How can I build some wealth?

Question

I have two properties with about 250K in equity between the two. One is a single family home where I live with my family and the other is a rental two family home. We are in Westchester County NY which tends to be on the expensive side.

I want to do something else. I went thru a difficult financial period but I am starting to pick up. My credit is also getting better (close to 700). I would like to cash out and invest in another property or buy a piece of land and develop it.

Not sure about the process though. Any ideas or suggestions would be appreciated.

Claudia

Claudia Jurado · Answer

This is how I see my numbers....

Caleb Heimsoth · Answer

@Claudia Jurado the amount of equity you have means nothing without knowing the LTV.

What’s the LTV

Michael Ealy · Answer

Yes - if you like the property, it's in a good area and makes good cashflow, I agree on just refinancing some of the equity out to get some cash to buy another building.

Andrew Syrios · Answer

I think the vast majority on these forums are going to tell you to buy more real estate. Maybe refinance the properties you have to use that to purchase additional properties with strong cash flow or something like that.

Brian Van Pelt · Answer

Find a lender who will give you a HELOC on primary usually 80% of equity.

More difficult find a lender who will lend on non primary - Credit Unions are what i use NFCU some offer 60-80% of equity on non owner occupied properties with 1-3 years rental history.

Claudia Jurado · Answer

@Artem Pyryev

@Michael Ealy

@Brian Van Pelt

Again thanks, I understand the concept, but what I would like to do is keep both my properties, refinance them to take our money to use as a down payment for another investment property. Both properties that I have rent well in a good priced area, so i don't think I should sell them.

What do you guys think about this option?

Michael Ealy · Answer

Yup Artem, that is what 1031 exchange means and thanks for adding in the details.

Claudia, to make the long story short: 1031 exchange means you can buy a larger apartment using the equity from your 2-family rental without paying any capital gains taxes (as long as you comply with the 1031 exchange rules as Artem mentioned). The benefit of doing this - if successfully executed - is your cashflow is now going to be higher than before without you putting up any more capital.

Art P. · Answer

@Claudia Jurado

@Michael Ealy correct me if I am wrong on my explanation on your suggestion of 1031 exchange below:

"If you're not in a great financial situation, maybe 1031 exchange the equity in your 2-family rental house into a 10-unit or 20-unit apartment building. "

I believe what Michael alludes to is electing a 1031 exchange on your two properties to pull the full $250k minus costs of a qualified intermediary and traditional selling costs on both, to identify a new deal (45 days from sale of first residence) for a larger commercial multifamily residence that is greater than 95% of the sale value of the two relinquished properties, but does not exceed 200% of the Total Sale value of the two properties. You have up to 180 days, or end of the tax year (unless filing an extension) whichever is sooner to close on the identified property.

To give you a scenario, your two properties sell for $350k and $400k, respectively. You have ~$250k in equity you can use to fund your next deal within the 1031 exchange parameters. The identified property would need to be at least $712,500 (95%) and no more than $1,500,000 (200%) to qualify. If you can secure a commercial multifamily residence within that range within 180 days, you carry over the basis of the two sold properties into the new one and defer any gains recognized to the newly acquired property to be recognized upon the future sale of the property or further deferred with a subsequent 1031 exchange.

Claudia Jurado · Answer

Got it. I understand what you mean. Thanks

Claudia Jurado · Answer

Thanks for your input guys. I do agree with you on the developers point of view. Not there yet.

I would like to look more into using the equity to get more properties. I don't have any bad debt and I do have an annual income of over 100k. Can't save 30% right now but will be able to in a few months.

Michael Ealy, can you please tell me what you mean by:

"If you're not in a great financial situation, maybe 1031 exchange the equity in your 2-family rental house into a 10-unit or 20-unit apartment building. " ?