WHAT TO DO WITH ALL THIS EQUITY

Question

Hello! Wanted some opinions on the best way to use the equity that has accumulated for RE growth, i have about 400K in equity and want to buy more RE for cash flow. Should i cash out refi? My mortgage payment will increase, cash flow will drop significantly but ill still have the asset for the future. 1031? I loose the property but 400K could go a long way for a bigger property, maybe more cash flow. Business Line of Credit? Simply use this to finance down payments and cash needed? any other suggestions or thoughts on how to grow?

Caleb Brown · Answer

I would look into a HELOC. Phoenix market is nuts so long term wise it'll continue to go up. With a HELOC you can have the line of equity to use as a DP. Maybe try to do BRRR'S to rinse and recycle the equity.

Curtis Denlinger · Answer

Say more about if you go the cash out route? I recently did a cash out. The mortgage payment for that property did go up about $400. I used the cash out money to buy another bigger newer property. I moved out an underperforming tenant, did a bunch of work to get that unit nice again and rented at market, and the other unit I just renewed their lease at market. The new property now cash flows over $1,000/month. So if you’re saying that cash flow will decrease for the property you are cashing out, that’s correct most likely. If you use that cashflow correctly, overall your cashflow should increase.

Juan V Lopez · Answer

Hi Larry, I actually just had a similar situation. A home we owned in Reno NV had about $500K in equity, so we cash-out refi'd it this summer. Took out $300K and at a 6% interest rate. Not ideal, but I knew the market we were going into was going to recess a bit, so I wanted to have cash ready for acquisitions.Our plan:• Sell the home in Reno within 3 years (market should be back up by then) and capitalize on the remainder of the gains.• Our old mortgage was $1400/mo. New mortgage is $3100/mo. $1700/mo difference. My wife has a big need for security, so I separated 3 years of these extra mortgage payments into a separate account to make up the difference ($1700 x 36 = $60K). That way, she feels secure and we still have extra cash to invest.• Invest the extra $250K into more cash-flowing assets during this market dip.That was my approach. Hope this helps. Wish you the best, brother.

Brian Jackson · Answer

Hi Larry, one option would be to do a cash-out refi with a hard money lender into an LLC, however the interest rate would be much higher than what you have now, especially the most recent rates. You would just have to weigh the pros and cons and ensure you are still cash flowing well, but it's an option to pull out up to 75% Loan to Value of your property in cash.

Dave Foster · Answer

@Larry Fullard If you're looking to get cash and also purchase future investments then a 1031 could be in your best interest. You said you have 400K so why not buy one smaller property for 300k and use the remaining 100k as a down payment on a second property. That way you have one property that you own free and clear so you can turn around and do a HELOC to get cash. Unfortunately you can't 1031 into a syndication because it has to be the sale of real estate followed by the purchase of real estate, and a syndication is not real estate its generally a membership interest in an entity that owns real estate.

Scott Wolf · Answer

Very difficult to find a syndication to roll a 1031 into.

Austin Johnson · Answer

have you considered syndications? roll your 1031 equity into a passive role (or active if that's your thing) on a much larger property. MAY increase cash flow and leverage the equity. that being said you can also refinance (run the current numbers) and leverage the additional capital to do the same thing.

John Bradley · Answer

What rate is your first position mortgage at currently? Do you have any current opportunities for 1031'ing the property up?

Alec Stephens · Answer

Hi Larry,Warren Buffet is a big fan of buy an hold. In my experience, cash out refi, secure longer term fixed rate to insulate from future rate increases and keep principal at balance such that rents will cover monthly mortgage and buy another property that cash flows...build the portfolio. Hard to predict what the future holds but if you plan for the worst and position for the best. Continue to use leverage...that's the benefit of real estate investing, superior returns as compared to all cash purchases and the interest paid (by your tenants) is expensed against the income. Over the long run the market will continue to appreciate, the tenants pay down your mortgages and your equity continues to grow....and then cash out refi and buy more. In the meantime, with fixed rate loans, adequate cash flow and moderate cash reserves you will be able to weather any downturns. Quickest way to accumulate significant wealth.

Brian Plajer · Answer

Hi Larry, It sounds like you have a great property and there is potential to increase cash flow with minor updates. I would invest in the property you have and get the most out of it. Then it will appraise higher and the cash out refi may make more sense depending on rates at that time.