Tapping Equity to buy vacation home?

Question

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 · Answer

@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.

David Cook · Answer

Hey Ben,

I bought a long time ago in Brooklyn.

Mack Lengel · Answer

The best time to buy real estate!

Dave Foster · Answer

@David Cook, I would buy one of the lake homes with the first 1031.  The whole point of my convoluted exercise :). was to get you into at least one lake house with the 1031.  And have the rest of the equity concentrated so that you could find and buy the 2nd lake home at your leisure using a refi (or second 1031) without the 1031 time constraints.  The assumption I was reading between the lines was that it would be easier to find a couple decent rentals to buy for cash than to find the 2nd lake home during the 1031 period.

David Cook · Answer

Thanks, @Chris Seveney & @Dave Foster

Dave - in your first scenario, when do you buy the first lake house? Am I correct that you're saying buy a smaller townhome for 1.3, a second property for $400K then a 3rd for $500K, with $100K down...where does the lake house come in?

The DST I understand at least in theory.  But I think I'm missing something with scenario 1.

Thanks for your input - much appreciated!

David

David Cook · Answer

Hi Nick,

That's kind of where my instincts lie tbh.  thanks for weighing in!

David

Nick Gober-Keller · Answer

Hey there, congrats on your awesome real estate game so far! It's really cool you're reaching out to the community to bounce around some ideas.

Here's what I'm thinking. Why not hold on to your townhouse? It's already a proven winner with good equity and steady rental income. Plus, it's likely to keep appreciating and rental rates are probably gonna keep going up.

While you're raking in that rental dough and working your day job, you could be stacking up cash for that dreamy lakehouse down payment.

This way, you're spreading your bets – you're keeping your foot in the door with the bustling townhouse scene, while also making a splash into the vacation rental market with the lakehouse. Picture this: cash flowing from the townhouse and your own lakeside retreat for those much-needed breaks, or even an additional rental income source if you decide to rent it out!

Just some food for thought. Remember, the best move is gonna be the one that vibes with your financial goals and risk level. Hope this shakes things up a bit and helps you out! Good luck and keep crushing it in real estate!

Ben Firstenberg · Answer

I'm wondering how you managed to get a triplex that's worth 2.3M with only a $450k mortgage! You must have chosen the location very well?

Chris Seveney · Answer

@David Cook

I would start talking to lenders now as most likely none will give you a second and want you to payoff the first and refinance it out. Lending to getting tougher and tougher by the day especially on investment products.

Tapping Equity to buy vacation home?

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