The warm weather is finally here! Did you know that summer is traditionally the busiest time for the housing market? Summer is the busiest moving time of the year and people tend to buy more aggressively than in other months. Taking all of this into account, we’ve decided to do a series on real estate investment and equity with the goal of providing you with some useful hacks.
First up, let’s look at refinancing and purchasing an investment property! Remember, you can refinance up to 80% of the value of your current home. A true investment property needs a minimum of 20% down (note that this percentage may change over the next year, so act now!). For example, if you currently have a mortgage for $300K and your home has appreciated to $800K in value, you can access $640K (80%) of that $800K value.
If we do the math and take that $640K, subtract the $300K mortgage, you’re left with $340K to use towards the purchase of an investment property! Additionally, when purchasing a rental property, you can use a portion of the projected rent to help offset the new mortgage expense. The point is to acquire another piece of real estate where someone else pays down the principle, the market helps with appreciation, and the difference between the two goes straight into your pocket!
Be careful though as there’s a popular myth that 100% of an investment property’s rental revenue is used to offset the expense. For example, if the principal interest tax (PIT) is $1K, the rental revenue is $1500, your cash flow is therefore $500 per month. Typically, only 50% of the revenue is factored into the lander’s calculation. In other words, if the principal interest tax (PIT) is $1K with a rental revenue of $1500 and the bank only recognizes $750, you actually have a cash flow of -$250 per month (from their perspective).
A common investment question we deal with is if prices are high but real estate is still an amazing long-term investment, how do you get into that space? Well, as shown above, if you have that $300K mortgage and your home has now appreciated to $800K in value, you can access $640K of that $800K value.
How does one use that equity for their next purchase? The difference between that 80% and the mortgage is what get’s leveraged to acquire that next piece of real estate. You don’t actually need $340K (using the same example) of cash sitting around, you already have it in the form of equity — so let’s help you access it! Be sure to check out our next blog where we look at how you can refinance, move and rent your existing home as an investment.
Disclaimer: The opinions expressed herein are just that, and should be consumed as such. Always do your own research when considering investments in real estate or otherwise.
Contact the Kyle Miller Mortgage Agent team to learn more about your income situation and how it can affect your refinancing and mortgage application processes. We’ll provide you with different options so you get the best deal possible!
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