Need Help Understanding How to Use Equity Wisely

[James Sidney]

This is an appeal for advice. My title refers to using equity, but I could just as easily have called this post "somebody please tell me what to do now!" I've had some success but I'm more an amateur than I seem. I plodded my way through the process and found myself the beneficiary of a rising tide that lifted all boats. So I doubled down and did it two more times. Simple. But now that tide has stalled. But as a starting point I'm reaching out to the broader community of biggerpockets because I have seen there are some very sophisticated professionals who grace these forums, and they don't mind sharing insights from time to time. Please anoint me with your wisdom.

My problem is straightforward. I'm a small landlord with a decent amount of equity at my disposal, looking for the next move to make. Part of the struggle is simply not understanding how equity works, and part of it is not being sure what's the smartest way to use the equity at my disposal.

Background: I own 3 condos at separate addresses in Brooklyn and Manhattan. It's been a long slog with many ups and downs. I have worked hard at a physical job for decades, lived frugally, and finally made it happen. Two of my condos are owned outright, and the third (the one with a mortgage) is where I live with my family. Until now, my philosophy as a small landlord in NYC has been to just buy the nicest low-maintenance condo possible, paying the required 20% downpayment from personal savings and getting a 30-year fixed mortgage (it's not the most original strategy, but it got me this far). I renovate using a small stable of handymen, cabinet makers and specialists I have assembled through personal relationships, then I find outstanding tenants whose monthly payments will put me at break-even or better. Rather than require monthly income from the property, I trust in appreciation to make it worth all the effort. I give tenants a fair deal and great service as a landlord, and never raise rents unless my expenses go up or the rents become plainly out of whack with reality (when you only have 2 rental apartments, the extra 100 per month you might make by squeezing a good tenant isn't worth running the risk of driving him out). My philosophy has worked well up to now. My condos have doubled in appraised value, and in addition they now net a combined 41K per year which is, for me, precious supplemental income.

Doing real estate as a small landlord in a supercharged city like New York has pros and cons. One upside is that you can always find a tenant with a six figure salary and a credit score above 750 (I'm not kidding). Another pro is that when you succeed in paying off your first rental it becomes a miniature cash cow because rents are so high. The biggest con of course is the very high price of entry. I couldn't have gotten my start here but for the fact that I jumped in right before the real estate bubble of the aughts took off, when banks were still offering no-doc loans and prices were just about to jump through the roof but still had not.

Today I have 1.25 million in equity in the the two condos I own outright, and another 500k equity in the mortgaged condo where I live. It sounds like I should be able to make my next move with ease, but I find myself looking at a completely different landscape. I no longer see the same potential for appreciation in areas that I know well enough to feel confident buying, and the bar to entry is even higher than it was before.

So here's the FIRST THING I need help understanding: I'd like to now expand without having to raise cash for a downpayment. If I borrow against my equity for a downpayment on a new investment property, how do I then fund the rest of the purchase price? Is this even possible through a conventional bank? My mortgage guy says I could pull up to 60% (or 750K) from the equity I control, but going 750K in debt (at a commercial interest rate between 6 & 7%) would stress me out mightily, and 750K won't even get me to 1/2 the purchase price of of a two-family rental property here. Is it possible to find a lender who will let me use the promise of income from future rents to qualify for the second loan I will need in order to complete the purchase of a small multi-family investment? If so, what do you call that, and where do you look for it?

Or would I be better off taking a deep breath, slowing down, and using the money I know I can readily get my hands on to just complete the full purchase of a less expensive single family condo to add to my portfolio, expecting it to do little more than be one more thing in my portfolio, paying for itself slowly (though not giving me the same kind of appreciation I enjoyed in the past)? That would at least be SOMETHING, and so it might be better than leaving 1.25 million of equity just sitting on the table untapped, but it feels kind of disappointing because it ties up a huge chunk of equity and fails to fulfill either of my two main goals: generating monthly income, and serving as a significant vehicle for further expansion in the near term.

Several apparent ideas I'm actually NOT interested in trying are: investing out of state, partnering with other investors, and expanding into parts of NYC that can still be called "bargain" areas (in the later phases of a multi-year superbubble like ours, such places tend to be mind-blowingly distressed and they are simply beyond my comfort zone). One idea that DOES appeal to me is going up the beautiful Hudson River Valley (not much farther than 100 miles away) and investing in a part-time rental that I could buy completely using only about a third of my available equity, with the goal of renting it to vacationers and occasionally using it with my own family. The idea would be to have rents cover the carrying costs plus generate some kind of monthly profit. If I could pull that off I'd have a formula for something to do next with the other 2/3 of my equity. But I've got no idea how banks look at part-time rentals when they consider a loan request. And I know short-term rentals are a whole universe of their own within real estate. There would be a new learning curve. I may decide it's not worth the effort, but I feel like it is something I could figure out. I'm just trying to think of strategies that could realistically be accomplished with the resources at my disposal.

So thanks for sticking with me this far. Now, with much due respect, I ask of all you seasoned pros and property geniuses out there: if you were me, a smalltime landlord with two successful NYC rentals under your belt, and now you had your first respectable chunk of equity to put to work, and you wanted portfolio growth paired with incremental income growth, and your tolerance for risk was somewhere in the middle of the spectrum (not on the aggressive fringe), and you found yourself feeling shut out of the overpriced market where you live, what would you do next?