TL;DR - If you don’t have cash on hand, you can use the equity in your current properties to invest in a new one. A few options are home equity loans, cash-out refinances, HELOCs, and reverse mortgages. Each comes with its own risks and benefits.

So you have a rental property — or a few — but you want to get another.

You check out your bank account and maybe it doesn’t have a lot of funds in it.

So you’re wondering…

Can I buy a rental property without cash on hand?

You’re in luck, because the answer is yes!

In fact, there are some awesome ways to do just that.

And they involve a resource you already have…

Equity!

Tapping Into Equity

Having a lot of equity in your properties is a great thing!

It signifies ownership and the hard work you’ve been putting in to build it up.

But beyond that, it isn’t doing much to work for you.

So instead of letting it sit around and collect dust…

What if you tapped into it instead?

Not only would it give you another method of capital, but it’d also allow you to add to your investment portfolio even if you aren’t cash-rich at the time.

This is a great option for anyone that owns a rental property or residence, but it comes with its own set of risks, which we’ll cover later.

Until then, let’s dive into the methods of using property equity available to you!

The Best Methods for Accessing Property Equity

When pulling equity from an existing property to reinvest in another, you have a few options to choose from.

Which one you go with will depend on your particular situation.

Home Equity Loan

A home equity loan is essentially a second mortgage. With it, you use the property’s equity as collateral. You don’t refinance your original loan.

You can expect to be able to borrow around 80% of your property’s value with this method.

Let’s imagine your property is valued at $300,000. Your current loan amount is $180,000. You could potentially pull out $60,000.

• $300,000 x 80% = $240,000 - $180,000 loan amount = $60,000

The interest rates are usually lower than those of credit cards and other unsecured loans, making this a more attractive option. Although the rates can be higher than those you might find with a cash-out refinance.

What rates you get will depend on your income, credit history, and debt-to-income (DTI) ratio, among other factors.

The bright side with a home equity loan is that you’ll have a fixed monthly payment, which can help with budgeting.

The downside is that you now have a second mortgage.

This means that if you default on the loan, your property could be foreclosed on.

Cash-Out Refinance

A cash-out refinance is when you take out a new, larger loan to replace an existing one — and then use the extra cash to buy or put a down payment on a new property.

For cash-out refinances, lenders usually allow up to 75% loan-to-value (LTV) ratio.

Here’s a quick example:

Let’s say your property is worth $300,000 and your loan balance is $180,000. Your equity would be $120,000. You would be able to pull out around $45,000.

• $300,000 current value - $180,000 loan balance = $120,000 equity

• $300,000 x 75% = $225,000 max loan amount

• $225,000 - $120,000 = $45,000 cash pulled out

This is a great option if you have good credit and can qualify for a low interest rate.

The major downsides of a cash-out refinance are that it resets the clock on your mortgage loan and your loan payment is larger.

Not to mention, you could end up paying more in interest over time.

However, if you’re generating extra cash flow from a new property, it could be worth it!

Home Equity Line of Credit (HELOC)

A HELOC is very similar to a home equity loan, except that instead of receiving one lump sum of cash, you’re given a line of credit that you can draw from as needed.

This is a great option if you want flexibility or don’t need all the cash upfront.

You can use it as a revolving line of credit, similar to a credit card.

This means that you only pay interest on the amount of money you actually use, rather than the entire line of credit.

HELOCs offer amazing advantages to you as an investor, but they do come with some risks.

HELOCs can be variable rate loans, which means that the interest rate can change over time.

This means your monthly payments could go up or down, making it difficult to budget.

HELOCs also typically have a draw period — normally 10 years — which is the time frame in which you can borrow money.

After the draw period ends, you’ll enter the repayment period, during which you have to pay back the money you borrowed plus interest.

If you don’t repay the loan during the repayment period, your property could be foreclosed on.

You shouldn’t overleverage with a HELOC. Keep in mind that you could lose your property or residence if you can’t repay it. Even your primary residence.

HELOCs are the first thing banks restrict in a downturn.

Reverse Mortgage

A reverse mortgage is a loan that allows you to tap into the equity of your home — without having to make monthly payments.

Instead, the loan is repaid when either when you sell it or die.

This is a great option if you want to use your equity without having to make monthly payments.

It’s also a good option if you don’t have the income to qualify for a traditional home equity loan or HELOC.

The downside of a reverse mortgage is that the interest accrues over time — meaning the loan balance can snowball.

This can eat into the equity in your home, leaving less for you or your heirs.

It’s also important to note that reverse mortgages are only available to homeowners ages 62 and older.

So if you’re not at retirement age yet, this option won’t be available to you.

Weigh the Pros and Cons

Whether or not to use your current property equity to finance another investment is completely up to you and your situation.

Here are some quick points to consider:

Pros

• You can create an extra source of rental income

• You can increase your down payment amount

• Increased cash flow because of larger down payment and lower monthly mortgage

• Can invest even if you don’t have cash available

Cons

• Your ownership equity becomes debt once again

• You might reset the length and balance of your loan

• You have to pay more or higher mortgages

• A new property might go south, putting you at extreme risk

Go through the positives and negatives. If it makes sense for you to use your equity to add to your investment portfolio, go for it!

If not, you can always rest assured that you have money you can tap into if need be.

As always, happy hunting!

How We Can Help You

Does investing in real estate sound intriguing to you? Would you like to learn more? We’d love to be of value!

At Undoor, we pride ourselves on teaching new and experienced investors how to maximize their gains with minimal stress. Our goal is to help you fall in love with real estate and real estate investing. What we’re most passionate about is maximizing investment gains for people like you.

Do you want to get key insights and advice that’ll help you get ahead of the game? Don’t hesitate to contact us for any and all real estate wants or needs.