Not sure what to do with a house with equity and need advice
Investor · Tavares, FL · Member since 2015 · 110 posts · 24 votes
I purchased a SFH for my primary residence about 3 years ago via short sale. Purchase price was 133K, I put down 20% with a 2.99%APR on a 15 year loan. I owe around 90k on it currently and it's worth roughly 180k. We have since moved so it's no longer our primary residence. It rents for $1300/month and is a little under market value.
I'm trying to figure out how to use the equity in the house to purchase additional properties. One issue is losing my 2.99APR if I go through a traditional refi. At this point I would probably end up with a 5% 30 year being as it would be an income property and not primary.
It's been difficult finding someone to take a second mortgage on it so I can keep the 2.99% on the 90k I owe currently. I've thought about selling it since it's not an ideal rental. If I sell it I assume I would have to pay long term capital gains on the roughly 50k profit or do a 1031.
Anyone have any ideas on what to do with this property? To this point I've only been doing buy and holds and have yet to sell a house.
@Jeremiah H., if you owned and lived in the home as a primary residence 2 of the last 5 years, you have a capital gain exclusion of $250k (gain) if you're single and $500k (gain) if you're married filing jointly on combined lien amounts up to $1.2MM on a primary and secondary residence.
So, it would appear that you have no capital gains issue since its tax free. So, a 1031 isn't necessary and worrying about a 2.99% interest rate is ridiculous. What's the cash flow?
You can sell the house and, it appears, take 100% of the profit tax free. Or, if you want a long term hold, refi it and cash flow like a banshee.
Equity is the absolute worst enemy of investors so stop worrying about it and the interest rate.
Equity doesn't buy groceries. Cash flow does.
Analyze the cash flow and make your decision.
@Jeremiah H. what about seeing if you can get a HELOC.? Good luck
Michael
@Jeremiah H. what about seeing if you can get a HELOC.? Good luck
Michael
I haven't been able to find anyone that's willing to do a HELOC on a rental property. Am I not looking hard enough?
You have a problem. It's a good problem to have though. I don't know if there are HELOC lenders that'll lend on non owner occupied properties.
I'm sure if you look hard enough your bound to find a lender that'll do a 2nd, but it's highly likely the rate they'll charge will make a refi look much more attractive.
But that's not why I posted in this thread. I'd offer that you should consider looking at your "problem" through a different perspective.
I'm going to assume your whole reason for wanting to buy yet another property is part of a larger plan to own a portfolio of rental properties. As an investor looking at growing a portfolio you want to be able to look at your assets, remember this is no longer your home, from an unbiased 3rd party perspective.
Now, I'd recommend you do a complete analysis of your investment property. What are the metrics? What are you earning on investment? Specifically what is your ROE (return on equity)?
Can you do better in that equity in another investment? If so what are your costs to gain access to that equity? Then with what equity is remaining will that invested in a different deal become a better investment?
If it would then I think you'll at least know what would be a better decision as to what to do with your existing investment. If it's not then perhaps you continue on your current course and maybe look at pulling out some equity after inputting those costs and reduced income and assessing those results.
Two additional thoughts. You're not losing anything if your increasing your return by redeploying equity into another larger property. Likewise, you will also not be losing if you recapitalize the current investment property by stretching the term at a higher interest rate so long as you leverage that equity into another deal that increases the overall ROE. Lastly, don't fall in love with real estate. To many investors get attached to their investments emotionally.
Look at your investments objectively and make decisions accordingly.
@Jeremiah H., if you owned and lived in the home as a primary residence 2 of the last 5 years, you have a capital gain exclusion of $250k (gain) if you're single and $500k (gain) if you're married filing jointly on combined lien amounts up to $1.2MM on a primary and secondary residence.
So, it would appear that you have no capital gains issue since its tax free. So, a 1031 isn't necessary and worrying about a 2.99% interest rate is ridiculous. What's the cash flow?
You can sell the house and, it appears, take 100% of the profit tax free. Or, if you want a long term hold, refi it and cash flow like a banshee.
Equity is the absolute worst enemy of investors so stop worrying about it and the interest rate.
Equity doesn't buy groceries. Cash flow does.
Analyze the cash flow and make your decision.
so, if you refinanced, you would add 2% to your interest rate. you take the money and buy more properties and add 25% increase, at least, to your net worth. and the problem here is???????
