The Smart Way to Use Your Home Equity

By Loral Langemeier

While it may be true that in many parts of the country, the real estate boom has ended, many people are left with hundreds of thousands of dollars in home equity. Unfortunately, few people know how to use this excess home equity to become wealthy.

I meet regularly with people through my Team Made Millionaire seminars, Loral’s Big Table and my Live Out Loud business who are cash-poor, but have a lot of money tied up in their home and an IRA or 401(k).

What I tell them is the same thing that I’ll tell you here: you won’t ever become wealthy by keeping your money in these “lazy” assets. You’ve got to do something constructive with your assets, and that includes your retirement accounts and your home.

For example, Mick and Mary earned about $150,000 annually between them, but had very little money after taxes and expenses. They had $200,000 equity in their home, which was just sitting there.

After identifying their lazy assets, Mick and Mary decided to pull out $100,000 from their home and do what few people ever think of doing with their home equity. With the $100,000 from their home and another $40,000 from their mutual funds, they invested in several cash-flow producing real estate properties.

What’s interesting about Mick and Mary was that they weren’t particularly interested in becoming full-time real estate investors. Many people find themselves in this situation, and believe that the only way out of the rat race of their corporate jobs is to become real estate investors. That’s simply not true.

Mick and Mary’s real estate investments, which they were able to purchase with the equity in their home, simply allowed them more freedom to pursue other cash-flow producing opportunities that were closer to Mick’s interests.

As a consultant, for example, Mick was more interested in investing in businesses – not through the stock market, but by actually investing in the business itself as a partial owner.

The money Mick and Mary made from their cash-flow homes enabled Mick to scout out other deals, the first of which involved a private-label nutritional products manufacturing and distribution business.

They were able to easily repay the home equity loan, and take extra money from Mick’s consulting business for investing in these other opportunities. Mick and Mary were smart to leverage their home equity into multiple cash-flow generating opportunities.

Do you see the difference between what Mick and Mary did compared with what most people do with their home equity? Most people will take out a home equity loan to purchase toys (cars, a boat, vacations), pay credit card debt, or to remodel the house.

Mick and Mary, on the other hand, were able to use their home equity to purchase cash-flow producing assets. These assets in turn created enough cash for Mick and Mary to pursue other opportunities, repay their credit card debt, and eventually have the same amount of money available for toys, should they wish to do so.

That’s the smart way to use your home equity. Instead of letting it sit as a lazy asset, especially in the current “down” real estate market, you want to intelligently pull out equity to buy cash or equity-producing assets.

Wealth accumulation is a business of asset accumulation. Wealthy people use their assets to buy other assets, and those assets in turn fuel their leisure activities. Eventually, Mick can quit his consulting job if he wishes, or continue to consult strictly on his terms and on his schedule.

Wouldn’t it be great to have the freedom and flexibility to do what you want, when you want it, working in a field that gives you great satisfaction? Perhaps the place to start down the Wealth Cycle path is with your home equity.

Use it wisely though, everyone’s situation is different and each of us have different money rules established. Identify your lazy assets, do your due diligence, follow your money rules and put those lazy assets to work! That’s how millionaires do it, and it’s how you can do it from now on.