How does a HELOC differ from a cash refi? A HELOC, it’s like a credit card. It’s a credit line that you get from the lender. Let’s say, for example, you go to a bank and you say, “Hey, I want to get a HELOC for $130,000.” What does that mean for you? It means that they’re going to give you a credit line of $130,000, that works like a credit card, and you are going to use that on whatever you need.
The beauty about utilizing a HELOC is that you only pay for what you need, as opposed to a cash-out refi as soon as you take all $130,000 you have to start paying interest in all of the $130,000, but with a HELOC, you only pay interest on that option of that choice, of that portion of the money that you choose to take out from the account.
What about interest rates?
There are times when the rates are going up, and there are times where you’re going to get historical low-interest rates. That’s when you come in, and you enjoy the advantages of a HELOC. What if the interest adjusts six months on the row? We’re still talking about a low rate.
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Then, six months later, you’re analyzing again, and then if you’ve had another low rate, but then let it be it, but if you’re in the process of trying to shop for rates, or trying to figure out what’s the best way or the best approach for you to go, whether to use a cash out refi with a locked interest rate, or to use a HELOC with a variable interest rate, it’s all a matter of you understanding what it’s up with the economy.
Are rates going to go up or are rates going to go down? If the rates are going to go up, you certainly will not want to pick this choice, you will certainly want to make sure you’ve locked yourself with a low rate and have that nicely low rate for the next 15, 20, or 30 years depending on the length of the mortgage.
There’s also a third tip: Credit cards. There are two types of credit cards:
- Personal ones
- Business credit cards
Ideally, you will not use your personal credit cards because every time you rack up debt in those cards, it’s going to impact your credit negatively. Ideally, what you want to do is to use business credit cards.
If you’re leveraging business credit cards, then you don’t have to worry about the debt showing up in your personal credit, which makes it great because all you can do is to use the business credit card to get the 20% down, and then you can still go to the lender and ask for financing through a mortgage and not have to worry about that debt showing up in your personal credit report.
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