Equity Beware!!

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The last thing you want, as an investor, is another investor knocking on your door, because YOUR house is up for auction. Many people use their EQUITY from other properties they have, as they money. This is a good way to buy buy buy, and not have to use "your money"

The problem with equity, however, is this. Lets say your market is beginning to stablize, and you get your 100k house, for 70K. Now lets say 2 months later, you find a rehab property for 30k. Your thinking, I have equity in my house, so why not use it. Your on the right track, but I would be careful in your stablizing market.

Once a market begins to stablize, the interest rates typically rise. When this happens, and one needs to take money out against their house, they end up paying astonomical rates. Another nitemare that could happen, is the market depreciates 1-2%, and now your house isn't quite worth what it was last year and now you owe 100k on a house (70k for the 1st, and 30k for the second) and the house is only woth 98-99k. Your now upside-down with equity. (THe same thing that happens to many people with cars and trucks.) This is beginning to SLOWLY happen in Massachusetts, the market is beginning to stablize, and house prices come down. Now lets say somthing happens, and you need money fast for an emergency. (your boiler lets go) and you now have no money to take against the house. You may find yourself tied up in a situation, and may find yourself getting letters from lenders and attorneys! Equity is a great thing. But don't take advantage of it. As a rule of thumb. I always try to keep AT LEAST 5-10% equity in a house that I have, incase of disaster. Just My two Cents



Happy Investing

Comments(3)

  • hibby763rd April, 2004

    I have yet to do this, but eventually I would like to diversify and add stability to my real estate portfolio by having properties in many different areas, so that if one area is up, another area may be down, but I'm less affected by the ups and downs in the market.



    You're being conservative. I've seen rents and values drop by 25-35% in a very short period. The people that are heavily leveraged on variable intrest rate loans loose everything. The ones that are more conservative survive the market shocks.

  • John293rd April, 2004

    BTW, equity in a property IS YOUR MONEY, but otherwise you got it right:



    Don't let the heather (or as you call it on the East Coast "boiler"), "bring the over leveraged house of cards down".

  • Lufos4th April, 2004

    My early instructor in real estate was my Grandfather and his advice if you are trying to accumulate properties for an income stream be sure that you do not go over 60% of Value.



    Of course when I started the slow run up that was 1955, I found it impossible to go by his plan. I was fresh out of the service did not have the money. So I walked with one ear raised waiting for the pending signs of doom. I lucked out and had the chance to do some studying on the subject and I then arrived at the thought that in rental income properties I could go as high as 80% in mortgages and my equity if at 20% was safe.



    I could not utilize the 20% to borrow but then At the early stages of accumulation it was not a good idea. So I spent a lot of spare time doing all the things I could not afford to pay. I did of course all the plumbing, most of the electical and all other tasks except a major roof repair. I slowly built up crews and with them I began to diverge into the semi destroyed properties that could be obtained for almost nothing and the game changed. After awhile I found myself building houses and having a love for modernism I followed that becon of style and started into a heavy schedule of building small houses. It worked but in the process we were many times at 100 to 120% of value. Upon completion we would be right side up, sell the house and on to the next. It worked out but whenever I go over 80% I shake a little.



    Cheers Lucius

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