If a home equity loan is not ideal for paying off credit card debt, what other options are there for making the most of the cash that would otherwise be locked away? David Bach has a suggestion, and it is his second tip out of seven for dealing with your home equity.
2. Use home equity credit to build assets.
Besides a financial emergency, the most worthwhile reason to tap your home’s equity is for the purchase of, or investment in, appreciating assets. Buy an income-producing property or a second home and you’ve got a great investment.
Adding onto or upgrading your present home can be another good use for your home equity, if done carefully. According to Remodeling magazine, remodeled kitchens and bathrooms usually hold their value the best.
Using Remodeling magazine for an opinion about the value of remodeling a house is like asking a real estate agent if right now is a good time to buy (or sell). The answer will always be positive despite any evidence to the contrary. The evidence is that any amount you use for home improvements will likely not be fully recovered when it is time to sell. If you want to spend money on a new kitchen, a pool, or any improvement that’s not necessary, it should be for the enjoyment of the improvement. I’ve heard people try to “justify” their spending by saying it increases the value of the house, but the amount of that increase will almost certainly fall short of the amount spent. We all lie to ourselves occasionally, so I don’t pass judgment.
It’s a better option to use leverage, like the debt of a home equity loan, to buy assets that increase in value or produce income. That is why you will see savvy real estate investors use home equity from one property to make a down payment on a rental property. There are some calculations that need to take place in order to make sure the property will pay for itself, but this would be a smart use of debt. Bach also suggests using home equity to invest in a business, but this can be risky. Putting your home equity on the line may not suitable for the risk-averse.
Seven Ways to Be Home Equity Savvy [David Bach]
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12:45 pm (reply)
I think one needs to be careful about holding out investment real estate as if it’s guaranteed to not lose value and/or be at least cash flow neutral. Remember that leverage can be amazing when the leverage is on an asset increasing in value, but leverage works the other way if the asset decreases in value. In at least some major parts of the country home prices are indeed decreasing.
7:05 pm (reply)
I agree. Home improvement that is outside of the necessities will not get a home owner any more money on their sales price. Prices are determined by comparable sales, and mostly the square footage of the house is important. However, nice remodeling does contribute to a quick sale.
4:06 pm (reply)
I’m planning on using my equity loan to redo our bathroom – not for increasing the houses value, but for our use…since it is currently only a half bath (we have 1.5).