500k of home equity... What to do next??

Question

Hello! I'm looking for some advice/direction from the community for my next real estate investment.

I completed construction on my home in the Hudson Valley in 2020. Acting as my own GC, I was able to save quite a bit, and only took out a small loan, so I wound up with about 500k in home equity.

I briefly considered selling, but decided against it partly because I have been Airbnb'ing when I'm not there and the cashflow is great, and partly because of my emotional attachment to my first build!

So I've been trying to decide what the best next project would be to pursue. Some options I'm considering:

- Build another home in the Hudson Valley: Either to Airbnb or sell. Advantage here is that I know the area and contractors well at this point.
- Fix/flip in the Hudson Valley: Again, either Airbnb or sell.
- Fix/flip in Detroit or Kalamazoo: My fiancé and I are both from Michigan, and we are planning to start a family in the next couple of years. We don't have plans to move there, but we have friends and family to check in on things and it would be nice to not have to stay with in-laws every time we visit :)

Any of the above would most likely be financed by a HELOC and, depending on the investment, either refinanced (hopefully rates go down in '23) and held as traditional/Airbnb rental, or sold.

Any opinions or advice are welcome!

Jason Wray · Answer

Austin,Your correct and not in a bad situation at all my advice just comes from my experience with HELOC issues. Not only that but 85% of people who have a HELOC do a cash out refinance to consolidate the HELOC into a 30 year fixed at some point. That is usually if they have an ARM, Interest Only, or have a shorter term or balloon. Also 1031 exchange can be a benefit but remember Biden introduced a bill to eliminate the 1031 exchange and is pushing it for 2023.The other issue is you cannot get any more cash from that property unless you do a cash out refinance so it acts as a debt obligation with no ability to take cash out beyound its original terms. Having a 4% rate is great but keep in mind that is only great based on where rates have been for last 8-10 years. At some point investors will have to start looking at the burn rate or offset risk on taking a higher rate to borrow cash...You can always opt to do a rate buy down as well to lessen the hit to the PITI payment and help cash flow.

Drew Sygit · Answer

@Austin Griffith it's always the same, you do what makes the most off your assets at an acceptable risk.You can also throw in your "hobby" interests, but carefully.So, what's your ROI on all that equity sitting there? What could you do with it if it was all in your bank account? Build two houses?Now factor in that since you've lived in it for 2 years, $250k if single, $500k if married, is tax free on the sale.

Ruchit Patel · Answer

Sounds like you are good at hassle and hustle both. For a 100% passive investor, purchasing high-quality turnkey is the answer and for someone like you, more new construction is the answer as it brings more money. Speaking of 4% interest on HELOC, cash flow from your investment property can pay that easily. For people who need cash flow to retire, for them the 4% is a lot, I guess not for you.

Colton Hahn · Answer

Its been said before that "cashflow is king"In all seriousness it depends what you want to do next. I talk to many people who parlay their success into multiple properties. Then they realize how much work that can be, and go full passive (ie syndications). Others like the grind and go even bigger, hiring a team to manage the properties with them. Happy to talk more!

Aj Parikh · Answer

Cash flowing turnkey rentals might be a great option for you because you can remain passive and build a portfolio at the same time. I worked with a couple of turnkey companies to purchase in the midwest and you can find steady appreciation and good cash flow in these markets. Feel free to connect if you want to chat and I can share my experience with this strategy.

Conner Olsen · Answer

What's your cash flow on your property with $500k in equity? I'd pay attention to your return on equity and factor that into your decision. After factoring the financial aspect of each decision, you should lean into what makes you excited. Did you love building and managing renos? Or maybe you love Airbnb's? Real estate can be fun when you're doing the right thing for you and a drag when you're not.

Jason Wray · Answer

Austin, If you elect to build you can save some money by building a second home with just 10% down. Great way to build a brand new home and in a short period of time transition it into an AIRBNB or LTR. If you have $500K in equity I would advise doing both a cash out refinance and a HELOC. In this market cash is king and having "Liquid Reserves" is needed to buy more investment properties. You cannot use a HELOC for PITI reserves required by any bank/lender. That available cash even if it was $200K-$300K or more would allow you to offer an aggressive offer or all cash purchase on a home. A HELOC is great for projects but it's an open end liability and counts against your DTI - debt to income ratios. HELOC's are also high risk and the bank/lender holding the line of credit can and will close or reduce your credit limit if you have any drop in credit score, missed payment, or added debts considered to be excessive based on multiple trade lines. Fix & Flips are okay but come with a tax liability but cash out refinance is tax free and you would be putting that cash into another property building your REI portfolio.

Angela Venger · Answer

I would say all options are good, but choose one with higher cash flow after paying your mortgage and HELOC. Build your portfolio first, and then do the most desirable projects later.

David Shakhunov · Answer

@Austin GriffithSounds like you have some cash reserves. I would open up HELOC and use you cash reserves as soon as you run out or have an emergency you can draw funds from HELOC. Also advantage of HELOC you can do multiple draws and pay interest only once you draw. When you build that I am advantage since you can draw fund whenever you need fund to build.

Austin Griffith · Answer

@Conner Olsen It's our first year and we were there quite a bit, but it looks like it's on track for $85k (before expenses). That's good advice, excitement certainly helps keep the motivation up!