I have $725k in equity. Whats the best way to Invest/Leverage?

Question

Hi everyone. We currently have 2 rental homes and both are completely paid for. The rental houses have a combined equity of $725k. Also have $100k in equity in the house I live in. The 2 rental houses bring in $1900 and $1350 monthly. I'm building a rental in the basement in my current house that should bring in $1000 monthly.

My question for all the real estate investing pros is this: What is the best use of this equity? Where or how do I invest it? Would love to hear your ideas on this.

thanks, Marc

Kevin Dean · Answer

Hey @Marc Webster, based on the data you have provided I'm assuming you're already meeting your monthly expenses without issue. Unless you need the cash flow in order to live, I would recommend diversifying in a couple of ways.1. Diversify Geographically - you don't want all of your wealth tied up in one market.2. Diversify by Asset Class - assuming you are keeping all of this portion of your wealth in Real Estate, I would explore putting your money into other real estate asset classes in addition to the single family residential space. You might want to consider shifting some of your portfolio into asset classes such as self storage, medical office or multifamily just to name a few. If you do not have expertise in these areas, but you do have the desire, there are a good number of experienced operators on BP which can get you moving in the right direction. 3. Diversify between High Cash Flow Markets and High Growth Markets - Real Estate 101 says to buy for cash flow and not for appreciation. While you certainly want to make sure your investments cash flow so that you can meet all debt obligations, cash flow doesn't accelerate your equity nearly as fast as appreciation can. Consider splitting a portion of your portfolio between both strategies.If you try to become an expert in all of the strategies above, you will probably end up accomplishing nothing. The good news is that with that amount of equity, you can spread your money among both active and passive projects which you qualify as meeting your risk/return criteria. If you can leverage both the equity in your current portfolio as well as the time and experience of others, you can put yourself in a much better position and should be able to boost your returns pretty quickly.I know those recommendations are a bit vague, let me know if you have any questions on specifics!

Jason D. · Answer

@Marc Webster so you're earning 3.6% gross on your investment. After expenses, maybe 2.5%.I would do a 1031 exchange into a downpayment on a nice sized apartment complex, or a few smaller ones.

Bob Woelfel · Answer

The best use would be to move on from these properties IMO. Even if you sold and purchased other property with cash, you should be able to double your gross income with that amount of money. Now, if you wanted to get aggressive and 1031 into larger buildings you should be able to do significantly better than that. Every situation is unique because of markets and personal taxes, etc. But if you're just talking about shifting dollars around for the highest return then I would look at moving on. Best of luck

Jason D. · Answer

@Scott Krone I dont know enough about opportunity zones to make that suggestion. But, with some research, they could be an excellent option.

Canesha Edwards · Answer

@Marc WebsterHey Marc,Have you looked into Qualified Opportunity Zones? This might be a good way to put your equity to use while receiving a tax break. All the wrinkles haven’t been ironed out yet, I think it’s something worth looking into.

Edward Liu · Answer

This depends on your age and overall wealth situation. If you are 65+ or very close to retire (and equity is majority of your wealth), then my suggestion is don't bother with change anything and get the stable income. If you are younger and have enough wealth so okay with more risks in investment, then $725k generating $3500 monthly gross rent seems low. These rentals are actually not good rentals purely based on numbers (you are far from 1%). To get higher income, sell them and invest else where that can generate more.

Canesha Edwards · Answer

@Allyssa MccleeryHere’s another article that provides a more detailed explanation but in simple terms. https://www.nar.realtor/taxes/background-qualified-opportunity-zones

Allyssa McCleery · Answer

@Canesha Edwards Thank you for the information!

Jay Hinrichs · Answer

take some cash and buy a sustainable repeatable business that will generate far more than any rental property.

Jonathan W. · Answer

@Marc WebsterJust a suggestion Find a lawyer, consider using them to go through a 1031 property exchange and upgrade to commercial investment propertiesI don’t the semantics on selling multiple properties for this reason or if you could but I imagine you could. I’d love to hear otherwise but it is what some people do when they hit a higher number and can move into property that has a better cap rate. Word of advice if you do go with this, use a lawyer. It can go terribly wrong for you if it’s done wrong and having a lawyers name behind it will keep safe and keep a lot of problems you could run into from happening, especially when they see that lawyers name.