Buying a Rental Property
Can you buy a second home with your current equity?
Yes, you can, and it has advantages.
Let's look at some benefits of getting a home equity loan or equity line of credit to purchase a second property for income or vacation.
Closing cost savings
Lenders spend less time when creating these types of loans. The benefit, they have lower fees and closing costs. These types of loans come with a lower interest rate than a personal loan: the results, more reserve cash.
Keep your current investments
You do not need to divert funds from existing investments. Why not use funds from an investment portfolio? There is also a risk that your property may not pay for itself right away. By not withdrawing funds from your investment portfolio, IRA disbursement, or cash saving, your current home, your remaining assets continue to appreciate.
Using your home equity, whether it is to increase the down payment or pay for the property in full, you increase your monthly cash flow.
The interest may be tax-deductible. (see IRS page for qualifications ). If you are buying a second home as a rental property, you can depreciate the value of the building, the land not used in this calculation for depreciation. You can deduct maintenance costs as well. (please talk to your accountant to verify what can and can't be used as a deduction).
Home values on the rise
Home prices are on the rise. That means, so is your home equity. Plus, when purchasing that second property with a home equity loan, it appears to the seller you are buying with a cash offer. In today's market, this gives you better odds of getting your offer accepted in a multiple bid situation.
How to calculate the equity
Most lenders will let you borrow 85% of your home's value. If your home is worth $550,000 and you owe $200,000, you can have $267,500 to purchase a second home. ($200,000 balance owed+ $267,500 New home equity loan = $467,500 equals 85% of $550,000).