The appropriate level of equity

[Justin B.]

I'd like to get the forum's opinion of what everyone thinks is a happy medium for equity in an investment property. I don't want too much. A good source of capital is refinancing current properties.

I'm always looking for new properties (I am currently sub-$100k properties and own 5 currently) so I always need capital. When searching for it, beyond what we have in cash, I look for any properties I own that I can refinance, and refinance back to 20% equity (this is typically the best the bank will do for me). My strategy is also buy and hold (rent). I do not currently flip nor do I look for those opportunities.

To lay it out simply, I do this:
equity < 25% - Never Refinance
25% < equity < 40% - Refinance if capital is needed
equity > 40% - Always refinance even if capital not needed (assuming property will positively cash flow afterwards).

My thought is I never want more than 40% equity in any property I own. I can't come up with a good argument for it. I'd rather own more properties than tie up my capital in a property.

So, I'm curious as to other's thoughts on the topic.

[Duncan Taylor]

Originally posted by @Justin B.:

I'd like to get the forum's opinion of what everyone thinks is a happy medium for equity in an investment property. I don't want too much. A good source of capital is refinancing current properties.

I'm always looking for new properties (I am currently sub-$100k properties and own 5 currently) so I always need capital. When searching for it, beyond what we have in cash, I look for any properties I own that I can refinance, and refinance back to 20% equity (this is typically the best the bank will do for me). My strategy is also buy and hold (rent). I do not currently flip nor do I look for those opportunities.

To lay it out simply, I do this:
equity < 25% - Never Refinance
25% < equity < 40% - Refinance if capital is needed
equity > 40% - Always refinance even if capital not needed (assuming property will positively cash flow afterwards).

My thought is I never want more than 40% equity in any property I own. I can't come up with a good argument for it. I'd rather own more properties than tie up my capital in a property.

So, I'm curious as to other's thoughts on the topic.

My first thought is it is a bad idea to not compartmentalize your financing. The way you are doing this you always have everything you own at risk. You are building a house of cards and sooner or later a stiff wind will come along.

But, there is an even bigger issue here, if you are not very careful you can cause yourself some real tax headaches. There is a limit to how much you can pull out of a property depending on how you hold title. If you borrow more than that limit, the interest is no longer deductible and in some cases can be considered income by the IRS.

Make sure you have a really good CPA and tax attorney.