What should I do with the equity in my house? SO many options...

[Adam Sankowski]

Hi everyone, I'm asking for some help with my awesome issue of having a bunch of equity in my house. I live right outside of Boston in Somerville which is absolutely exploding right now in house prices. I know everyone talks about how their market is crazy hot but for example a 2 family house, that's behind another house on the same lot (aka. no yard of any kind) just went on the market on my street for 1.7 million. Our 2 family is way bigger and nicer than it and we bought it for 740K 5 years ago.

Anyways, we just closed on a HELCO and I have a bunch of equity to play with, several hundred thousand. My main goal is achieving financial freedom as quick as possible. Our family probably needs about $6,000 a month to live off of if that matters. Part of these funds has already been ear marked for renovating our house to create an Airbnb unit, which will help the financial freedom goal, but that's not the focus of this question...

My question is: is using the rest of the HELCO money as down payments on cash flowing rentals a good strategy? I already own two single fams in Indy and one in KC so I already have out of town real estate teams and contractors in place. My concern is over-leveraging... can banks call a HELCO if another 2008 happens and the price of our home decreases... like they can with capital calls on commercial real estate? Can the rates increase at a dangerous rate since they aren't fixed? Or as long as the properties I buy are cash flowing am I good to go if I'm also using part of the cash flow to pay down the HELCO?

I haven't heard anyone anywhere really lay out a solid step-by-step strategy for using a HELCO in this manner. I hear people all the time say that you should be using all of the equity in your properties ... but how??? And what is the safest way to do that? I don't want to sell because this is only going up in value since a subway line is due to be built in my neighborhood in the next two years. Plus I love where I live and I don't want to deal with a 1031 exchange or anything like that. But, I'm done with working and want to put this equity to work for me. Also, I'm not interested in note investing or private lending or anything like that.

My initial thought was to go and buy a piece of commercial real estate, like an 8-12 unit building somewhere like Indy/ KC/ or Cleveland. Commercial financing scares me but if I used the HELCO funds I could basically pay cash for it and then just pay off the HELCO instead of dealing with a commercial loan that will be due in 5 years. Is this a good idea?

Also, in 10 years I need to either pay off or re-finance my HELCO... has anyone ever run into an issue where they couldn't refinance? Like in 2008? Wow I know this is a lot. Even just directing me to a book or article about this would be awesome. Just wanted to make sure that I'm not missing something or not thinking about something important. Thanks for your time!

[Steve Vaughan]

Hi Adam,

Just a couple comments and I'll leave the rest to others.

In a downturn like 2008, I think it was more common for secured lines of credit to be frozen, not called.  All that meant was you couldn't draw on it anymore, but these have a ton of fine print.  

I always say to dance with the one that brought ya.  If nicer places in nicer areas works, stick with it.  CF hoods OOS work til they don't.  I'm like you on a larger scale but smaller net gains each.  B class assets in a good market.  Appreciation will outperform cash-flow any day as long as we have value going in at the buy.

Be patient. Nothing on fire here. Good luck and welcome to BP!

[Blake Denman]

Hey @Adam Sankowski  - what a great problem!

I'm pretty sure that your HELOC should have a cap for how high the adjustable rate can go. Check with your provider on this. If you use that money to invest in a property, you can be very conservative and run it as if you're paying the max rate the HELOC may rise to - if the deal still works, then no need to worry!

But, why are you not interested in note investing or private lending?  If you have, say, $500,000 to play with, and you get a 10% return (much more passive than buying houses too) - you're almost where you need to be to retire!  

[Adam Sankowski]

Hey @Blake Denman good point about the private lending.  So my thing with private lending is just that I don't have control over the properties and what happens to them.  I know that the response to that is that the note is secured by real estate but... I actually just finished Chad Carson's book about retiring early with real estate... and the one story in it where the investors lost everything in 2008 was with note investing, not real estate.  Basically they said that when #$%& hit the fan the house flipper just walked away from everything.  So yes, they got the property but it was half finished or completely gutted, they couldn't find anyone to work on it, and much of what had been done hadn't been permitted so they found the properties that they received as security pretty much useless or requiring so much money to finish that it caused them to go bankrupt.   

So I def. want to use the HELCO to purchase actual properties, not to do any other strategies.  Thanks for the info about the cap on the rate hikes, I'll def. research that! 

[Jason Dillard]

@Adam Sankowski Buy some small properties and leave them free and clear to stay safe. We have some single families that pay 12% for example right now. If you are gonna leverage new property, only pay what you know you can borrow back. Since you are a cash buyer, you can win lower bids. Make more lower offers. Don't give up on lending. Lend lower LTVs and control draws on a flip. Or only lend on improved stuff if flips scare you. We use a strip center as a line of credit with private lenders for example. I can borrow at 6% from a person fast at 50% of value. It's worth it for me over a bank because the flexibility of a person to "move and go" is a huge benifit. The lender that only makes 6% is ok because of the safety.

[Corby Goade]

Hey Adam- your proposed strategy is exactly how I've built my portfolio. I have specific buying criteria that I use, and it includes being able to refinance immediately so that you don't have to worry about the balloon at 10 years. I have a turnkey company in Idaho and I work with investors to do the exact same thing. I'd be happy to get in to the nitty gritty for you, if you'd like. Feel free to PM me. 

Good luck!

[Blake Denman]

@Adam Sankowski - There are many trusted operators out there who invest in ways that won't lose your $$ during a recession.  

To clarify, I wasn't thinking about flips, I was thinking more along the lines of multifamily syndication.  The rents will keep coming in even during a downturn, and the value with commercial assets is based on income - not on the market.  So they won't lose all their money if a crash happens, if they just manage like professionals.

I think I just saw that Matt Faircloth's DeRosa Group is raising capital for a big purchase in KY.  Investors get preferred dividends and then a return at the end.  Finding trusted operators to invest with (that project is just an example) is very possible on BP, and talking with some of them about their business and your goals may make it a little more appealing to you.  

I just encourage you to look into it more! :)

[Adam Sankowski]

@Blake Denman thanks for the advice I’ll def check it out!

[Theo Hicks]

Hi Adam,

One strategy is to passively invest with an apartment syndicator. Assuming an 8% to 10% annual CoC return, you would need to invest $720,000 to $900,000 to make the $6,000 a month. But, you'll also receive a lumps profit once the syndicator sells the property, which you can in turn reinvest into more syndications.

I like this strategy because it is 100% passive. 

Buying your own commercial property that has a value-add component is also another good strategy. Will require more effort on your part and isn't passive, but you can force appreciate to create equity. Then, once you achieve the $720,000 to $900,000, you can passively invest.