Tapping Equity to buy vacation home?

[David Cook]

I have a house worth approx 2.3 million with a $450k mortgage.  It’s a nice townhouse with 3 units.  I rent out all 3 after house hacking years ago.  I now rent my own living space nearby.  (Didn’t buy my own primary - long story - dealing with the here & now) 

I’d like to keep the rental townhouse & buy a lake house which will cost around 1-1.3.

I’m thinking of moving back into one of the townhouse units, and getting a heloc to buy the lake house. Or refi and buy a lake house. 

Long shot theory - 1031 the townhouse and buy two lakehouses with cash, renting out both, until I covert one into my primary. That seems fraught with risk though - lake house inventory is low and I would be on the 1031 deadline.

Any thoughts/suggestions will be welcome!

Thanks!

[Dave Foster]

@David Cook, A somewhat complex twist on the 1031 might help you out - depending on valuations and how constrained you feel by those timelines and trying to purchase the second lake house. If you sell your townhouse that will free up around $1.8 in cash and your reinvestment target will be around 2.3 mil. If you've got the appetite for a couple smaller rentals then do the 1031 and purchase one townhome for 1.3 in cash. And buy a second property say for $400k also in cash. Then use the remaining $100K to purchase a third rental with the remaining 100K as your down payment on a $500K property. Or you could use a DST to absorb the debt very easily and 1031 into two free and clear properties and a dst.

What this does is to allow you to 1031 into the lake home and concentrate the equity in it. The second property also is concentrated equity but hopefully it's price point and location are easier to complete as your second purchase. The DST is a commodity which are pretty easy to find.

The second step then is whenever you find the next lake house.  Assuming the good ones are few and far between you'll not want the timelines of the 1031 to create pressure to find the second one.  Concentrated equity in the one you have could be accessed at any time through a refinance to buy the second whenever the opportunity presents.