What to do with almost $400k in equity?

Question

My husband and I moved out of our SF home to make it a LTR last December to buy a lake house that needed some serious renovations. We planned on doing a year live-in flip which is falling right on schedule and wrapping up within the next month or so. The plan is to have it up and running as a STR in the spring.

We bought the lake house for $418k with a primary residence conventional loan at $390k 3.3% interest. It’s a beautiful property on Lake Granbury with multiple buildings, pool, hot tub, boat slip, two docks, stone patio, and much more all on one acre. Our realtor ran comps in the area today including all our renovations and his estimate came in at $785k, which is significantly higher than anything we ever imagined. If these numbers are correct, we’re sitting on $395k in equity. I’m a little less skeptical about these numbers because a home that needs updates with similar square footage on .25 acres in our same cove sold for $800k a few months ago.

I know we could just sell but we don’t want to sell this property. We’ve put so much heart and soul into this property and want it to be our family lake house for days we want to block out for our family. The property is also estimated to make $100k in gross annual revenue.

I bought my first house at 23 and we've taken the slow route to investing by living in our houses before renting them out. With this new estimate I know we can't just sit on this amount of equity, especially when thinking about our return on equity. We've considered taking a HELOC out and reinvesting some of the money because a higher rate on a HELOC would be better than raising the rate of the entire loan.

I'll also add that we're under contract to sell our LTR that I bought at 23 and preparing to buy a house for us to live in. This will probably be another STR in the next few years or so when we're ready to move projected to make $60k gross annual revenue.

I think we’re more stunned than anything because we never imagined that we’d be sitting on this much equity in such a short period of time.

If anyone has any ideas they’d like to throw around and bounce off we would love to brain storm with you.

I’ll also add that we’re under contract to sell our LTR that I bought at 23 and preparing to buy a house for us to live in. This will probably be another STR in the next few years or so when we’re ready to move projected to make $60k gross annual revenue.

I think we’re more stunned than anything because we never imagined that we’d be sitting on this much equity in such a short period of time.

If anyone has any ideas they’d like to throw around and bounce off we would love to brain storm with you.

Allan Smith · Answer

I didn't really see a specific question other than the title. So all you can really do is refi or get a line of credit for projects less than 12 months. Or just leave the equity and enjoy the increased cash flow.

Kenzie McIlvoy · Answer

That’s exactly what we’d love to do!! Thanks for your response. It’s very encouraging!

Brad Hunton · Answer

I live on Lake Granbury as well and our home appreciated significantly with a 2.7% interest rate. I could have sold it 8 months ago for an outrageous amount but we missed that boat. So I used a local bank and took out a HELOC and used that acquire four additional rentals. While my debt increased the extra flow puts me in a much better position than I would have been.

Jaron Walling · Answer

Why rent a property is SF when you live in DFW?

When did you buy the lake house for $418K?

That's a ton of equity at a stupid low rate. I wouldn't sell that ever.

Michael Vinson · Answer

Congrats!  That is awesome.  My wife and I live here in Granbury and love it.  I guess the only thing I can offer is how we are approaching this market and maybe reaffirm the HELOC you already mentioned.  I would not refi if I did not have to at these rates and the HELOC may be the ticket for you.   It’ll be easier to get a HELOC while you live there but maybe count on a conservative appraisal.  Just manage your debt!

We’ve done a little bit of many things in RE investing since 2019, including an Airbnb on the water, rentals, new build on the water that we are trying to sell currently, flips, etc.  here is what we are doing:

Currently, we are trying to pay down debt and accumulate more cash and cashflow to better prepared for the downturn we are in.  That’s not to say we are not offensive (I’m always looking but I’m heavily discounting everything I’m looking at), but I’ve not gone through a significant economic downturn as a REI and I’m trying to prepare the best I can.  I am in oil and gas and have gone through many commodity busts, and cash reserves has always gotten me through.

I think you’ve already mentioned y’all do not want to sell.  I was very surprised in the lack of showings on our new build.  It’s a small SF on a canal that we initially priced very aggressively but we missed the boat to sell aggressively.  My wife listed a house in FW and is under contract and appraised, but be mindful that the market is shifting and old comps may be of little worth if they are before this past fall.  With it being winter and rates 6-7%, it’s much slower than anticipated and that is weighing down prices.  We will rent it out if we do not see enough traction on our lake house.

I would strongly advise discounting your STR income as well.  It’s a tough market right now and marketing is crucial. Be skeptical of what the calculators tell you. We opened ours in April and this summer was very good, but overall, our income is at least 30-40% less than anticipated.  Our customers love our product, so this is telling us we likely have a marketing problem.  We’ve decided to find professional management instead of trying to DIY it. That has been our experience so far.

We are also clearing out a property that will be more of a burden with little equity for us.  We picked up a small cabin in Granbury from the 1880s. We intended to Airbnb it.  But I cannot find a contractor who can build what we visioned and for us to have equity in the deal.  For a DIYer, this project could be a good one, but we think our attention would be best served looking for amazing deals, then trying to make this one work for us.  So I’ll be listing it soon.We bought one of our flips as our home and while I do not like the interest rate (or the mortgage), we still bought with a lot of equity and I will put in an rv pad for additional income.

That is how we are positioning.  I hope that is useful to you.  In short, I’d look at the HELOC if you are comfortable with the risks and can manage the debt.

What to do with almost $400k in equity?

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