Thoughts on leveraging current equity to purchase REI?

Question

Hi everyone,

My current strategy is house hacking but l realized recently that it’s hard to make a property cash flow with current real estate prices. That being said my property has gained a lot of equity since I bought it and I was thinking of leveraging the equity to buy an investment in another market. I’d be curious to hear how it went for you and what type of equity cash out you used? Thanks!

Jonathan Styer · Answer

If you have the equity and want to scale your investments, that is a great way to get the capital for your next deal. While you may not be cash flowing great in Denver, I imagine you're saving a bunch in living expenses by having tenants which helps the bottom line. I'd suggest checking out Columbus, OH if you're looking to invest out of state. Great mix of appreciation and cashflow.

Christian Albright · Answer

Thanks Jonathan, the Midwest is definitely a market I’m considering I’m originally from Syracuse New York and was considering some properties there since I know the best neighborhoods but New York is a difficult state with very high taxes and low appreciation (at least in upstate). I hear Columbus is on the come up I’ll have to check it out, thanks for the tip.

Nick Cooley · Answer

Hey Christian, you've gotten some good feedback on the pros/cons of utilizing equity to grow your portfolio, so I won't belabor that point, although at face value it's easy to see the allure of tacking on additional debt at 4% to go and buy assets that may rise as dramatically as 16% this year (according to Redfin data center.)

As far as Denver being a hard market to cash flow, the data also shows that home values have risen more dramatically than rent prices since 2012 across the country, so the data supports what you're "feeling" on the ground.

Finally, to voice a contrarian opinion (I'm not a big fan of buying 1 door at a time out of state,) what would it look like if you turned your current house hack into a rental and got another primary residence with 3-5% down. Have you run the numbers to see what the return is on that?

Chris Levarek · Answer

@Christian Albright We've been doing this for years. In fact most businesses do, especially when getting started. Nike was constantly in debt to grow their business(read Shoe Dog). Leveraging your equity is why real estate is possible. If you choose to do it all in cash, you rarely scale very fast at all. I prefer Home Equity Line Of Credit. Now that we have a business, of course Business Lines of Credit help, but getting started, Home Equity is great.

Joshua Janus · Answer

I would say that living for free or close enough is a great advantage of a house hack, and finding a property that cash flows positively with you in it is a difficult feat in most markets. I am going to be house hacking in Columbus and hope to break even and live as close to free as possible.

Remington Lyman · Answer

Yeah Columbus, Ohio has been a great market!

Kyle Deutschmann · Answer

Hey Christian - I have a number of clients that do exactly that. You could either get a cash out refi if you want a lump sum on a fixed rate, or a HELOC, but that would generally come with a variable rate so a little riskier with rates rising.

Ben Einspahr · Answer

Hello, @Christian Albright. I could not agree more with @Nick Cooley. Turn you current HH into a stabilized rental and buy a second HH. There are great loan programs out there that would be perfect for a savvy guy like you. You should check out the Bank of America Grant Program.

I have an out of state rental but I am not a fan of it. Mainly b/c I do not have a good team in that market. However, I am a fan of diversifying your portfolio in on state with only a 2-4 hour drive away. It is worth looking into the Springs and Pueblo. In 2023 my plan is to 1031 my first HH into a multiunit in one of those markets. I have investor friendly realtors and contractors I trust there.

Best of luck!

Christian Albright · Answer

I agree Josh. In my current House hack I am not living for free but pretty close to it as I expected. It seems though that real estate prices in the Denver area have risen so quickly that rents have yet to adjust to accommodate them. Even after I would move out (after 1 year ideally) it seems hard to make a property cash flow. I have some other ideas about how to make it work so it’s not totally out of the question, but also trying to think of other strategies for when the time comes to pull the trigger.

Thoughts on leveraging current equity to purchase REI?

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