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Updated over 7 years ago, 08/15/2017
Should I take $600k equity out of my house to buy more property?
Hi Gurus,
My primary residence just in last 3 to 4 years has built 600k equity & have 500k on loan with 2.75% for 15yr fixed. Living in Silicon Valley. My question is should I sell this home and buy cheaper property as primary residence little far and use cash to buy more investment properties? This will give me 400K in cash. OR Keep living in it as interest rate is so good and use home equity loan to buy investment properties? Basically, want to know what you would do if you are in my shoes? Any other advice or planning will be appreciated. Much thanks!
I also have 200k cash(some in stock market) which can be liquidated quickly.
Please let me know if you have any questions.
Regards!
Single family homes are great for appreciation. If you believe your property will no longer appreciate, then it has reached its maximum value. . . I do agree with you on selling your primary and downsizing to something smaller. 2.75% interest rate is low, but the current rates in the 4% is not too bad either.
Maybe you can look into multi-family investing for cash flow. . . I've seen homes in Milwaukee that go for $30k and rents for like $700/mo. . . which is a GREAT return on your money. You'd have to develop a trust-worth team out there to make sure it works right. Feel free to message me, or comment on here.
Unless you have a great deal available for you to buy right now, right in front of you, then I would wait for the next down market and then ask your question again ... I tend to behave counter cyclically ... meaning that when the market is hot and everyone is running towards REI I play it conservative with my leverage and underwriting of deals. When the market tanks and everyone is running away from REI, that is when I leverage up and get more aggressive. All of that to me is not necessarily directly related to a hot or cold market so much as it is the availability of great deals ... when there are more great deals to be had I want to buy more even if that means taking on leverage to do it, and that typically happens if/when the market corrects. However, if I can find a great deal in a hot market, I absolutely will buy it, it is just that it doesn't happen as often then. As to your primary residence, if you can afford to live there, enjoy it, and it has served you well financially, then I would not sell it ... if it is too much house for you, or you are struggling to keep up with payments and maintenance, then yes you should probably sell it. I would NOT try to time the market to sell it at peak unless you had another compelling reason like mentioned above for wanting/needing to sell anyway ... remember, even if you hit the peak for this RE cycle (which is hard enough to do), it does not mean you will be selling out at the global all time peak ... it reminds me of something my parent's did in the 1980's, they timed the market perfectly and sold at the peak for that RE cycle ... it was a triplex a few blocks from the ocean they sold for $150k, value stayed flat for years after they sold but today is probably worth >$2M.
Thanks @Peter Mac ! Though I cannot time peak but it will help me to think about some multifamily investments on bigger side! I will connect with you on BP to get more info on these deals!
Thanks @David Faulkner for awesome reply as it clears some of the things for me! Currently, I do not have any issues on making payments and building more equity but I am thinking to sell to increase my buying power for the next time when market hits and do some investing now if find good deals somewhere out of state as in bay area its very hard to find something to get positive cash flow right now. Any thoughts around this? Much Thanks!
Depends what your goals are. If you like your house and can afford to stay there, what does selling accomplish?
Equity is a great source of cheap money. If you're just looking to leverage your equity to buy more RE, then I'd recommend just getting a home equity line of credit. That way the money is there when you find a good deal, and you're not paying any interest on it until you use it.
I personally think your market may be a little hot to buy at the moment, so maybe look at some secondary markets for good deals. Unless of course you come across something you can't pass on.
It seems like it makes sense to keep your home if you enjoy the home and neighborhood.
Do you currently own any investment properties ? I'd probably say liquidate the stocks first before taking a home equity line on your home .. but depends when you bought the stocks too . You'll pay a lot more in tax if you've owned less than a year .
Also want to consider if the stocks are in a retirement account or regular brokerage account .
You can actually invest in real estate using a "self directed " retirement account but there are rules . I haven't done it but you can find more info if you google self directed IRA or self directed 401k .
What area are you looking to invest in CA Or out of state?
Originally posted by @Nitin S.:
Thanks @Peter Mac ! Though I cannot time peak but it will help me to think about some multifamily investments on bigger side! I will connect with you on BP to get more info on these deals!
Thanks @David Faulkner for awesome reply as it clears some of the things for me! Currently, I do not have any issues on making payments and building more equity but I am thinking to sell to increase my buying power for the next time when market hits and do some investing now if find good deals somewhere out of state as in bay area its very hard to find something to get positive cash flow right now. Any thoughts around this? Much Thanks!
