Best way to use my equity?

Question

I have a single rental property right now and I'm trying to come up with some ideas about what my next step should be.

roughly 100k in equity, I can sell this year using the 2/5 yr rule. It's rented out thru October, so I would have to wait till November to list it.

right now it's on a 30 year at 5.2% from a refy in 2019

my main short term goal is to get into the rehabbing side so I can increase my income and leave my job serving tables in 2 years max.

should I cash out refy, with a plan to keep the property longer term, and then try to partner with a person or two to learn the rope on a few flips?

should I sell and look for a 3 plex to run as an STR and use maybe half for the idea above on getting started with flips?

Just looking for some feedback or more ideas about what I could do. And not to be dismissive but unfortunately, as far as quitting my job, I wont be able to move to a different job that would require gettig a license 😬

Tyrek Brown · Answer

What are your goals? Are you looking for an active real estate career or something more passive?

I'll be honest with you. STRs are a lot more work right now in this market.

With that said, once you are settled into an AirBnb you can get into a kind of rhythm and they can be fairly passive. However, that isn't really an option with rehabbing.

You'll have to deal with construction teams, mishaps, no-shows, additional work needing to be completed, property not appraising high enough or selling fast enough, etc. You will definitely go to bed with more restless nights from rehabbing then AirBnb. However, your opportunity for growth will be higher.

At the end of the day, it depends on your goals. Evaluate the market, see what is needed, and go from there! I would definitely say if you plan on continuing to work, you should probably steer more towards the 3-plex than rehabbing. BRRRR will be almost a full-time job when you first start due to the lack of a team.

Ryan Thomson · Answer

@Abe Louis one idea could be doing a HELOC. Security Service Federal Credit Union is currently doing 100% LTV HELOCs. Adjustable rate mortgage for 15 years (interest only) with a 25 year repayment period after that. They are in Colorado and Texas.

@Ben Rhodin is a great realtor in Denver that has done his own house hacking and rental property investing.

Ben Rhodin · Answer

Hey @Abe Louis! This is a very common question and I've assisted numerous other clients with it. It can be simplified down to where do the numbers make sense, and is this an asset that I would want to hold in 5-10 years as it's in such a great location or such a desirable asset.

In short there are three ways that you can utilize and capitalize on your equity.

1. Cash out refi

2. Heloc

3. Sell

Which one makes sense for you depends on the property. If it's a small condo, I'm assuming that the 100k in equity is a big chunk, as the property is probably worth somewhere in the 200ks. With both a HELOC and Cash out you'll be capped at 80-75% LTV unless it's your primary currently. Which doesn't sound like it is. My approach for this type of question is to first calculate your ROE (Return on Equity) for the property, and I'm going to guess it's decently low. From there you can see if you can optimize this property, by changing rental strategies, if it's a 1 bedroom condo in Denver, you may have some luck in the MTR space depending on location. That would increase your cash flow and make the asset a better performer. Then after that, you can look into the options for capitalizing on your equity, with HELOC and Cash out being first, and they both serve different purposes. If the property still makes sense after a cashout or HELOC and it can support the higher balance, then go that route. If it doesn't and becomes a nonperforming asset, then it may be worth looking at selling it.

From what I've gathered, personally, I would look into turning it into an MTR, doing a cashout or HELOC (depending on what you plan to do with the money), and looking into a new primary home in the area in order to house hack. That will make your capital go the furthest.

Let me know if you want to dig into these numbers a bit more, and see what is the right direction for yourself!

Steven Foster Wilson · Answer

My brother lives in Denver and is a realtor there. I would be happy to connect you two. I think he could defiantly help you with this.

I like how you are ambitious and try to think outside the box. Keep that up! If I were you I would ask for someone to invest with you. Even if they are a private lender that could help you get your portfolio going. Just with your one property, you have proof of your experience and positive cash flow. I would do a PowerPoint (that is what I did) and ask anyone/everyone if they wanted to invest with you. Now because of my track record, I have family and friends coming to me asking if they can invest.

Mark Ito · Answer

Hey Abe! My biggest question/concern when reading the post is: would your rental still cashflow if you pulled all the equity out in a cash-out refi? Make sure to take into account capex and operating costs, not just PITI.

@Tyrek Brown nailed it with identifying your goals. What do you want to do, and get out of real estate investing? There are so many ways to make money, and what works for others may not work for you. Identify your strategy and create a plan to make it to your end state!

Abe Louis · Answer

Yes this is a good idea except that I don't make enough to go buy another property unless there's cosigners. There is inherent risk in that as well.

I have to figure out a way to essentially double my income so that I have the right qualifications for a low down payment primary residence mortgage in the metro area.

Matt M. · Answer

You need to learn a trade if you want to go start flipping. "Getting into flips" right now is risky, ESPECIALLY since you don't know what you're doing.

I'd keep the rental, turn your current home into a rental, and buy another primary with a low down payment. Then rinse and repeat.

Ben Einspahr · Answer

This is one of my favorite questions because it boils down to optimizing your rental portfolio and what separates good rental property investors from great rental property investors. As mentioned above, you have multiple options to consider but the 3 main ones are HELCO, cash ur refi, sell and trade up via 1031.

before going down that road you will want to take a deep dive into your current properties health. The 3 main metrics I look at when deciding to make a big decision like this is:

Cap Rate greater than 4%

Return on Equity (ROE) greater than 10%

And Loan to Value greater than 50%

If you are below any of these metrics, may be worth considering selling and trading up via.

With this being my favorite topic in REI to cover, I create a spreadsheet that help run all of these numbers for you and spit out some cool charts. Happy to send via messenger.Best of luck!

Ryan Williams · Answer

Hey @Abe Louis it sounds like you have some options! I would be slow to get ride of a valuable property in Denver and really examine your options to reach your goals in other ways. Those of us that purchased in 2020 or before experienced unprecedented appreciation, which we may never see that same kind of growth again. If that property has equity and cashflows, it doesn't hurt to play the long game, make some extra cash, and have that thing be a nest egg down the road.

That being said you can do whatever you want! lol cash out, HELOC, or even sell you have options which is a good place to be!

Best way to use my equity?

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