Turn Your Existing Equity Into Your Next Investment Property

One of the biggest advantages of owning real estate is that your property can become a source of capital for your next investment. Many investors make the mistake of thinking they have to save another $50,000 or $100,000 before they can purchase another property. But if your existing property has appreciated significantly, you may already have the money you need sitting in the equity.

One strategy investors use to access that equity is a Home Equity Line of Credit, or HELOC.

What Is a HELOC?

A HELOC is essentially a revolving line of credit secured by the equity in your property. Your equity is the current value of the property minus what you owe on the mortgage. Unlike a traditional home-equity loan, which gives you one lump sum, a HELOC allows you to borrow money as needed, repay it, and potentially borrow again during the draw period. 

For example, let’s say an investor owns a rental property worth $500,000 and has a mortgage balance of $200,000.

That’s approximately $300,000 in equity.

The lender won’t necessarily allow the investor to borrow all $300,000. Instead, the lender establishes a maximum loan-to-value based on its underwriting guidelines, the investor’s credit, income, existing debt and the property’s financial performance.

If the investor qualifies for a $100,000 HELOC, that money can potentially become the down payment and acquisition capital for another investment property.

How Investors Can Use a HELOC

Here’s where the strategy becomes interesting.

Instead of selling the first property to get access to the equity, the investor keeps the property, continues collecting rent and uses a portion of the equity to purchase another property.

Property #1: Value: $500,000 Mortgage: $200,000 Available HELOC: $100,000

The investor could use $80,000 from the HELOC toward the purchase of Property #2, while keeping $20,000 available for renovations, closing costs or reserves.

The investor now controls two properties instead of one.

This is essentially using one asset to help acquire another asset.

Example #1: The Rental Property Investor

Let’s say an investor purchased a rental property several years ago for $250,000. Today, the property is worth $400,000 and the mortgage balance is $175,000.

The investor has approximately $225,000 in equity.

Rather than selling the property, the investor obtains a $75,000 HELOC.

He finds another rental property priced at $300,000 and uses the $75,000 as part of the acquisition funds, while financing the remainder with a traditional investment-property mortgage.

Now the investor owns two properties.

The first property continues generating rental income, while the second property has the potential to generate additional rental income and appreciate over time.

Example #2: The Investor Who Renovates and Repeats

Another investor owns a property worth $600,000 with a $300,000 mortgage.

She establishes a $125,000 HELOC and uses $90,000 toward purchasing a $350,000 fixer-upper.

She uses another portion of the HELOC to renovate the property, then rents it or refinances it after the improvements increase its value.

The important concept here is recycling capital. Instead of allowing equity to remain completely idle, the investor uses borrowed equity to acquire an asset that has the potential to produce income and appreciate.

HELOCs can be used for down payments on additional real estate, although the investor must still qualify for the new mortgage and should confirm that the HELOC lender permits the intended use of the funds. 

The Strategy Isn’t Without Risk

This is where investors have to be careful.

A HELOC is debt, not free money. Most HELOCs have variable interest rates, meaning the payment can change. After the draw period ends, the borrower enters the repayment period, and payments can increase substantially. 

And remember: the property securing the HELOC is collateral. If the investor can’t make the payments, the lender could ultimately foreclose.

Investors also need to make sure the new property produces enough cash flow to cover its mortgage, taxes, insurance, maintenance, vacancy and the additional HELOC payment.

The Bottom Line

For experienced real estate investors, equity can be a powerful financing tool.

You don’t necessarily have to sell your first property to buy your second. If you have sufficient equity, strong credit, adequate income and a solid investment opportunity, a HELOC can potentially turn some of that trapped equity into capital for your next acquisition.

But I believe the key is this: Don’t borrow equity simply because it’s available. Borrow it because you have a specific investment strategy and the numbers make sense.

The goal isn’t simply to own more properties. The goal is to build a portfolio that produces positive cash flow, builds equity and creates long-term wealth.