I would sell while you still can take the profit w/o paying capital gain tax. As was mentioned before, you have to have lived in the house 2 of the last five years. So if you lived there two years, then you have three years in which to sell.
Unless this house has a huge appreciation potential I would sell
@Jeremiah H. I think that if you keep searching you should be able to find a lender willing to do a HELOC on an investment property. It will likely be a smaller local bank who does portfolio loans. I found one near me and while I haven"t used them for a HELOC yet it's nice to know the option exists. Again best of luck.
Michael
Cash out refi @ 4.25% if you have less than 10 loans. Take the cash and buy more deals. The higher rate is what you're giving up for access to your equity tax free. I feel it's a trade off worth making if you can locate more attractive deals. If you can't, keep it.
I'm with you...cash flow focused, appreciation icing :-)
But...Tax free cash from a cash out refi buys plenty of groceries.
See your CPA too.
You might want to go in for a tax check up on everything
@amanda Han
@Jon Q.
Completely agree. I only mentioned selling it because that's what the OP mentioned when he referred to the 1031. Not sure what kind of HELOC or HELOAN he's going to get on a NOO Cash Out Refi but I'd get as much as I could get and STOP creating equity in properties.
I never want equity in any property and I don't put cash down on deals. Everything is no money down. Value and price are irrelevant if I can get the terms I want.
In REI, cash is king, credit is queen, and equity is the enemy.
@Christopher Telles @Vincent Polisi@Jon Q.@Brian Gibbons@Michael Leffelholz @Jean Bolger@Mark Elliott
Thank you for so many great responses. I wasn't clear in my original post. I purchased the house 3 years ago, but I moved out after a year or so. It has been renting for almost 2 years so I don't qualify for the 2 out of 5 year primary residence exemption.
I have a meeting Tuesday with my CPA to discuss this and other topics.
I believe my main error was I was hung up on this great rate of 2.99% and you guys made me realize that giving that up and going to 4.99% isn't the end of the world because I'm going to take that equity and make much much more than 4.99%.
An issue that is making me lean more towards selling it is that it's not an ideal rental. I can't get anywhere near 1% return and I'm getting that on almost all of my other rentals. If I didn't already own this house I wouldn't buy it as a rental, so why not sell it and go buy houses that fit my criteria?
Something that I want to make clear is real estate isn't my main source of income so I'm not as cash flow driven as a real estate only investor. Not sure if that changes any advice you guys and gals might give. Thank you all so much!
@Jeremiah H.
If you're dealing with the "tenants and toilets terror" for no cash flow (not sure I understand no cash flow given the equity position and interest rate, but..), I'd dump it and move to greener pastures.
it doesn't change my thoughts, jeremiah. raising the intrest rate isn't a big deal unless it is a huge amount. selling the property may seem a viable option, sure, but in refinancing, you basically are selling it, to yourself. the tenant is paying the payment for you so there is no out of pocket cost to you, plus i am sure you can do much more with the additional money to offset anything that raising the rate will cause. use the house as a " money house", if for nothing else
OK SO
I have recently run into a similar issue... my issue being that I have 5 loans and of those 5 I am trying to do a refi cash out on a duplex...well when i bot it it was a single family non owner, that i coverted to a duplex
So far ive learn this:
There are banks that will do a non owner HELOC type of loan, and i think rates are comparable to a non owner financing... HOWEVER it needs to be on a SINGLE family residency.
I think if you called like a bank of the west or even wells fargo they will be able to do an equity line for you
but if you dont have more than 3-4 loans, I would say do the refi cash out and get a new 15 yr loan with your new balance then use that cash toward an investment..the reason i say this verse a heloc is because if you plan on holding the current house for a long time you might as well fix the payments on it instead of let a heloc linger and if u go heloc and later decide you want to fix it , thats 3 loans you need to genereate... 1 for heloc, 1 for new investment, then 1 to refi rate term on your first original investment. might as well cut that third step out and go refi cash out from the beginning , then invest that money into new project and fix your costs.
for my own particular situation I am still looking for a non owner occupied lender that will do equity lines of credit for multi units and im striking out so far.
I never sell my SFRs unless (1) my original thesis about the property was wrong or (2) the neighborhood has significantly changed such that I can no longer attract quality tenants paying high rents to generate my cash flow target.
@Jon Q.