No, you don't want to go out of state IMO ... you give up way too much control and put your financial destiny on the investment 100% into the hands of others ... there are serious risks associated with doing that and it is way more difficult for a newbie to pull off successfully then all of the out of state service providers who sell this stuff on BP make it out to be ... if you are going to give up your control on the investment anyhow, you'd be better served IMO to sticking with stock investments or REITs if you want to get into some RE ... at least then you will be diversified, have scale and world class management with a verifiable track record behind you as opposed to a single lower value asset managed by some mom-and-pop or only slightly more sophisticated PM that may or may not have your best financial interests at heart and may or may not be competent even if they do. Otherwise, stay local and hands on to control your investment if you want to invest in single properties. You could take out a HELOC to get ready to pull equity quickly if/when you happen upon a deal, then refinance (either on the investment property to pay off the HELOC and/or on your primary to pay off the HELOC) once the new investment is stabilized and can be converted to 30 yr fixed rate mortgage.
Here's what I would do.
1) If you could find another house thats a little further away but still doable and get it at a discount to boot, then I would do that.
So if your house is worth 1.1 million and you can sell and buy another house for 650k so you end up with 400k thats one thing. You've basically just grabbed your equity and you're bump in rate will somewhat eat a chunk of that gain.
But if you could buy a 650k at a discount (I'm not sure if silicon valley has discounted properties but I know nothing of that area) for say 550 (85%), then you're on to something.
2) Otherwise, why not stay where you're at (unless the taxes are a nightmare) and take out a second? Your first mortgage is at a fantastic rate. Second mortgage rates are still pretty good.
You just have to ask yourself. If you pull out 400k out of your house and you're paying 5%, what can you make off the investment you put it in and is that return going to be more than 5%?
The wisconsin suggestion seems nice. But heres the catch to those. While the cash flow to purchase price looks good, you're missing out on the real returns of real estate.
You make money investing in real estate four ways:
1) Equity capture when you first buy the property.
2) Rental income
3) Appreciation
4) Principal paydown
For those wisconsin houses - assuming you pay all cash. You may get decent rental income for your money, but you're not getting any appreciation at that price point. And you won't have any principal paydown either. So your rental return is your net rental income.
Now maybe you can get loans on those houses so that you do get some principal paydown but how much would that be on a 21k loan? Even if you bought 60k houses and got loans, how much would that be on a 42k loan? Over 20 years?
To me, I want to be in the sweet spot for home prices. Something that will double every 20 years or so, something where I can have principal paydown of 200 to 250/mo on 20 yr notes. And something where I can still make 200 to 300/mo in rental income assuming 25% down.
That would be the product type I would target. 150k houses that you can be all in around 100k to 120k even. Decent area. Decent school districts. You'll get your rental income. You'll get your appreciation, principal paydown and your equity capture.
Thats what I would do. Whether you stay in your house or sell. If you can tap that equity at 5%, you're going to make way more with real estate if you're target product is something that lets you gain in all the ways you can make money in real estate.
Thanks @Stewart Wyne : That's great! Does equity line of credit has any expiry? Also, what if market goes down and equity goes down as well. How that works? Thanks!
Forgot to mention this @Nitin S.: the home sale exclusion -- homeowners are entitled to when they sell their primary residence for a gain after having lived in the home for at least two of the five years immediately preceding the sale. Singles can shelter $250,000, and couples can shelter $500,000. Talk to your real estate CPA to verify.
I suggest to liquidate the stock and use that to invest in real estate before selling your primary residence especially if you are just starting out.
There are many deals you can do with the $200k so don't sell your house just yet...
I'd for sure refi and pull money out. You can borrow at historic lows to invest. I don't see there ever being a better time.
I've been trying to get while the gettins good.
I'm going to make my response short and sweet:
Yes you should, and you'd be nuts if you didn't. Just be cautious as usual and invest in solid high cash flow properties and/or easy flips.
No @Nitin S. Typically a HELOC doesn't expire. It can take months to find a new deal or opportunity. If you re-fi and pull out the equity, you'll start paying interest on all the money on day 1. With a HELOC, you can pull only the money you need out instantly. It also allows you to be a cash buyer, which is more attractive for sellers. Once your new property is stable (leased), then you just re-fi the new property with a new 30 yr fixed loan, pay off the HELOC, and then repeat the process.
If we have a huge decline in values, then the bank "could" reduce your credit line, or even close it if you have no equity left. It doesn't effect you negatively, but you'd no longer be able to use it.