equity stripping - cash out refi specifics

[Joshua M.]

Hello BP! I troll around here as time permits and have recently been seeking information pertaining to a specific question (or series of them) without really nailing down an answer with the kind of experiential wisdom that I have come to expect and appreciate from the BP knowledge bank. So, any input would be both welcome and appreciated.

We (my wife and I as tenants in common) own a 5 plex that we purchased for $250,000 with $20,000 down, owner financed. It has been about 3 years now and we've gained about $5,000 in equity through payments to principal. My question pertains to the equity we have created through improvements to the property and increased rents.

We have completely remodeled 3 units. One of which, our only 2BR, we occupy with our 2 children. In our market, I estimate we could rent this unit for $900-$1,000. The other 4 units rent between $625 and $700. We have made extensive repairs (more than I planned on, honestly) including a substantial re-wire, plumbing repairs, new roof, insulating of the attic, and we plan to re-side this summer. By the end of the year we will have an attractive, fully remodeled 5-plex in a decent area close to the University, shops, hospital, etc..

Preliminary calculating the commercial value as a function of the NOI and assuming a 10 cap we would seem to have gained a decent amount of equity - if we do not occupy the 2BR. Or am I wrong? The actual commercial value is set by the actual income of the property, is it not? and not the potential income of the property? and after 2 years of tax returns? Would this plan require us to relocate our family?

I am not opposed to relocation. The additional rental income will almost cover renting a single family for us to hop into, but if we don't have to I would prefer to not incur the additional expense and potential stress/upheaval.

Ultimately, I am desirous of using the value of our equity as a contribution to a down payment, along with some savings, towards a future loan on a more appropriate setting for my family.

I am open to selling, switching, stripping (equity), or other necessary means so don't hold back your suggestions. I spent almost 10 years in the woods of Northern Maine, the only guy for a mile in every direction, and I am seriously motivated to plop my but into a rocking chair on a wrap around porch in the middle 100 acres ....

Experiences, critiques, questions, etc are all welcome. Thank you very much!