To use home equity or not...?

[Jonny Morris]

We bought for about $363k. Put down 80k on the house to avoid mortgage insurance.

We have now put about 50k into developing an apartment above garage as our "1st property" rental which generates $1250 per month.  Recent city valuation puts house value about 60k+/- from what we bought at.

Question: I would like to use equity from our home to pursue a second investment. My wife sees this as a second mortgage and is nervous...

 Any advice, numbers or light anyone can shed on my scenario? I feel I am in a strong position and want to capitalize on current opportunities. 

[Greg Scott]

@Jonny Morris

A few thoughts for you 

I would always rather borrow against my equity than come up with new cash for a down payment.  Why?   Borrowing against equity is a tax-free transaction.   Coming up with after-tax cash usually means you have to actually earn much more than what you need.   Now, one caveat on this comment, I will never put a property into a negative cash flow situation.  Assuming it is cash flow positive, I love skimming the equity for new projects.  

Your situation is a little different as it is your personal residence.  That becomes more of a personal decision than purely financial.

Also worth noting, what the city thinks your house is worth is meaningless. They are usually less accurate than Zillow. And, ideally they put the value of your property much lower than you paid for it so your taxes are lower. I would ask a realtor to give you a Broker Price Opinion (BPO). An appraisal would be even more accurate and it is what a bank would use to determine any potential cash-out loan proceeds or HELOC.