What to do with my Equity?

Question

I'm seeking advice on how to best utilize my equity across multiple properties. Below are the details of each property, including purchase price, current estimate, and equity, along with their respective cash flows:

Home 1 - Condo, (2 BR, 2 Bth) Fayetteville,NC- Purchase price $50,000 - Current Estimate $75,000, loan amount 0 = Equity $75,000
Cash flow - Rent - $825, PM Fees $75, HOA Fee $100, HOA Assessment $163, Taxes $50, Ins $25, Loan Pmt $0 = Cash Flow $412

Home 2 - Condo (3 Br, 2 Bth) Fayetteville,NC- Purchase price $89,000 - Current Estimate $155,000, loan amount 0 = Equity $155,000
Cash flow - Rent - $1250, PM Fees $112.5, HOA Fee $231, Taxes $90, Ins $30, Loan Pmt $0 = Cash Flow $786

Home 3 - SFH (3 br, 2 Bth) Little Rock, Ar - Purchase price $189,000 - Current Estimate $300,000, loan amount $85,000 = Equity $215,000
Cash flow - Rent - $1500, PM Fees $150, Taxes $269, Ins $156, Loan Pmt $766 = Cash Flow $159

Home 4 - SFH (3br, 2 Bth) Abilene,TX - Purchase price $225,000 - Current Estimate $315,000, loan amount $51,600 = Equity $265,000
Cash flow - Rent - $1850, PM Fees $185, Taxes $583, Ins $145, Loan Pmt $1400 (0 Interest) = Cash Flow -$463

Total Equity = $710,000

Total Cash Flow = $894

Sell, Sell with 1031 exchange, Cashout Refinance, HELOC'S...Too many options, i don't know what to do.  I know I need to do something with all of this untapped equity.

What do you think are the best options for me to utilize this equity effectively, and why do you recommend those particular choices?

Thanks

Melanie P. · Answer

Which DSTs are you recommending amd which "institutions" have their money invested with them?

Selling your real property and buying into a syndication is similar to selling to go to Las Vegas. Read up on recent syndicator results here (paused distributions, captial calls, lost principal) before altering course. A 1031 exchange would seem to make a lot of sense, but you need to have a firm plan in place to execute on this when you sell.

Chris Seveney · Answer

@Jason Mergl

I would either sell and do a 1031 or I wouldn’t do anything- yes you have untapped equity but your borrowing rate is going to be greater than the cap rate so you will have negative leverage.

Jay Hinrichs · Answer

I think the math is off his cash flow from his numbers is more like 1800 a month.. not 780 he mentioned. . and the 700k equity will be whittled down with sales costs no doubt.

Mike Terry · Answer

@Dave Foster is right on.  when I was comparing your portfolio reporting to mine. I noticed you don't account for repairs, vacancy and capital expernitures.  This gives you an inflated cash flow number.  I subtract those off the top to compute cashflow.  When you consider those expenses your cash flow to your equity is pretty low.  I would definetly sell 3 and 4 because I think in many years they will both be cash flow negative.  Redeploy that capital for a better retrun in another investment (stock etf? private lending).   Hell your 530k in equity will produce more return in treasuries... right now almost 5 percent.  I know that is not a long term solution, but at least look at the math.

Dave Foster · Answer

@Jason Mergl, None of your properties are home runs as far as NOI to equity.    Properties 3 and 4 especially are killing you with your equity producing very little.  The real take away on all of this is that a refinance isn't going to make them perform better.  Their performance will decrease.  And with the interest rates we're seeing these days, It's doubtful that you can get a superior enough return on a purchase with a refinance to offset the decreased performance on your old property caused by the refinance.

But what is attractive about 1 and 2 is that there is no debt.  That's the reason I'd consider holding on to them.  But just to hold not to refinance.   I would sell and 1031 3 and 4 and take that $450K of net equity (since the 1031 will allow you access all of the equity) and use it to buy better cash flow.

My own personal preference right now is to get out of interest rates way by investing in DSTs.  since the institutional financing on them becomes non-recourse to me.  And I can buy additional depreciable basis simply by utilizing higher leveraged DSTS.  This lowers my taxable income and my taxes on operating income.

Jon Sidoti · Answer

Would you ever consider selling and getting into commercial investments?

Jason Mergl · Answer

Melissa Haworth the Abilene property is an anomaly.  I'm not sure how to gauge my cash flow since the loan I have on the property is "ZERO" interest.  So all my loan payments go directly to the principal adding to my equity each month.

Lee Singleton · Answer

Hi Jason,

Wondering what to do with equity is always a good problem to discuss. The biggest question is, what kind of real estate investor do you want to be moving forward: an active investor or a passive investor?

If active, selling and using a 1031 to leverage into higher income-producing properties would be a great option.

If passive, selling and using a 1031 to invest in DSTs would make sense. You should be able to more than replace the income you are currently receiving on your 4 properties.

Of course this all comes down to where you as an investor and your overall goals.

I also sent you a private message.

Bob Stevens · Answer

700KISH, buy rentals, cash with 8- 10% or so NET caps. So about 5-6k  a month net VS 900 BUX, Simple, yes that simple.

John McKee · Answer

Let's break down your equity based on your numbers:

Property 1: 6.5% return on your equity (yearly cash flow/Equity)

Property 2: 6.08%

Property 3: .88%

Property 4: 2.09%

Property 3 and 4 are definitely too low of a return.  However your returns are probably even lower if you factor in upcoming major expenses like an hvac or roof replacement.

It really depends on your goals.  Are you trying to create more leverage? Are you done with managing real estate?  Do you want something passive?

Here are some options:

Option 1) The only way I know to double your cash flow from Day 1 is to sell and reinvest in mortgage notes at 12%.  In a few years your capital gains tax will be offset by the higher returns.

Option 2) Your other options involve risk or work such as MF syndications, flipping houses, 1031 into an undervalued property that you fix up

Option 3). Invest in a DST to avoid capital gains.  They have low risk, but also lower returns like 5-6%.

If you decide to keep the properties at least get a HELOC on the properties so that you can access your equity at anytime.