3 Ways to Use Home Equity to Generate Passive Income

When one is at the point in their life asking themselves โ€œShould I rent or buy a house?โ€ many questions are going to come to mind. They might be thinking about whether where they are looking to buy is where they really want to settle down and if not, will it be somewhere that’ll be easy to rent out. Itโ€™s also more than fair to think about what the market is going to look like for the coming years and what that’s going to mean when they are looking to sell.ย 

These were the things I considered when I bought my first home back in 2007. I lived there for ten years. I finished paying for it in 2017 and when I left together with Mahal and our baby, I had it rented out. It has been serving me well (minus a few major heartaches from not-so-good-tenants which can’t be prevented sometimes) and at the moment I am having it repaired and repainted so I can find better tenants who will treat it as their home.

This is my 2-storey townhouse currently undergoing some renovation…

What potential buyers might not be thinking is about how a purchase, such as a home, can actually be a way for their money to work for them – not as a place where theyโ€™ll be sinking money into. Thinking that sounds too good to be true? Hereโ€™s a few different ways it could actually happen.

Use Your Equity In The Market

Donโ€™t, not for a single second, think something like this doesnโ€™t come with a little risk. It might even sound a little impossible for those who havenโ€™t heard of it before. How a homeowner can do this is by taking out a cash-out refinance on their home. In short, this is going to be a new mortgage on the home youโ€™ve already paid off. Seems like there might be no point in this but remember how low interest rates are right now. 

If you take advantage of that and put that same money into the stock market, thereโ€™s the potential for plenty of extra income as long as your investments pass out the current interest rates.

Pay Off Higher Interest Debts

This is through the same principle as using your money in the market but it might be a little easier to swallow for those less risk averse. Risk tolerance in itself is not something thatโ€™s static for most individuals and will change as thereโ€™s fewer and fewer debts throughout the various avenues of their financial lives. Comparing the current housing interest rates to other debts might make this strategy quickly seem appealing.

By locking in that lump sum at a low interest rate that could be the ticket in paying off other purchases with higher rates of interest, such as car payments, school loans, etc. While those themselves arenโ€™t passive income makers, they might be what certain individuals need to take care of first before moving their money around elsewhere. 

Invest In Real Estate

In terms of risk, this is going to be somewhere in the middle of the two previous options. It will all depend on what investing means to you in this context. For those who have always been curious about having a rental property (which is one of the most popular passive income strategies) using your equity to make the purchase of a second home possible might be the ticket into becoming a landlord.ย 

The less risky option here would be to take that money and use it to improve the property you already own. Not only will this make your living there all the more pleasant, depending on what improvements are possible (and whatโ€™s really needed), putting your money in the correct places can drastically improve the value of the home and far exceed the interest rate that came with the cash-out refinance.

Advertisement

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.