Should I take out home equity to reinvest?

Question

Hello! I'm new here and this is my first post on this forum. I have a rental property at the Tidewater (VA) area which has nice cash flow around $700 and about $200K of equity. It is in a nice subdivision and it always rented out like a hot cake. In its past 19 years of rental history, no one tenant ever been late on rent. Current tenant has been there for 6 years. My only complaint is the property value seems to appreciate at a rather slow rate especially when compare it to my other property in Boston. I have been considering investing in small multi-family property in greater Boston. Since I have some equity in this property, I'm considering to either sell the property or take a HELOC and reinvest the money in a small multi family property in Boston or STR in Outer Banks (NC) area.

Another reason I'm considering to sell it is if recession hits, the property value might go down and most likely it will take several years for the home price to climb back up to where it is now.

I'd love to hear any thoughts or insights on this. Thank you!

Sophia K. · Answer

@Dave Foster, thank you for your response. I have been thinking about 1031. If I decide to sell I'll definitely try to do the 1031 exchange if all timings work out. Agree on the long term cash flow only property. This property could really fit the bill.

Melanie Thomas · Answer

Hello! It's great to have you here. Based on the information you provided, it seems like you have a successful rental property in the Tidewater area with consistent cash flow and a strong rental history. However, you're concerned about the slow appreciation of its value compared to your property in Boston. Additionally, you're considering investing in a small multi-family property in Boston or a vacation rental in the Outer Banks. Here are a few thoughts and insights to consider: Market Comparison: It's important to compare the real estate markets of Tidewater, Boston, and the Outer Banks to understand the potential for property value appreciation in each area. Research historical trends, local economic factors, population growth, and any upcoming developments or infrastructure projects that could impact property values.Cash Flow vs. Appreciation: While slow appreciation may be a concern, your Tidewater property seems to generate solid cash flow. Consider the trade-off between cash flow and appreciation. If your primary goal is consistent income, the Tidewater property may continue to serve you well. If you're looking for higher appreciation potential, exploring other markets like Boston could be an option.Risk and Diversification: Investing in a small multi-family property in Boston or a vacation rental in the Outer Banks introduces additional risks and considerations. Assess factors such as local regulations, demand, rental market trends, maintenance costs, and potential vacancies. Diversifying your real estate portfolio across different markets and property types can help mitigate risks.Financing Options: If you decide to invest in another property, evaluate your financing options. Taking a Home Equity Line of Credit (HELOC) on your current property can provide you with access to funds for a new investment. However, carefully assess the interest rates, repayment terms, and any potential risks associated with leveraging your existing equity.Long-Term Outlook: Consider your long-term goals and how each investment aligns with them. Are you looking for immediate cash flow, long-term appreciation, or a combination of both? Evaluate the potential returns and risks associated with each investment opportunity in the context of your overall investment strategy. Ultimately, the decision to sell your current property, leverage its equity, or invest in a new property depends on your specific circumstances, risk tolerance, and investment objectives. It's advisable to consult with a financial advisor, real estate professional, or property management expert who can provide personalized advice based on a comprehensive understanding of your situation. Good luck & happy investing!

Dave Foster · Answer

@Hooi-Hong Khor, Your property will qualify for a 1031 exchange. It was converted a long time ago. and you are using it for investment purposes right now. So 1031 would be fine. Doing 1031 vs a refi would allow you to access more of the equity to make your next purchase. But more importantly, a 1031 would allow you to exit that market while appreciation is at it's highest. Like you said you may want to reposition your new property in a market with more favorable appreciation.The compelling reason for a refinance would be if you can truly look at this as a long-term cash flow-only property. If you do this you quit looking at appreciation/equity etc. And solely look at the NOI and what that does to your portfolio in general. I have a bunch of clients who lost millions on paper in the last great recession. But they didn't lose an actual penny. Because the value of your property is irrelevant if you don't have to sell it.

Colin Kelly-Rand · Answer

@Hooi-Hong KhorAnd HELOC interest rates are likely 8.5%+. So $100K at 8.5% interest only = $8500 per year, or $708 a month...which is the entire cash flow of the property - I can't imagine bank would even lend that much. So maybe you can take out $50K? Less costs of the transaction...seems not worth it.Time to look at doing a 1031x exchange if its an investment property. Put 200k down on a 3 family in Greater Boston (20% down payment on a $1M property). One way to look at your current property, is your cash on equity is $8400/$200k = 4.25% Your cash on cash return (return on initial investment) is probably great but that does not take into affect appreciation. You probably put $50K down originally (just making it up) and you CoC = 8500 / 50K = 17%. Looks great...except its not the whole picture.

Chris Seveney · Answer

@Hooi-Hong KhorChances of getting a HELOC on an investment property are slim and lenders if they lend may go to 70-80% value max. As you noticed cash flow is ok but appreciation is where you build wealth. If it were me I would sell and buy in Boston over OBX. Reason why is Boston will do much better than OBX as OBX is a destination compared to Boston which has jobs and is better suited for any downturn

Sophia K. · Answer

@Melanie Thomas Hello! Thank you for your thoughts and insights. I appreciate all the points you listed above and will do more research and weight various risk factors and evaluate options.

Sophia K. · Answer

@Colin Kelly-RandThank you for your input and those numbers really help me to evaluate it objectively. I think I'm leaning toward a 1031 exchange but have never done it before. This was a primary residence turned into a rental so not sure if I could do a 1031 exchange. My initial investment was $13K, so now the CoC = 8400/13K = 64%. The initial CoC wasn't great but now the number looks great I think mainly due to we have paid off more than 2/3 of the mortgage and the rent increase over 19 yrs. Am I getting it right? I used a home appreciation calculator online to calculate the average appreciation rate over 20 yrs, it is 2.56%. So it is not great in terms of appreciation.I was not a "true" real estate investor when I bought properties in the past, it was more as a saving. So never bother to look at CoC, ROE, etc.. I'm just starting to learn all these now.

Sophia K. · Answer

That’s a good point on Boston vs OBX. I have never taken out any HELOC before so didn’t realize it is hard to get it on an investment property. Thanks for pointing that out. I learn some meeting new today. 😀