Lots of equity in two properties, not sure what to do next?

Question

I’ll try to make this short....44yro married with 3 kids, good paying job, very conservative

Primary residence in Southern California. Owe 480k, property worth 1.5mil. Locked in at 2.65 for 30 years.

Rental Southern California owe 130k property worth 600k. Has had the same renter there for 13 years. Payment is 1900, tenant pays 2400. (Market dictates roughly 2700-2900 in rent, but they are great tenants.

Looking for some advise as to what the smartest long term play would be? Not opposed to owning more long term rentals or even short term rentals. Not wanting to leave the state, as most of our friends are.  But just scared as to what to do. I feel the real estate market is so inflated right now and people are just fleeing to other more affordable states. I’d hate to be missing an opportunity right now, but also worried about investing and the market taking a severe hit...any opinions would be greatly appreciated.

Joe Villeneuve · Answer

What you have right now is cash in the form of equity equal $1.5M that is wasting away.  It's face value is worth a mere $2.1M in property value.  If you sold the property, and reinvested it, that same equity could be worth $7.5M in PV.

The property isn't your asset, your equity is.  The property is just its temporary resting place until it moves on to a bigger and better location.  The longer you let it sit dormant, the more money you are losing.

Ana Marie B. · Answer

@Kevin Panella - Looks like you own 2 properties with amazing equity, congrats!

In the short term, I would incrementally increase the rent on your rental up to or slightly below market rate. (I opt for the latter to keep my properties attractive when in need of new tenants).

In the long term, I'd tap into the equity in either property to leverage a HELOC to purchase another property. Yes real estate is inflated everywhere at the moment, but you can begin the steps now to open a HELOC so when you find a property that fits the bill, your HELOC will be ready to go.

And even if you decide not to purchase another property, a HELOC is great for home renovations and other projects. I find it beneficial to have in my back pocket and I am fiscally conservative like you. Good luck!

Kristopher Kyzar · Answer

@Kevin Panella with that kind of equity, you have so many options.  Cash-out refinance to pull that capital out and redeploy in other investments (not my favorite).  Get a HELOC on either or both properties and redeploy that capital in other investments (this is my favorite).  Here's why...while a cash-out refinance does allow you to leverage into new investments, there are fees associated with it (loss of capital), it reduces your cash-flow (loss of income).  With the HELOC option, the fees are minimal, the money can be deployed and repaid over and over (velocity of money).  If you're interested in adding additional rental properties to your portfolio, you could actively invest employing the BRRRR strategy.  You could also look at turnkey properties and employ the BRRRR strategy.  You could invest in multi-family as an LP, or even a GP.  With the HELOC option, you basically have a bank account sitting there earning you no money.  @Sean Rooks made a good point with what's your ROE?

Sean Rooks · Answer

About every 5 years I take a look at my ROE. Return on Equity. So take your yearly cashflow from a property and divide it by the equity. For example, your rental, assuming about $200/month cashflow = $2400/year. ROE = Cashflow/equity so you ROE = $2400 / (600000-130000)*.90 = 0.5%. (The 90% is a rough assumption on selling fees, closing costs, etc). Can you earn better than 0.5% elsewhere? I bet you can. So either do a cash-out refi, or sell the rental and buy 3-5 more, or something larger. Then watch that $200 in casflow expotentially grow. This is leverage at is finest.

The opposite view would be to agressivly pay off the mortgages, and get more cashflow from the properties you do have. This is a more conservative, safe approach but it works for some people depending on your goals and how you like to approach the problem. If you are happy with your job, and current situation, no hurt it increasing your cashflow by paying off the mortgage. Then late you can always get a HELOC on the rental, or even a new mortgage to buy the next property. Just depends on what your goals are.

Kevin Panella · Answer

@Damaso Bautista

That’s good to hear. I’m not opposed to buying outta state, but definitely not leaving California in the next 10 years. I feel like it might be a little late to the game buying outta state. What’s your thoughts?

Kevin Panella · Answer

@Ana Marie B.

Thank you so much! An equity line is in the works...😀

Damaso Bautista · Answer

@Kevin Panella

We are in very similar situations, so my question to you is why not just sit back, get your money in order for when the next too good to pass up deal to come along and then jump on that.

At this point in the market there aren't to many deals here in So Cal just laying around to be picked up so unless you are planning on a full time transition or putting all of your off time effort into real estate investing exclusively in So Cal ( you said you don't want to go out of state) then just make sure you are as prepared to go with your money when something does come across your plate.

Good luck!

Jason Shackleton · Answer

Hey  @Kevin Panella I think @Ana Marie B. hit the nail on the head. A HELOC is likely your best play on your primary residence to have capital ready to purchase when the time is right. Also if you decide not to buy you will only be out the cost of the appraisal. So definitely do this.

When we are at a high point in the market we want to consider two options refinancing or selling. Getting a high appraisal on your primary is great. You could also do a refi on your rental but it sounds like you would rather not do that at the moment. Perhaps consider selling the rental to have even more investment capital to deploy on the next deal. You would be getting a better ROI by re-positioning your capital for better leverage. Depends on capital gains, taxes, etc just a thought.

If you are in a highpoint in the market cycle with a perceived correction coming I would access capital at the top and buy the dips. Just my thoughts.

Lots of equity in two properties, not sure what to do next?

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