What to do with the equity?

Question

We were able to tap into the equity of a few of our rental properties. The idea is to just keep buying but we’re thinking if we should start rehabs and flips. Small LLC with under 10 units just looking to maximize the funds. Just want some thoughts.

Evan Polaski · Answer

@Matthew Otero, back to Taylor's point: what are your goals?  If in growth mode, flips are likely going to be the fastest route to growing your net worth.  But this is assuming you have the time and desire, since they are very active.

Rentals are the next step down. Often times still rather active, and you trade that short term growth for longer term income, and hopefully some appreciation.  But there is risk in long term capex, tenant destruction, mismanaged by a PM (if you aren't self managing), drops in value with mortgage rates dramatically higher than recent history, etc. (And honestly most small rentals, over the long term, barely break even given long term capital needs)

And then you get to syndications: likely the most passive, but all control lost.  Vetting the sponsors business plan is very important, but there are real risks here too.  Based on capital markets today, effectively all class B properties are in negative leverage (fixed and floating debt priced around 4% and cap rates in the high 2s), many value add sponsors are 3-5 yr holds, but if your goal is to hold long term (10-15-20 yrs) and reap the cashflow, you will be hard pressed to find this.

Personally, I am a flipper part time, and passive investor with profits.  Long term rentals right now are near impossible to make work, without simply stacking up deferred maintenance.  And I wouldn't call a 5 yr hold that long term.

Andrew Hogan · Answer

@Matthew OteroYou can take 50-100k and spread that across several hundred or even 1,000+ apartment units in a syndication with an experienced sponsor. This will help you maintain capital preservation while maximizing your equity. It's also not going to require any time beyond the initial due diligence period.

Matthew Otero · Answer

Evan thank you for your insight. The equity mentioned in my previous post was used to purchase more rentals. You hit it right on the head though as I'm barely breaking even on few of my units. My partner and I are novice investors with the goal of one day replacing our W2 income. The long term buy and hold strategy was the easiest door to walk through at the onset and we've been fortunate thus far, although working capital is getting tight and the current rental market is hard to read (for myself anyway). I'd like to stay with rentals and keep growing as neither of us has the supposed time or team necessary for a flip although the profits would be nice. We've entertained the idea of partnering with an investor experienced with flips but mostly just with ourselves. I'm skeptical and worry about getting burned with the limited funds we have dealing with something we dont know much about. Syndicates sound interesting but not very profitable I'm going to have to read up on them. What would you do with 30k right now?

Jim Kalish · Answer

It sounds like you have a really good handle on finding properties to hold. My suggestion would be to stay the course. Rental properties generate passive income, which means you are building what will some day, if not already, allow you real financial freedom. Flipping is a great tool to generate capital quickly but since you already have the capital you can skip that step. BRRR allows you to use that capital you have to grow your business and grow your wealth.  Remember, if you stop flipping the cash flow stops. If you concentrate on rentals the money just keeps coming.

And then there is the timing of this. Unless you already have a flipping team in place it may be really tough to pull one together. Especially your rehab team. With the prices of homes being so high people are turning to remodeling their current homes. So finding a good contractor that is ready to go when you find a house to flip could be a problem. A good friend of mine who has been flipping for a few years has switched gears to doing remodels for homeowners. He is booked 2 years out. And this is pretty common. I know you will have to do some rehab on buy and holds but it's usually not to the extent of flip and hopefully you already have that team 9n place.

Best of luck

Taylor L. · Answer

What are your goals (i.e. what do you want to get out of your investments) and who is included in 'we'?

Some investors are best served by focusing on passive investments, typically when their goals boil down to producing return without massively increasing their time commitment. Typically that kind of investor has a busy schedule with work or their other businesses.

You mentioned maximizing the funds - have you considered the tax implications of flipping? Looked at BRRRRs or other strategies that lead to longer term holds?

What to do with the equity?

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