Can you use home equity to buy a duplex?
The average homeowner in the U.S. currently has close to $300,000 in home equity. And since borrowing against home equity is currently cheaper than many other options, especially credit cards, many borrowers are opting to use it.
Two popular ways consumers can tap their home equity is to take out a home equity loan or home equity line of credit (HELOC). You can use home equity funds for any legal reason, and common uses include home renovations and repairs. If you use home equity for those purposes, you may qualify for a tax deduction.
That said, while there are tax benefits to using your home's equity for those purposes, you can tap your home's equity for various other purposes, such as consolidating debt or paying for school. You can also use it to buy a second home. And if you're interested in purchasing a real estate investment property, you may wonder: Can I use a home equity to buy a duplex? The quick answer is yes, but you should weigh the pros and cons before proceeding.
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Can you use home equity to buy a duplex?
In short, yes, you can use home equity to buy a duplex but there are some nuances to consider. Here's when it may make sense - and when it may not - according to the experts we spoke with.
When to use home equity to buy a duplex
"Using home equity to purchase a duplex can be a smart move if the rental income covers the loan payments and offers additional cash flow," says Tyler Meyer, certified financial planner and founder of RetireToAbundance.com.
He adds that it could be beneficial, especially if the property value is likely to appreciate and you have a clear plan for managing the property and tenants.
Steven Calio, CFP and CEO of financial planning firm CSG Financial, thinks it could make financial sense if the duplex will generate rental income. And he adds that it could also be ideal for those looking to house hack — live in one unit while a tenant rents out the other — because it can reduce your living expenses.
In addition, Steven notes that using a home equity loan or HELOC could be an affordable financing option. After all, they typically come with lower rates than other types of debt like personal loans and credit cards.
Katie Lindquist, certified financial planner and founder of Lindenwood Financial, says using your home equity to purchase an investment property could be appropriate as a short-term financing solution. "For example, if you have plans in the near future to move into half of the duplex as your primary residence and sell your other home," she says.
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When to not use home equity to buy a duplex
Although using your home equity to buy a duplex can be cheaper than other financing options, there are some major potential drawbacks to consider.
Meyer said he'd advise against tapping your home equity to purchase a duplex if you're already carrying significant debt, lack an emergency fund or if the rental market is uncertain. After all, if you're relying on rental income to repay the loan and it doesn't come through, one major consequence is that a lender could foreclose on your home.
Lindquist says she'd advise against taking out a very large home equity line of credit, for any reason, without a practical plan to pay it back - or without a financial safety net in the form of other liquid assets.
Other ways to finance a duplex
If you want to purchase a duplex and want to avoid the downsides of tapping your home's equity, explore alternatives.
For example, consider taking out a primary mortgage to purchase a duplex, says Lindquist. "This removes your primary residence from the picture entirely, and it can open up different loan and rate options that may be more beneficial for your situation," she adds. After all, rates for primary mortgages are typically lower than second mortgages, such as home equity loans and HELOCs.
Another possible option, says Meyer, is pooling your financial resources together with a partner to reduce financial risks.
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The bottom line
You can use your home equity to buy a duplex or as another investment. And doing so could make financial sense as long as the property generates enough income to offset your borrowing costs. However, before you go down this path, assess your current financial situation to determine whether you can afford to repay the loan. Meyer recommends that homeowners consider this route, conduct thorough market research, ensure they have a reliable property management plan and keep a financial buffer for unexpected expenses. If you need help deciding whether it makes sense for your unique situation, consider contacting a certified financial planner or real estate professional.
