It is no secret that investing in real estate is a great way to build wealth. But only a few investors are actually taking full advantage of their opportunity to leverage equity in a way that maximizes tax deductions and equity gains. With the housing boom nearing its end, the only question is what will happen next. Will prices simply hang at a steady point or with they begin to drop? No one has the answer to that questions so it is more important than ever to protect equity while you can.
Most buyers purchase a property and amass a certain dollar figure of wealth through loan payments and appreciation of the property. For example, the amassed wealth of a single property is $250,000. But that wealth is at risk and you will lose a part of it if the value of the property drops. A 20% drop means that you lost $50,000 of your wealth simply because property values decreased.
To avoid such a loss, you can refinance the property in an interest only loan. A percentage of the equity is taken out of the property and placed in an equity insurance product. So now if the property value drops you do not lose the same 50K because your gain is protected in the equity index insurance product. This insurance product is not just a policy as you would normally think of it. This is a product that is tied to the stock market index. But the best part is that the policy carries a guarantee that it will never lose value even if the stock market crashes.
So in essence, you have taken money out of a potentially volatile market, the real estate market, which could fluctuate and result in you losing money. But you placed it in another volatile market which is tied to the stock market. The difference is that you have placed the money in a product which offers you a guarantee that you will not lose money, you are insured against that happening. But if the stock market has a great year and increases by a large amount, then you see the benefits of that growth. So what you have managed to accomplish is that you have protected the value of your rental property against depreciation due to home value fluctuations. Also, you have used the equity in your rental property to access the stock market and receive potential gains from that resource. And finally, you have converted the taxable growth of a property appreciation into a nontaxable insurance policy which will only grow.
The housing market has been booming for a number of years, and it has always and will always prove to be a cyclic market. It is only wise to forecast that the market will plateau or begin to drop in the near future. That makes this a perfect time to reduce your risk of loss of equity in your properties and move those funds to a less volatile product.