Is now the time to pull out equity?

Question

Hello BiggerPockets community,

This is my very first post...A little about me. I've been selling real estate in St.Augustine FL for 6+ years now. I have purchased three rental properties within the last two years and am lucky enough to have a lot of equity in each. I don't want to sell them however I am considering refinancing them while the interest rates are low. I have a quadruplex which has roughly $400k in equity (valued at $900k with a $500k loan) and another duplex which I own outright (valued at $400k). I don't necessarily need the money however I'm thinking about taking the equity out while the interest rates are low and "stock piling" cash to reinvest when the market dips. Just curious what the BP community thinks about future market predictions and what you'd do if you were in my situation (not a bad one to be in I admit).

I'm interested in purchasing more multifamily units however our market is extremely high and deals are very hard to find. I've been contemplating buying land zoned for multifamily and building new. This would ultimately help eliminate the things I struggle with (repairs/maintenance) and also allow me to rent to more qualified tenants. I have yet to meet with contractors to talk about cost to construct but that's on my to-do list. Any concerns with building multifamily?

Side note: I'd love to link up with investors, landlords, or anyone who has a passion for real estate in the St.Augustine area

Tamara Deering · Answer

If you are going to build new multi-family I would consider investing in opportunity zones, there are many tax advantages, you probably won't qualify for the most generous of them because you need to have everything in place by the end of the year but the incentives are phased.  Yes, if you can pull out equity and not increase your debt load I would definitely do it now.

Kevin Howard · Answer

Wow! First time posting and am impressed at the informative responses I received. I truly appreciate all of the input from the BP community.

The quadruplex I have was quit claimed over to me and I "assumed" the loan without actually notifying the lender (was a death in the family). I went ahead and titled the property using my LLC which raised a red flag on the lender's end when the name on the insurance policy changed (lender also merged which caused them to review their files). The lender is force placing another insurance policy in the deceased person's name ($3200 policy) since they are the one on the mortgage still. All of that being said, I will most likely go ahead and refi this property so that I can lock in a low interest rate and have everything "legit". I might take out an additional $100k in equity to assist with improvements and to have a little more cash on hand.

I'm on the hunt for more opportunities. I think until I actually locate something I will just leave the equity in the other properties. I do have some liquidity and I also have lines on credit at my bank which I can use if something comes up.

Tamara: Thank you for your response. I was unfamiliar with the "opportunity zones" but will do some research and see where those zones are in the community. Savvy idea!

One more thing...I would love to do a complete renovation at the quadruplex and start short term renting the units (we live in a tourist destination). The City has been cracking down on short term rentals and will only provide 100 short term rental permits which are all taken (and long wait list). One way around this is by doing a condo conversion on the quad. Has anyone done a condo conversion in Florida? Any estimate on cost to do so?

Paul Choi · Answer

Funny...Just found this article on the Wall Street Journal.  Clipped the first few paragraphs.

Fannie Mae and Freddie Mac Curb Some Loans as Regulator Reins In RiskUpdated Dec. 10, 2019 5:58 am ETFannie Mae FNMA +1.97% and Freddie Mac FMCC +2.17% are pulling back on some mortgages meant to make homeownership more affordable, their latest effort to rein in risk at the behest of their regulator.The two companies are cutting back on the proportion of loans they back to borrowers with small down payments, for example, and mortgages to deeply indebted borrowers.The regulator, the Federal Housing Finance Agency, says it wants Fannie and Freddie to be prepared for a possible economic downturn. Tamping down risk could limit their defaults and produce bigger profits, which in turn could help them appeal to potential investors. The FHFA has made it a priority to get Fannie and Freddie out from under government control, but doing so will likely require the firms to raise billions of dollars from investors.“Some of this really is a reflection of the increased emphasis and focus on: let’s do what we need to do to get out of conservatorship,” FHFA director Mark Calabria said in an interview.Fannie and Freddie undergird the U.S. mortgage market. Their recent pullback in some affordability-oriented programs feeds into a broader debate about the extent to which they should shoulder risk to make homeownership possible for modest-income borrowers.

Paul Choi · Answer

I would refi at current low rates and pull out cash at a safe LTV and hold on to the cash unless a great deal comes along.  When a downturn occurs, you will have cash to act and make acquisitions.  The downturn will be nothing like the last one but I remember back then, credit market and lending pretty much froze.  So unless you had cash and good relationships, folks had a hard time getting loans for commercial deals.  Refi'ing at a downturn is also harder with tighter credit restrictions and rates are higher.  Just my thoughts :)

Patricia Steiner · Answer

From a wealth management perspective, you don't pull out equity for the sake of doing so.  While interest rates are at historical lows, closing fees are at historical highs...everyone has their hands in your pockets.  So, pull out equity when you can reinvest/re-employ it for at least 2% return (the cost of inflation) - or leave it alone.  Equity provides you with financial strength and stronger borrowing power.  So, pull the lever when you have a purpose to re-employ those dollars because there is still a hefty cost in refinancing with fees.

Nathaniel Hovsepian · Answer

I have one question for you:

What would your cash flow be if you were to pull money out of the equity that you have in the properties?

Personally, I wouldn't take anything out until I had something solid that I was going to do with that money. I know that everyone is saying that we are at the top of the market and that it is going to crash at any second now, but why would you want to just have cash sitting in the bank for no reason?

You can always cash out refi later. Who cares if you lost a percent on interest rates down the road? You don't know that interest rates aren't going to keep dropping from where they are today.

You have to ask yourself what return on your money you are getting currently, and what return you get if you take that money out and either have it sit and wait for a maybe opportunity down the road, or reinvest into something else.

Is now the time to pull out equity?

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