How best to use $650-850K Equity in my personal Home to buy an income property?

Question

Location: Boise Idaho Market

Current Pay-off: 348k (does not include the 77k HELOC below)

HELOC: Owed 77k (with a 9.74% variable interest rate)

Current Monthly Payment (Including Taxes and Insurance): $2411

Term and Interest rate: 2.99% at a 30 year term

Current Value of the Home (What it would sell for) $1.2 million

Personal Backstory

-Married with 6 kids (still at home) / 45 years old / Self Employed Plumbing Contractor

GOALS:

-Retire in 15-20 years with multiple Income producing Properties in my portfolio

-Be able to quit my day job and Focus on my Rentals

-THE BIG QUESTION:

-How should I use the equity in my home to purchase a rental property?

-Should I rent out my home and refinance (Rents would be $5000 per month)( (and of course my family would in turn need to rent somewhere Approx $2500/month)?

-Should I Sell and collect the equity to use for a cash flowing property (This would leave my family without a home, but would free cash for investing)?

Any advice is greatly appreciated!

Account Closed · Answer

Personally, I'd invest in Idaho or Arizona, Either one because both favor the landlord and have growing economies. WA, OR, CA are down for the count.

Team up with someone who knows what they are doing, to do your first couple. Learn about the biz from them and then it's sustainable, not impulse.

Aaron Williams · Answer

Agree w/ those above. Hang on to that low rate you currently have a get the largest HELOC you can. Plus you'll only make payments on the amounts you pull out and not to entire HELOC balance. A great way to start out is by house hacking. I've found and helped several BP members get into properties that offer that as options over the years. Reach out if you'd like to brainstorm more about those.

Steven Goldman · Answer

Casey Spence: why not get a larger HELOC on your personal property and use the money to fund another project. The primary rate on your mortgage  rate is so low that I would hold on to it. If you want to rent keep in mind high end rentals are often the worst to manage. The type of tenant that rents in that space usually has reasons they can not buy a house and they are not good ones.  Good luck and keep moving forward.

Greg Kasmer · Answer

Casey - I agree with Steven. I think your first move is to get a larger HELOC or Loan (second position) against your primary residence. (You should be able to get 80-90 LTV) Seems as though you have huge equity to take advantage of that could be used for your first few investments. After you do a few deals you'll be more educated/experienced to clarify what you might want to do long term. Good Luck!

Don Spafford · Answer

@Casey Spence Ultimately, be sure to make any decision with your wife and family. My observation with your work and family is that you probably don't have a lot of time to also then be spending overseeing or managing properties or property managers. You likely need something that is more hands off.

When you fine a way to access that equity, you could consider investing it in some syndications. I have made that transition myself and I also am on the active GP side of it. There are multiple options, multifamily, self-storage (great team in Boise for that), mobile home parks, etc. Personally I invest in RV Campgrounds because the cash flows are higher. If your goal, as you stated, is to retire in 15-20 years, then you should be focused on building passive income and wealth.

With commercial RE syndications, you can invest passively, so that it does not take up much of your time, get consistent cash flows and build equity. Typically in 3-5 years you receive back your invested capital plus equity which you can then reinvest to continue building more. You can very easily within that 15-20 year timeframe reach that retirement goal.

For example, I'll use RV Campgrounds as an example since it is what I know best. Say you invest $500k today, using a current available fund with my group, that will earn you a 10% pref return, we target 12-15% cash on cash, so let's say at a minimum you get 10% cash on cash per year, and in 5 years 2.5-3X multiple on your money. You don't touch the cash flows, which equal about $50k+/yr on that $500k invested. So save up the cash flows and when you get your equity return, you now have about $1.25-1.5M to reinvest. If you repeat that process and invest all of it, you will then be getting $125-150k+/year in cash flows and again multiplying that amount over the next approximately 5 years. All while being totally passive to spend time with your family and on your business.

The added benefit as that there is potential huge tax savings through cost segregation. We have seen up to 222% depreciation provided on the investor K-1s.

This is not for everyone. You of course need to consider what is best for you and your family and your future and your current circumstances and goals.

For me, I started 6 years ago buying a single fourplex. Five years later I was able to quit my job. I made the transition to commercial RE after about year 3 as I realized that I could not reach the scale I needed on my own just buying fourplexes. Now I buy RV Campgrounds with investors through syndications as well as ground up development of multifamily, also through syndications. The best way to scale is to do it with others.

Brady Faigl · Answer

Casey,

Congrats on the equity, and love seeing a big family like yours!

First off keeping that low of an interest rate in your current home whether you stay in it or turn it into a rental is something to try and hold on to of course. There are a few options to make that work and still be able to use the equity without affecting the interest rate, although if you can cash-out refinance and keep a low payment then use that cash for a rental property it could make sense long term with if you find some great deals. There is opportunity there to leverage your money and purchase multiple rental properties with that amount of equity.

I Am in the Boise Market and it can be difficult to find anything with substantial cash flow with current rates and prices. I have a STR that does well and it has a similar rate to yours. Depending on your home you could have a high potential there to create great cash flow to cover the cost of your new home or rental and to use the rest for new investment opportunities.

If you did find a home to rent for your family and rent out your current home that can have some benefits to create cash flow right away to then use and save for your next investment properties, so that you avoid having to use a down payment on a new home for your personal.

I would love to help answer any questions I can and find out more details to see how I could help!

Bob Stevens · Answer

Buy rentals with 10% or so net caps.

How best to use $650-850K Equity in my personal Home to buy an income property?

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