Should You Borrow Against the Equity on a Rental Property?
If you own residential rental property, you may have some big expenses to pay, like the installation of a new roof or replacement of the furnace and air conditioner. Rather than put these on credit or deplete your savings, though, you may instead be able to access equity you have in your investment property(ies) through a home equity loan or line of credit.
These are types of loans that are secured by the property. In order to do either of these transactions, though, it is required that you have ample equity that exceeds the amount of the mortgage balance.
Typically, up to 85% of the equity may be borrowed. So, for example, if the value of the property is $200,000 and you owe $100,000 on the mortgage, you have $100,000 in equity, and could likely access $85,000 of that amount.
The difference between home equity loans and lines of credit is that with the former, you would receive a lump sum up front. You would then make fixed payments throughout the life of the loan until it’s paid off.
On the other hand, with a home equity line of credit, you are allowed to tap into the equity as needed, up to a preset maximum. With home equity credit lines, the interest rate is usually variable, and the dollar amount of the payments is not fixed.
In some cases, it may make more sense to use a cash-out refinance on a property rather than taking a home equity loan or line of credit. In this instance, you would refinance the mortgage and pull out a lump sum of cash. But, rather than having two loans to repay, you would have just one new mortgage.
Some items to consider before extracting equity from a rental property (or any type of real estate) include:
How much cash you need
How much you will owe on the new monthly payments
How long you intend to keep the property
Other potential options for obtaining the funds you require
If you like generating equity and regular income through your residential rental properties, but you do not want to spend time dealing with tenants, day-to-day maintenance, and emergencies, using a property manager could be an ideal solution.
Do you own residential rental homes or units in Orlando or the Central Florida locale? If so, give CFL Property Management a call and we’ll provide you with more information on how we can help!