I have 650K in equity. What's the best way to access it?

Question

My goal next year is to double the amount of units that we have ( 8 to 16 minimum). Our focus is on smaller 2-4 unit multi-family properties, but I'm not opposed to getting a larger complex.

I'm trying to figure out what the best way to fund the 20% down payment is. We have cash on hand, but would prefer to keep it, so we'd like to access the equity in our current properties.

We have around $650k in equity spread across 5 properties including our personal residence. If I eliminate our personal residence, we have around $550k between 4 properties. Our rates for these properties ranged from 2.5% to 3.75% so it hurts to think of the current higher rates, but having the equity just sitting there doesn't seem wise either.

We've thought of getting a HELOC on one of the investment properties, or possibly doing a cash out refi as well. What are your thoughts on those options? Are there any other creative options we might be missing to access our equity?

Conner Olsen · Answer

@Dumisani Thomsen A cash out refinance is a better option IF you can get a better return on your equity elsewhere and increase your cash flow. For example, you have 4 rentals and if they each brought in $400/month in cash flow that's $19,200/year. Your ROE would be $19,200/$550,000 = 3.49%. There's a good chance you could use that equity to get a higher return than 3.5% in a different deal so in that case I'd sell or refinance. Let's say they each brought in $1,000/month and your ROE is $48,000/$550,000 = 8.72%. That's an amazing deal and could be difficult to replicate. If that's the case I'd keep the money in and wait for the ROE to go down.

Dumisani Thomsen · Answer

Evan, thanks for the thoughtful response. We’re leaning towards a HELOC and could also tap other accounts like 401k, IRA, etc. We actually have a $60k HELOC one on Duplex 1 below, but I’ll look into one on Duplex 2 and perhaps our primary residence too. Numbers are as follows:

Townhome:

$481 monthly cashflow

$101k equity

5.7% ROE

Mortgage @ $1,154.74, 3.75%

Duplex 1:

$880 monthly cashflow

$186k equity

5.6% ROE

Mortgage @ $1,873.88, 3.75%

Duplex 2:

$500 monthly cashflow

$188k equity

3.19% ROE

Mortgage @ $2,218.17, 3.875%

Triplex:

$1,100, monthly cashflow

62k equity

21.2% ROE (we managed to get in at 3% down and had the agents contribute to closing costs due to some issues with the deal)

Mortgage @ $2,916.57, 2.25%

Nikita Ngan Nguyen · Answer

You should be able to calculate the incremental cost of borrowing (IRR of extracted equity) to finance for the new investment. That is the minimum rate of return you need to receive from the incremental loan amount in order to justify the loan.

I'll be happy to explain more or go through this with you if you'd like.

Good luck in making the most sound decision for your investment!

Dumisani Thomsen · Answer

Scale up!

We'd like to double the number of units from 8 to 16 units (at a minimum...more if possible). Shooting for 2 quadraplexes.

Dumisani Thomsen · Answer

Yes, the $101k is about 30% equity and the $186k is about 39% equity.

Steve Vaughan · Answer

I'd get lines of credit on any I could or do nothing.

I didn't see the value of each property, just know that any LTV you attempt to get above 80% will come at very steep costs.

For instance,  do the $101k and $186k equity ones represent more than 20% of today's market value?

Conner Olsen · Answer

Just remember this is a great problem to have. You made a great investment decision and it’s paying you an awesome return!

Dumisani Thomsen · Answer

I appreciate the feedback. We're hoping to capitalize on some of that panic soon!

Nathan Atkinson · Answer

@Dumisani Thomsen This scenario is one where there won't ever feel like a 100% correct answer. There are a handful of options for you to consider. Without repeating any of the other responses I would recommend looking into the highest and best use of each of your properties. I would see if there is a value add that can be made or if a property can cashflow more as a pilot crash pad(I saw a property like that the other day and it cash flowed decently for the owners), etc. If your current properties are being utilized to the max then it would just come down to comparing the gain from buying a new property with the costs of getting into that property, if the gain outweighs the costs then it may make more sense to purchase a new property. Also keep in mind that in this current market there are a lot more panic sellers than we've seen over the last few years. I've seen homes reduce their prices 100k over the course of a month and recently put a home in Northeast under contract for 70k below list price.

Dumisani Thomsen · Answer

Got it. Makes sense.

I ran the ROE per property. I wasn't thinking that you can't really average them out.

I have 650K in equity. What's the best way to access it?

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