Many people today are looking for ways to earn passive income. Did you know that you could do this by investing in real estate? In this article, we are looking at how using home equity for real estate investment may be just the thing you’re looking for in 2024.

Photo of a home model with a money saving jar - The Pros and Cons of Using Home Equity for Real Estate Investment

People consider this to be an easy way, but more often than not, it comes down to luck. If you want to tap into the real estate market and diversify your investment portfolio you need to learn all you can on how to go about doing so.

What is Home Equity?

First, we need to understand the concept of home equity and how it will help you going forward.

Your home equity takes the current market value of your home and removes how much you have left on the loans or mortgages you have attached to your home. The end figure is your home equity.

If you have more equity to your name, it will be easier to acquire a home equity loan or a (HELOC). If you receive a cash sum through these two methods, you will have enough of a sum to purchase a new property. Ensure that you have enough cash on hand to help aid your endeavors to cover more of the down payment on the properties, there are also other aspects that you need to cover to stop you from any financial hiccups in the future.

Real Estate Investment Options

The next step would be to look at your options for real estate investment. There are several ways you could move forward.

Buying Vacant Land: This option would see you buy available land and build property on it. This way you can lease out the properties that you build, and earn passive income through it.
Buy to Rent: This procedure cuts out the building aspect. You can purchase property that is already built, and lease it out to tenants.
Flipping: This process sees people buy dilapidated houses or houses that need to be worked on. They renovate the property and sell it to earn an interest.
Commercial Property: Similar to the buy-to-let process. This, however, is more geared toward smaller businesses that can rent from you for office space or storage purposes.

What To Do Before You Invest

Photo of a laptop computer on a coffee table — Proper research is essential to any successful real estate investment.

Before you start investing, there are key steps to take to make sure that you are on the right path and are empowered to make the right decisions.

Research: You need to understand the market you want to enter thoroughly, and if it is currently on an uptick. You also need to understand the legal and tax options that come with real estate investment.
Finance and Budget: While a loan is the most common option people will choose, it is also worth working with home equity investment companies as an alternative. This funding solution will allow you to access a lump sum that is repayable when you sell your home in the future, instead of dealing with interest rates and monthly repayment schedules that are common with loans.
Credit Score: Your credit score is important when you are looking to take out loans. Make sure that you have a good rating. If your score is on the lower end, look at speaking to a financial advisor to repair your credit rating.
Locate the Property: Because there are so many options, take care choosing the best one for your situation. Make sure to take advantage of your Realtor whether you’re buying a rental property or hunting for a great house to flip.
Learn to Evaluate Risks: You need to be able to read the market and make sound decisions based on the data available.

Pros:

Investing in real estate has many benefits that you can look forward to, these are a few that you will be in store for.

Passive income: You will earn money without having to do much physical work towards it.
Reach Financial Freedom: If you invest correctly and make the right choices, you will be able to achieve any financial goals that you set out for yourself, and also be able to provide for your family’s future.
Security: In addition to financial freedom, you will be able to have long-term financial security.
Appreciation: Depending on the market, the value of your property can increase.

Cons:

Potential Loss: You can lose your home if you default on payments – as you are trading an asset for debt.
Depreciation: Depending on where you live and current market conditions there’s a chance the value of the property can decrease. This means you can’t sell or move without paying off your lender first.
Legal Issues: If you don’t perform your due diligence there are situations where the wrong move can get you into some legal hot water. Familiarize yourself with the laws in your location.
Cash Flow: There may be times when you will need to cover unexpected costs due to non-payments by tenants. Without proper capitalization, you may risk the property itself.
Timing: The property market is fickle, if you read the market incorrectly you can incur losses.

The Bottom Line

Using home equity for real estate investment can be a good way to earn passive income but you need to be thorough in your research and plan smartly. We’ve outlined the pros and cons so you can evaluate each one as you move through the process. The better job you do planning from the start, the more likely you’ll realize positive cash flow in a stable real estate investment. Best of luck moving forward!