Defined: The nearly simultaneous purchase and sale of securities or foreign exchange in different markets in order to profit from price discrepancies (Mirriam Webster Online Dictionary)

This can be used in real estate by taking the equity in ones home and leveraging it to gain a higher rate of return than the offsetting interest on the mortgage.

Remember when figuring out offsetting numbers to take into account the interest paid which is deducted from your taxes as well as any taxes that may be added from interest earned.

Of course, there are investment vehicles available that are tax-deferred as well as other that are tax free!

Real World example: Take a loan of $100,000 from your available equity at 6.25% interest only - you pay $6250/year. With tax deductions this is a net payment of $4187.50 (34% tax bracket including state & federal).
Put the $100,000 in a tax free mutual fund that pays 4.9% yield and you get $4900. The difference between the 2 is $712.5. This may seeam like a paltry 0.7% return yet this is still quite a bit more than if the equity sat in your house doing nothing.

This is one aspect of real estate arbitrage.

The return you would receive on your investment (versus keeping your equity in the home with no return)could be further explained by your accountant or certified financial planner. Your mortgage professional will have more information on finding a CFP in your area.

 

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