Smart reasons to use home equity—from buying a second home to rental property
A home is an investment—and it’s an investment that can be used to finance other investments. Here’s how and why to do it with home equity.
According to the February 2024 Mortgage Monitor report, mortgage holders gained $1.6T in equity in 2023, the highest value on record. What this means—aside from property value appreciating like crazy—is that homeowners now have more equity than ever which they can use to finance their second home, a rental property, or a home for a younger member of the family (those not-so-property-rich Millennials and Gen Z).
Which is exactly what Paidoff™ believes homeowners should do, and they are sharing three smart reasons to use home equity to buy another property.
Investing in Short-Term or Long-Term Rental Properties
Most homeowners—when they think of their home—think of what they had borrowed to purchase it, rather than the equity they have gained over the years. And, most importantly, how this equity could be used to finance another property—a rental property that can be another source of income.
Whether it’s long-term rentals, where a property management company takes care of everything, or short-term rentals, which promise high returns and are relatively easy to run solo on Airbnb or VRBO, rental properties are a good way to take advantage of home equity.
And being a landlord, generally, pays well. According to the US Census Bureau, landlords typically earn $97,000 annually—significantly above the US median household income of $74,580.
Building Wealth With an Investment Property Portfolio
Historically, property value tends to go up. In the past 30 years, it has appreciated at 4.1%, with home prices rising for 11 consecutive years. The highest jump was recorded in 2021, with prices increasing by over 18%. And so many homeowners suddenly became millionaires.
The fact is, property ownership can make a huge difference to one’s long-term financial position. As the Urban Institute recently found, the average wealth gap between homeowners and renters in the US has now reached over $1,370,000, a divide that has widened by 250% over the last 30 years. This is a stark figure which highlights that property ownership is now one of the most reliable ways to build wealth.
And one way to afford a down payment on a new property is to use home equity, which has less stringent requirements and lower interest rates than loans.
Helping Younger Generations Buy Their First Home
Buying a home was never easy. But, we have to admit that buying a home has also never been harder. For homeowners, it’s great news that property value is going up and up and up; for those still renting and hoping to buy a home soon, well…not so much.
A Redfin study found that more than a third of Millennials and Gen Z are hoping to get some help from their partners to be able to afford a down payment on their first home.
One way parents (and grandparents!) can help younger generations buy their first home is by using their home equity. And, unless the gift exceeds $18,000 per year, it’s tax-free.
Home equity is not something most people think about that often, or maybe even ever. And while it certainly has its limitations, it is still money which makes up one’s net worth and which can be used to grow one’s net worth, or help someone else get a head start on their own. It all comes down to using home equity the smart way.
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