Tap rental portfolio equity and reinvest?

Question

I can get a total of 200K out of my rentals right now. With cash on hand I'd have about 300K to invest when the opportunity arises. This would finally put the equity in my King County, WA area houses to good use.

Thing is I'd have less cash flow (but still would cover mortgages and have some cash flow even after budgeting for expenses) and a higher interest rate than the sweet 3.xx rates I have now and less margin of safety in some ways. Tough to sell if the market turns and I only have 25% equity in each house.

Though it sure would be nice to have 300K on hand and maybe 400K by the time there is another major market down turn to invest in real estate, index funds, etc. I mean, at the end of the day, the equity sitting in the houses isn't earning me the money, the ownership of the houses is, regardless of whether I tap the equity or not. Since these are west coast properties in a HCOL area, the equity is where the majority of the gains are, not the cash flow, although that is good. But tapping the approx 130K a year in equity gains ever few years and reinvesting doesn't sound like a bad idea.

Heck, even with the equity I've gained in the short time (my annual equity increase goes up higher and higher as I add a property each 1.5 years) I could get about 3K extra cash flow per month if I bought four out of state rentals in Central Florida for 75K a pop paid in full. They have some nice houses in decent/safe areas for those prices. Even after PM and expenses I'm clearing 3 extra cash flow with that money reinvested instead of sitting there when it could be reinvested...

But what are the risks? I feel like this is the thing I've been missing, sitting restless looking for another strategy to increase my cash flow. This would do it. I mean getting 3K extra cash flow per month on top of other cash flow from the refinanced properties, wow, that would be awesome. I can easily live off 1K a month and go do whatever I want and just bank the rest. This seems like the game changer I've been looking for.

William Price · Answer

I like the way you think. What if you got a HELOC on each property and could tap the equity when a fantastic deal came along. That way you're not forcing it, but you're ready to pull the trigger whenever the perfect deal comes along.

Jonroy Connell · Answer

I will be in the same boat as Jack B at the beginning of 2017. I bought the ugly kid on the block. Beautiful neighborhood, dead end street fantastic school system. I am in construction management and it will cost me $100k to net $200k in equity. I will be looking for rental properies as well as property management. Feel free to contact me as I am very willing to listen and learn.

Thanks in advance.

JR

Thanks in advance.

JR

Adrian Smude · Answer

@Jack B. are you looking for properties in Lakeland?

Mike Dymski · Answer

"@ Charles Morgan, I could buy one in Aberdeen, WA or one in Lakeland, FL now with cash on hand if I wanted to. I would have enough to buy about 4 properties in cash if I draw 75% of the money out of 3 out of the 4 houses and combined with cash on hand."

If you want to leverage, I'd recommend getting financing on the new property(s) rather than paying cash (and having to refi 3 mortgages).

Rick C. · Answer

@Jack B. - Sounds like you are onto something with regards to tapping into the equity of your existing properties. I own rental properties mostly in Tampa, but Lakeland is also an area with significant growth potential, given its walkable downtown, location between the hubs of Tampa and Orlando, colleges and presence of large employment centers, such as the Publix headquarters. Please note though that it is a smaller community with lower rents than you may find in a place like Tampa. There are also some neighborhoods of Lakeland that are significantly less desirable, so be sure to travel there and do your homework before making any purchase decisions.

@Brandon Hall has an excellent article that explains the travel deduction rules before owning a property in a given geographical area. Here is a quote from it that should answer your question:

It’s important to understand that there are travel expenses that you may not deduct. These include any business trip undertaken to explore new investment opportunities in a geographical region where you have yet to purchase a property.

For instance, I live in DC and have a property in Western NC. If I choose to explore investment opportunities in Raleigh, my trip expenses are non-deductible — until I close on a property in that region, at which point the costs will be added to the property’s basis and depreciated over 27.5 years.

On the other hand, if I took a trip to explore opportunities right down the road from my current rental, my trip expenses are all deductible as “expansion costs.” It’s confusing stuff, so make sure you loop in your tax expert.

(https://www.biggerpockets.com/renewsblog/2015/12/20/plan-holiday-travel-maximize-tax-deductions/)

Jack B. · Answer

Aha, so other astute investors agree, they money sitting idle is not earning me anything, and it IS best to pull it out and reinvest it. Last night I determined that a HELOC is probably not the best method for long term rentals as the interest rate is variable. I can refinance with very little out of pocket costs, and a reasonable interest rate around 4.5% even as a rental. Now it's a matter of how much to pull out, out of which houses and where to put it. I think 70-75% is fairly safe to pull out of 2-3 of them, plus the properties would still cash flow.

@ Charles Morgan, I could buy one in Aberdeen, WA or one in Lakeland, FL now with cash on hand if I wanted to. I would have enough to buy about 4 properties in cash if I draw 75% of the money out of 3 out of the 4 houses and combined with cash on hand.

I've been exploring Florida as a relocation destination for long term retirement, but career and such is still good in Seattle and no reason to leave the high paying job that funded all this yet. I could also do the same thing in Aberdeen, WA, but it is less desirable as a retirement destination to me than Florida, which I've been looking into and researching for the past year online.

I plan on taking a trip there to look at some properties this year before I pull the trigger, just getting strategy together right now. I've been to Florida once, over a decade ago and liked it. Does anyone know if the cost of a trip such as this would be tax deductible under the usual guidelines or do I actually have to own property there to be able to deduct the expense?

Charles Morgan · Answer

What if you went with enough cash out to buy one in Florida to test the waters then add more as you feel more comfortable? You are correct that the equity is not bringing in cashflow, it is a cushion, I have recently taken equity out of a home and used it to buy more cashflow.

I am assuming you can refi one or two to get enough to buy one in Florida?

JD Martin · Answer

Equity sitting idle is like having workers sitting around doing nothing. You want your equity working for you. But just like any business, you want to have enough cushion so you can handle emergencies, unforseen circumstances, and opportunities. In my book that means you don't leverage at 100%, but nor do you leverage at 0%. I like about a 50/50 mix of free & clear & leverage, but my own personal situation is much less leveraged than that, about a 3:1 ratio of free & clear to leverage. So in some ways I'm not heeding my own advice, above, in that I have equity sitting around doing nothing, but I'm also somewhat on the conservative side financially and like having lots of cushion to tap should a problem or opportunity arise.

If I were to ever get to a point where I didn't want any leverage, I believe I would just sell my whole portfolio and move everything into some class of bonds or index funds.

Curtis Yoder · Answer

Sounds like you are in a great position to leverage your HELOC to create some additional wealth. If you pick up additional rentals, with good performing numbers, the risk can be limited. Simply keep yourself at a 70% ltv or lower and that will in essence hedge the market in case of a downturn. Worst case scenario you are sitting with cash flowing properties in a down market. The most valuable thing you have in real estate is TIME. And if you are sitting and waiting on a great deal to come along, or for the market to soften so you can make a move, you will be losing out on your biggest asset. The appreciation and wealth creation of real estate performs best over long periods of time. Take advantage of it because we only have so much of it! Just my opinion...

Tap rental portfolio equity and reinvest?

Tap rental portfolio equity and reinvest?

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