The housing market has been upward over the past few years. There are several reasons for the upward appreciation in homeownership, from increased remote work availability and an increased interest in larger homes, especially ones with a yard, to simply more people on the market looking to buy.
With the market becoming more competitive, it’s also becoming more difficult for the average American family to own a home. The housing affordability is at the highest it’s been in over a decade, pricing many families out of becoming first-time buyers.
The reasons for this are increased demand, lower inventory, supply chain issues slowing down new home startups, and rising interest rates.
And it’s not like inflation isn’t a real thing. In fact, inflation is at a 40-year high, increasing the costs of everyday items like food, gas, and other items.
So if you already have a home, how can you capitalize on the equity in your home and make some added income along the way?
You can make some revenue on your home by taking a loan out on your home’s equity, consider selling it now, or create a long-term revenue stream by renting out your house.
What Is Equity?
Equity is the value of your home after the value of the home is compared to the debt remaining on the property. Take the remaining debt on the home and divide it by the appraisal price of the home. The remaining difference is how much equity you acquired in the home.
One of the primary ways you can make revenue from your home is to cash in on the equity in a few different ways.
Home Line Of Credit
A home line of credit or HELOC is a financial agreement where the homeowner borrows against the equity in the home. Put another way, you borrow against your home’s equity at a variable rate like a credit card. Then you pay down your HELOC.
Another way to cash out on your home is to refinance it. With refinancing, you can get quick money or simply lower your mortgage payments when interest rates are lower.
By taking a cash-out loan to refinance a package, you’re taking a loan out on the home’s value that includes the equity accrued rather than the home’s value when you purchased the house. You are selling the original mortgage and, in essence, taking a new one out.
You can also consider a reverse mortgage. A reverse mortgage is a financial agreement that pays the homeowner a regular amount for the transfer of ownership in the equity accrued in the home.
Selling Your Home Now
One way to make immediate revenue in your home is to consider selling it right now. The advantages to selling right now are that in most parts of the country, the market favors sellers with a low inventory versus higher demand, often driving prices higher and offers on the home to be friendlier to sellers.
The downside to selling your home right now is that with the interest rates increasing, buyers have more difficulty securing loans that are friendly to the borrower.
Additionally, unless the owner has been living in the home for two years throughout 5-years, then a higher capital gain will need to be paid on the proceeds of the house.
However, if the owner has lived in the house for 2-years in a 5-year window, then there are tax benefits and breaks for the seller.
Rental Properties As Profit Center
In light of borrowing against the equity in your home, refinancing options, or selling your home outright, you can consider renting out your property either short-term or long-term.
Before you consider renting out your home, you need to consider where you will live and whether you can afford to rent your home versus the costs incurred from your rent. Additionally, you will need to be able to budget for maintenance and vacancies that will arise from time to time.
Short Term Rentals
A short-term rental is one where you’re offering your home for rent for any period of time less than a year. Typically, a short-term rental is three months or less, including as short as a night or two.
Tracking your vacancies and rental agreements and providing payment instructions all take a lot of disciplined bookkeeping. However, there are third-party apps and software programs to assist you.
Some of the best ancillary software are ancillary management software that keeps all your vacancies and appointments and tracks deposits and payments for you.
Some short-term rentals, such as through Airbnb or VRBO, can be illegal in some areas, so make sure you understand your options locally before signing up.
Long Term Rentals
The advantage of a long-term rental is that you know that you have a specific amount of income during a contractually specified time frame. Typically long-term rentals are under lease for at least 12 months, though in commercial real estate, those contract terms are typically a 10 or 20-year lease (unless subletting).
There are plenty of ways to generate income on your home, but understand the tax implications and municipal regulations before you decide which strategy is best for your financial needs.