Equity or Cash for next Purchase?

[Doug McKinley]

Hello All. I'm new to the site and currently own a residential home in southern Michigan that I rent out as a Vacation Rental. I purchased the property for $150,000 in Oct'2015 and spend the winter of that year renovating it from it's dungy 1950's look to a traditional/modern lake house. In all I've spend about $20k+ on renovations (New Roof, BR gut and remodel, furniture, driveway water softener, flooring, lakeside deck and landscaping. Since we put it on VRBO in April of 2016, the house rents out solid between Memorial Day & Labor Day. I increased the weekly rent in 2017 and again in 2018 without any dip in demand.

Because of the high capacity rate of our house and the very apparent demand in the area for additional vacation rental properties, I'm looking at finding our next property.  The current house is only a 2br & 1bath 1100sqft that can sleep 6. My next investment I would like to go for 3br's & 1.5 or 2 baths. I feel this will feed larger families and therefore allow for higher rent costs. The fact that I got my house for $150k is in my opinion luck. It was a diamond in the rough with over 100ft of prime lake frontage and people avoided it because it was ugly. Given the increased pricing of recent lake house sales, I suspect my next house will be between $250k & $300k. Both my neighbors houses were appraised for over $300k last year. Though my house is smaller and older, it's still 100ft of prime lake frontage so I'm guessing it would appraise currently for $200k.

OK, now that I've painted the picture for you, my question is: Can I use the equity in my existing lake home as the down payment for my next purchase? I also have roughly $30k in savings that I could use for my down payment with another $10k in reserves that I'm not willing to deplete. So, should I use equity or my savings to fund the next purchase?

Thanks for your feedback and I look forward to learning more from all of you.

Doug

[Thomas S.]

Equity is your savings. Pull it out and reuse as often as possible. Right now it is underutilised and in need of oxygen. Assuming you use financial wisdom and insure your income more than covers your leverage not using it is financially stunted.

Other more ultra conservative investors may differ so you must first decide if you are one of those or not.