How should I spend my $2mil equity??

Question

My sister and I got in to real estate investing after a family member passed away and left us a sum of money. We have both done a few BRRRR's now (not so much experience on the 'rehab' aspect, we've done small things for ~10k). Each of us owns a house in cash, plus a house with a mortgage (1 in Denver, 3 in LA area), plus a huge mansion in Hawaii worth about $6mil (no mortgage) that belonged to the deceased that we vacation rent out for a very tidy sum.

Several people have recommended we pull some equity out of the Hawaii house to reinvest. We are pre-approved by the bank up to $2mil and we are trying to figure out what/how to invest.

To make things simple (we both have other, full time jobs plus managing the other properties), we were thinking of starting small and using about 400-500k and buying a condo or house in LA to do a BRRRR. Our other properties were either bought in cash, or have a fair down payment so the monthly payment on the mortgage was fairly low.

After running numbers with our mortgage officer, he came back with an estimated 4.25% rate on a $400k loan, resulting in a $2000/mo payment. If the average place in LA at that price point rents for about $2800, we are worried our margin is too low once other expenses are factored in.

Is there some piece of this puzzle I'm not understanding? Do we just need to find a property at a rock bottom price to make these numbers work out? Won't that come with a whole other set of rehabbing expenses? Should we change our strategy completely? Help!

Note: don't message me about selling the house in Hawaii, it's a personal matter and selling it is just not possible.

Jay Hinrichs · Answer

you may want to talk to a wealth manager one that charges a set fee.. and come up with a comprehensive plan that may or may not even include real estate.. real estate is work and risk.

from all appearances you don't need to risk.

those that want to leverage their stuff up are usually in the growth phase.. I think your past that..

Dave Foster · Answer

@Taylor Elyse Murray,  Totally get not selling the HI house.  We have a family house in FL that has way too much of us in every corner to ever sell.  But if there's that kind of emotional entanglement why would you want to put it at risk???

At it's most basic - a mortgage is pawning your house for 30 years.  You can always buy it back from the bank.  But it's theirs for the length of the mortgage.

Go to one or two of your lowly leveraged properties - take out $100k in refi and use that as a down payment on that LA house you want to Brrr.  You're no more in debt than if you took out cash from HI and bought LA for cash.  But your debt (meaning risk) is confined to your investment portfolio.

Jim K. · Answer

I like that, Dave. A mortgage is hocking your house for 30 years. I'm probably going to borrow that.

Dave Foster · Answer

@Caleb Heimsoth, I'll just be happy if @Jim K. names a bridge after me :)

Caleb Heimsoth · Answer

@Jim K. You can borrow that saying, but only for 30 years and you have to pay @Dave foster 5 percent interest to do it

Steve Hartkopf · Answer

What is your risk tolerance or what it is you want to do with your life/time? I've got about half as much equity, a similar amount in other investments, am a senior, and have decided to just ride "into the sunset" with my current position. My investments support my current lifestyle and will leave a nice inheritance for the kids so why accept any risk? There are days, however, when that strategy feels a bit passive/boring and, with money still "on sale," I scan the net for real estate opportunities. So far I've resisted the urge to "do something because I can" and, instead, accept Jay Leno's advice: "You have to smart enough to know when you've already won the lottery."

Taylor Elyse Murray · Answer

Thanks for the advice everyone!!!

Sean Tagge · Answer

Of course take the advice of everything said above find out your skills, risk tolerance, where you are at, etc.

Me personally with $2M in equity to work with I would leverage that to buy a $3-5M value add apartment building roughly $1M for the purchase and another $1M for value add repairs on the property, closing costs, reserves etc. Add value, raise the rents over 1-2 years and refinance out your $2M (or as much of it as you can) in 2-3 years. Get it set in a 30 year fixed rate and cashflow. Then with the original $2M back in your hands, go repeat or pay off the house in HI its up to you.

I'd buy it somewhere in a cash-flowing mid-south market.

Greg Gaudet · Answer

Don't take this the wrong way, but it sounds to me like you should do some more research on the BRRRR method. Expensive markets like LA are typically not cash flow markets, their more of speculative markets in my opinion. You're buying and hoping prices go up, or you just have the means to be able to hold until whenever it is worth double what you paid for it. Read the BRRRR book and David Greene's book Long distance RE investing.

BRRRR could work anywhere, (I do it here in Maui) but it generally works better in lower priced cash flowing markets, such as Jacksonville, Alabama, Georgia, Memphis, OK, KC, TX, etc. I found a way to make it work with our median home price of $820,000 here only because I found a niche market of condos that I could buy for 100k each and rent for 1,700 each.

That being said, if I were in your position and had access to 2M to invest I would start searching for an apartment building and learning everything about commercial RE so I could be educated enough to find the right deal and be successful with it. I would expect you to make a whole lot more money by doing a value add MF deal than buying a few SFH rentals.

I expect some people to chime in and suggest MF syndication to me; I'm just not attracted to the idea of being responsible for a bunch of other people's investments. I'd rather just work for myself and invest my own money even though I know it's not as profitable or scalable.

Crystal H. Weston · Answer

Great post.

Sage advice being shared.

How should I spend my $2mil equity??

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