How to Borrow Against Home Equity to Build Apartment Buildings

Apartment construction can be very expensive.
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If you'd like to invest in building new apartments, one way to tap into money is to borrow against the equity in your home. If you can qualify for a loan, the interest rates are relatively low as of the beginning of 2014. Furthermore, you won't have to go through a construction or business loan process to get the money out of your house. However, tapping into your equity also has some real drawbacks.

Cash-Out Refinance

One way to pull equity out of your house to build an apartment building is to take a cash-out refinance. When you do this, you replace your existing loan with a new one with a higher balance. For instance, if you own a $200,000 home on which you owe $100,000 and find a cash-out refinance lender that will lend 80 percent of your property's value, you could pay off your old loan and get $60,000 to invest by taking a $160,000 loan. Since it's a new first mortgage, you will generally get the lowest rate and best terms by doing this.

Second Mortgage

With a second mortgage, you leave your original mortgage in place and take another, smaller loan. For instance, if you have a $200,000 house and owe $100,000 on your first mortgage, you could potentially take out a second mortgage for $60,000 to get money. That second loan will have a separate payment schedule and usually require a separate payment check. Since the lender on it is taking more risk, it might also carry a higher interest rate. The benefit is that you haven't changed anything about your first mortgage.

Equity Line of Credit

A home equity line of credit is like a second mortgage but with a key difference. Instead of borrowing money, you get the right to borrow money for a set period of time. If you don't have anything in which to invest, you don't have to tap into your line. When you find something, though, you can write yourself a check from your credit line's checkbook and then the loan begins. One of the drawbacks to a home equity line of credit is that it frequently carries an adjustable interest rate.

The Bigger Picture

There are two major factors to keep in mind if you're considering borrowing against your home to get money to build apartment buildings. The first is that, when you do that, you take the risk that if the investment doesn't work, you could lose your home. You could end up unable to make the new, higher, payments for your larger mortgage or your second mortgage or equity line. The other factor to keep in mind is that your home's equity might not go very far. Reed Construction Data estimates that the average small-to-midsize wood frame apartment building costs around $141 per square foot to build, as of 2013. This means that a single 900 square foot apartment would cost $126,900, so you'd need a lot of home equity to make a dent in the cost of any apartment building.

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