Purchase a Second Investment Property With Equity from the First

This is a strategy used for years to increase investment property ownership. As with any strategy, it applies under certain circumstances.

If you have owned investment real estate for some time, chances are that you have realized significant appreciation. The problem for some investors is that this appreciated amount is dormant and not creating more wealth. Below is a scenario of how this concept works by using a portion of your current equity to establish a second investment…

Current investment property value = $675,000
Current mortgage balance = $400,000
Amount of equity = $275,000

In this example, cashing out $125,000 of equity in your first property allows you to purchase a second investment property for $500,000 with a 25% down payment. This is good down payment that should allow for attractive financing. If rental income covers the interest of the new loan payment, you have essentially created a new leveraged $125,000 investment. If the new property appreciates only 15% over four years, the return on the $125,000 is 48%. Not an easy return to make with other investments. Also, as with all real estate, the capital gains tax is paid only after selling the property.

This is a solid concept that does require three things;

1.	Take the time to locate the right property at the right price. Being in a hurry and overpaying will hurt your overall return. Be sure to do the research.
2.	Try to have the rental income cover as much of the expenses as possible including loan payment. Factor in your tax benefits to arrive at a suitable figure.
3.	Be able to oversee two investments instead of just one. Some people are in better positions than others to do this.