Walking in with Equity...What Next??

Question

Hello! I'm excited to say I closed my first REI three weeks and will be house hacking in a two-family home. I'm in central CT and real estate prices are nutty. Crazy as it sounds, this house I bought was the first one I looked at and went for it. Listed at 370K, bought for 360K and the capper was that it appraised at over 390K! My agent said this almost unheard of (and got a sick interest rate to boot!). Now, I'm walking in with equity...what's the best thing to do here? Sit on it? Refi (cash out refi)? I don't know. The house needs some work, not major work, but some bigger ticket items for sure. I'm not sure what the best move is here. Has anyone else been in this situation?

Looking forward to responses from this great RE community!

Thanks!

G

Jaron Walling · Answer

@Gary Libero Congrats on the new place and congrats on doing the house hack! @Joe Splitrock gave you the details that matter, some harsh truth, and some wise advise. I would read his comment like 10 times. It's just details, rules, and numbers that add up to make or break a deal. Some of the members in here are geniuses. I've learned more in these forums than reading books, blogs, or anything else. The great news is you can pay back your 403B loan ASAP and hopefully cash-flow in the future? "There is 1/2 bath in serious need of some rehab and kitchen floor needs to be redone." - Those are not big ticket items so don't sweat it. You could learn some skills and bust that out DIY or hire contractors to do it for you. Keep in contact and hire them again for projects in the other unit. Keep going man!

Joe Splitrock · Answer

@Gary Libero unfortunately you will have trouble tapping that equity for a period of time. You will need to wait at least 6 months before refinancing per underwriting rules. Cash out refinance will increase your interest rate and is subject to appraisal value. I know it just appraised for $390K, but there will be a new appraisal. You can have ten different people appraise the same property and they will all come out to different values. It is rare in my experience to have a property appraise higher than purchase price. You either got an amazing deal or got very lucky with your appraiser, or a combination of both. Also be aware that cash out refinance may have minimum LTV requirements that make it difficult to pull money out. Even with the "instant equity" from appraisal, you still only have 11% equity. That is not even enough to clear mortgage insurance requirements, so could prove difficult to pull cash out.HELOC is likely not an option either. They also have minimum equity requirements and will require appraisal. My HELOC required 30% equity left in my home. If the lender is left holding second lien position, they want to know there is value there to secure their loan.My advice is make improvements to the property to force appreciation and wait a year or two for more time based appreciation. Even a year from now, you may still have challenges with LTV requirements.

Gary Libero · Answer

@Joe Splitrock Hey thanks for this response! A realtor friend of mine gave me very similar information, so thanks for reinforcing! I was aware of the wait periods and interest rate increases. My buddy also said the same thing about appraisers, they'll never be the same. As you mentioned, there was an element of both luck and a good deal (though it's a 200 year old house, so the major improvement pains are yet to be seen...the house was greatly maintained and updated by the former owner, thankfully). Very good information here! Really appreciate the response.

Maurice D. · Answer

what are the big ticket items that need repair? you have some equity, but not enough to cash out refi money, unless you put a lot down. what was your down payment and loan amount?

Ryan Thomson · Answer

@Gary Libero you probably won't be able to refinance and take any cash out for 6 months. Also you'll probably only be able to take out any equity above 75-85% LTV. But once you can, I certainly would consider it. You ROI might be great, but with equity sitting in the house your ROE is not as great. Move that money :)

Gary Libero · Answer

@Jaron Walling Thanks for the reply! Had a contractor come out yesterday and the 1/2 bath isn't as costly as I thought! I always have bloated prices in my head for everything. Yes, being able to pay off the loan is clutch. Once that is paid off, off to the next property purchase!Happy Thanksgiving all! Thanks for these great replies.G

Gary Libero · Answer

@Billy Davidson Most likely option 2. I know they talk about this from time to time on the BP Podcast (and not usually in a positive light)...I took $$ out of my 403B for the down payment on the house WHICH will be repaid very soon after my ex-wife sells the house which we still own (my cut of that sale will more than cover the loan I took against myself...so all good). I'm living in the larger side of the house and have the 1 BR up for rent. @Maurice D. I hear ya...3% down on loan for the entire house, so roughly 360K. From what I've read, I can at least get 10K out of refi (or HELOC?)....I'm new at all this and still learning, which is why I reached out here. The big ticket items are more on the side I'm living in (at least for a few years, then plan to do this again with a 3 family, or remain here and still own another multi-fam). There is 1/2 bath in serious need of some rehab and kitchen floor needs to be redone. Thanks for your input and replies gentlemen!G

Billy Davidson · Answer

@Gary Libero this is awesome!! Congrats. I think you have two routes to go about this. 1) This method... you have cash on the side ready to go. Personally, I would try and update the house to get the highest rents that you could possibly get. To add to that, it creates a lot of force appreciation and adds equity into the building that you can pull out with a refi. I think with this you can put money down on another property and keep it going. 2) You don't have money on the side ready to go. I would rent it out and house hack it, and while doing that I would refi and pull some money out to put into the property. Use the money to update and get highest rents, and then from there just cash flow and save and put into the next property.Snowball this and grow the portfolio and only good things are bound to come your way. Congrats and look forward to hearing what you decide to do.