Capital gains has nothing to do with equity and down payments. Capital gains is based off your basis in the property. You can argue that cash flow does have something to do with equity and down payments but the first rule of investing is don't lose money. With no capital at risk, there's nothing to lose. I've never put money down on any deal in 25 years and wouldn't. It's simply not necessary. I've got a friend with more than $2MM in equity that was on the verge of bankruptcy in 2008 because you can't eat or spend equity.
Equity is the enemy of investors. It's nothing other than an insurance policy for banks. It does absolutely nothing for investors except tie up liquid assets in a vehicle where the funds can be lost overnight as everyone saw in California, Nevada, Arizona, and Florida in 2008-9, create a negative rate of return and increase tax liability.
And, your experience is your experience. If you go to my website, you can see properties up to $2MM, none of which have anything wrong with them. I don't deal in rat traps.
I don't look at anything under $300k.
Doing a no money down deal doesn't mean the seller is desperate. It means you've created a value proposition that makes sense. I don't do vulture investing where I'm trying to beat up some poor sucker on a $30k house who's in desperate need of cash.
To your point about not selling houses unless it meets those criteria. I buy house that meet roughly the 1% rule. In my area they aren't everywhere, but they are out there and in good neighborhoods and come with quality tenants. This house at it's current value no longer would meet that rule with a refinanced loan. If we refinanced up to 180k we won't be anywhere close to $1800/month in rent. Which would now change my theory on buying the home if it was available today. So selling it to myself wouldn't make any sense, correct?
Using real numbers, I believe I can sell it and walk with 90k minus 7k in capital gains tax. I can use that 83K to purchase just shy of four $110,000 properties with 20% down on each property. Getting 1% return I would be receiving $4400/month in rent, have 4 appreciating homes, and still maintain 20% down on all of them.
If I refi up to 80% I can pull out $54,000 and avoid capital gains tax. With that I can purchase two $110,000 properties and have $10,000 left over to work on the third. I would still own the original home and be collecting $3500/month in rent.
Do these numbers seem logical based off using the numbers I know to be correct in my area for rents and home values?
To your point about not selling houses unless it meets those criteria. I buy house that meet roughly the 1% rule. In my area they aren't everywhere, but they are out there and in good neighborhoods and come with quality tenants. This house at it's current value no longer would meet that rule with a refinanced loan. If we refinanced up to 180k we won't be anywhere close to $1800/month in rent. Which would now change my theory on buying the home if it was available today. So selling it to myself wouldn't make any sense, correct?
Using real numbers, I believe I can sell it and walk with 90k minus 7k in capital gains tax. I can use that 83K to purchase just shy of four $110,000 properties with 20% down on each property. Getting 1% return I would be receiving $4400/month in rent, have 4 appreciating homes, and still maintain 20% down on all of them.
If I refi up to 80% I can pull out $54,000 and avoid capital gains tax. With that I can purchase two $110,000 properties and have $10,000 left over to work on the third. I would still own the original home and be collecting $3500/month in rent.
Do these numbers seem logical based off using the numbers I know to be correct in my area for rents and home values?
Generally yes, lender terms will differ...75% LTV is more common. It's a good time to cash out refi and hold cash to acquire deals in markets once they hit bottom (most markets are past their peak and softening). Rates will likely rise.
@Jon Q.
Capital gains has nothing to do with equity and down payments. Capital gains is based off your basis in the property. You can argue that cash flow does have something to do with equity and down payments but the first rule of investing is don't lose money. With no capital at risk, there's nothing to lose. I've never put money down on any deal in 25 years and wouldn't. It's simply not necessary. I've got a friend with more than $2MM in equity that was on the verge of bankruptcy in 2008 because you can't eat or spend equity.
Equity is the enemy of investors. It's nothing other than an insurance policy for banks. It does absolutely nothing for investors except tie up liquid assets in a vehicle where the funds can be lost overnight as everyone saw in California, Nevada, Arizona, and Florida in 2008-9, create a negative rate of return and increase tax liability.
And, your experience is your experience. If you go to my website, you can see properties up to $2MM, none of which have anything wrong with them. I don't deal in rat traps.
I don't look at anything under $300k.
Doing a no money down deal doesn't mean the seller is desperate. It means you've created a value proposition that makes sense. I don't do vulture investing where I'm trying to beat up some poor sucker on a $30k house who's in desperate need of cash.
Vincent,
I respectfully disagree with virtually everything you've said.
"With no capital at risk, there's nothing to lose."
Not true. You can lose trust, your reputation, and your credit. The first two are the most important things you have in this business. Though it diminishes in importance as you grow your business, not having the third makes it very difficult for newbies to start out.
How much money you put down affects your debt payments and therefore your cash flow. So deciding how much to put into each deal is a risk management decision. High risk tolerant investors will put little. Conservative investors will likely put a higher percentage down. The right question is how much risk are you willing to take?
Then there is the requirement by lenders that you out money in the deal. If you're able to locate attractive deals in quality locations, with attractive owner financing with zero down, great. I'm impressed. That's quite uncommon.
In addition, if you're raising capital from HNW private investors, they will not invest with you unless you gave skin in the game.
@Jon Q. You're entitled to your opinions but understand that they're your opinions, not fact.
And herein lies the issue with forums like this. People want to decree something as fact and regurgitate the standard party line when there's no basis in fact whatsoever.
As a result, each new person is propagandized with the same incorrect information.
With no capital at risk, there's nothing to lose but time. You're commenting on deals you don't understand presumably having never done one and want to act as an expert.
Investing in no money down deals doesn't lose trust or reputation and it doesn't use credit at all so there's zero impact to credit, hence, no money down owner finance.
Finding attractive deals in quality locations, with attractive owner financing with zero down is a non-issue and I've done it many times in your home state and in fact, your metro. They tend to be fantastic deals where you are because the price points are generally a mil plus which creates six figure down payments, great cash flow and huge upside on the backend.
The answer to your question, which isn't the right question, is, I'm willing to risk my time. That's it. I don't need to risk money.
The right question is: why risk money when it's not necessary when you can generate immediate income, cash flow and backside profit?
Newbies don't need cash, credit, or equity partners. They need education which is sorely lacking in these forums because mob rule to protect and defend the status quo ensues.
And, again, I don't know where you come up with this stuff because HNW private investors are everywhere without requiring skin in the game. I personally raised over a million dollars in liquid, unsecured capital wired directly to my personal bank account for the opportunity to participate in a deal with me. My investment or skin in the game? My experience and time. In fact, I did a call with an RIA last week with $20MM to invest and he couldn't care less whether I have skin in the game or not. His only concern is getting a reasonable rate of return that outperforms the market with a secured and collateralized cash flowing commercial property.
If I can make a suggestion and I say this with all due respect, you're selling to your own ideals, not discussing reality. I've seen this many times where people have to defend their method because they put money down and want to try to act as if that puts them in some position of propriety over people who they mistakenly believe can't or need to. Putting money down doesn't make you a better investor with greater integrity. It puts you at risk unnecessarily.
Any investment you can do with cash down I can outperform on an investment with no cash down based on velocity, cash on cash return, ROI, IRR, EBITDA, cash flow, tax benefits, NOI, any metric you want. The math doesn't lie.
Like I said, you're entitled to your opinion and I'm not looking for a holy war but consider the possibility that there might be another way and another way that may be better than what you're doing.
If you have good tenants in place, I would let it be and refinance. Of course you have to do the math. What will the refi or cash out cost you? Have you found another property? If so what is your projected profit? If the numbers look good, and things are going smoothly with this property, why not have your cake and eat it too.
You're incorrect with regard to your comments about me. I'm a full time investor and have over 12 years experience in many markets nationwide.
I also think you're incorrect about many other comments you're making, but let's agree to disagree.
@Jon Q.
Here's the difference in me and many of the strutting peacock braggadocios blowhards on BP and Facebook (not referring to you):
I can back up everything I say with documentation and recorded calls.
I have a private Facebook Group with over 7000 members as well as paid coaching clients and JVPs, and membership subscribers and everything I do is done with total transparency and documented proof.
My PBX records all calls and I post them for people to hear so they can hear actual deals done and I post wires received. I've got two calls you'd appreciate.
One is with a Major League Baseball player on his $1.7MM house and the other is with his financial advisor who you will hear tell me he understands I'm going to make over $100k on the deal and has no issue with it because I deserve to be paid.
Anyway, the purpose of this forum is to learn and hopefully I can inspire you and others to think outside the box and consider some new ideas because having an arsenal full of weaponry is how you survive and thrive in the ever changing arena of REI.
Try a brick and mortar local/regional credit union or bank. I'd try CU first, have had good success with them. Here they also have a "Signature" Loan that has no collateral and is based on your credit and good name.