Lots of equity, what to do with it?

Alina Trigub

Rental Property Investor · Glen Rock, NJ · Member since 2015 · 3k+ posts · 2k+ votes

7y

@Alan M.

It depends on whether you'd like/want to be active or passive investor.

Here's an article that should give a further clarification on the topic https://www.biggerpockets.com/member-blogs/10850/8...

Once you decide, it becomes a no-brainer as to whether take the passive investing via syndication route or buy a property yourself.

If you need further help, feel free to PM.

Charles Kao

Specialist · Grand Rapids, MI · Member since 2016 · 1k+ posts · 611 votes

7y

Originally posted by @Alan M.:

I'm in the fortunate situation of having a lot of equity but without much cash on hand. I need some help on how best to put the equity to use (or to sit on it for awhile) As background, here's my current real estate portfolio:

-Condo in Boston. FMV $950,000, $340k loan at 4% with about 21 years left, $610k in equity. Cash flow of about $900/month.
-Primary residence in California. FMV $1,650,000, $590k 7/1 ARM at 2.85% (5+ more years until it resets), $1M in equity.
-Brownstone in Boston. FMV of $2.8M, $0 debt, current cash flow of about $6,000/month but can get cash flow to about $10,000/month as the current leases expire. Sadly, I inherited this property because my Mom passed away earlier this month - I want to run it as part of my portfolio and selling it is not an option I'm willing to entertain.
-About $650k total in available HELOCs on the primary residence and the Condo (zero balance, right now)

I look at the above and realize I've got a ton of equity locked up. I get the advantage of leverage, but I'm conservative by nature - I'm going to be fine financially, so I'm probably not up for taking on a huge amount of risk. I also haven't invested remotely before (lived in Boston when we bought the condo and then kept it when we moved) and I work full time, so can't really take on a bunch of properties that I would have to self-manage remotely.

A syndicator that I trust recommended pulling about $800k-$1M out, doing 2-3 deals with 3-4 syndicators, and tapping into some of the remaining equity with a HELOC. I liked that approach, as it's basically multiple eggs in multiple baskets and still leaves some equity to tap into if something comes up. Taking this amount out would also keep the existing properties cash flow positive by a good amount - so maybe we take a loan out for $800k and a HELOC for another $500k to have access to? That would leave about $1.15M in HELOCs to tap into if something attractive came up in the future. Or do I buy some SFH too and just hire a management company?

Sorry, long post. Thoughts and advice much appreciated!

I think the reasoning is sound from your friend based on your wants but don't like having a bunch of variable rate debt funding the passive investments especially because if the market changes bank can pull those LOCs out from you in a hurry and you probably are on a 5 year hold commmitment on the passive investments. I would refi out versus HELOC but can see the urge not to because you are having significant prinicpal paydown for now on your ARM. Have you given consideration to investing in real estate full time and quitting the job?

3 Reply

John FortesPro Member

Multi-Family Syndicator · Abington, MA · Member since 2017 · 603 posts · 347 votes

7y

If you don't want to take on more responsibility of holding more properties even with the added PM managing it, then you can consider buying into LP sides of syndications and just keep building the wealth with that hands off approach. What ever avenue you choose, wouldn't be a bad one as you have ton's to work with. Everyone is providing great responses and the path you decide on is going to be the best option for you as its a personal decision. Plenty of ways to skin a cat in this profession and I wish you well. God bless!

OP

Rental Property Investor · San Francisco Bay Area · Member since 2018 · 87 posts · 87 votes

7y

@Charles Kao Thanks for your thoughts.

I think I think the thing I like about the 2-tiered leverage (some loan, some HELOC) is that I can have a good chunk of change to invest and then use the HELOC for extra investments, but pay it down quickly. I'm fairly risk averse, so I'd like to maintain a decent equity cushion and not max out my leverage, so the HELOC and pay down method would fit well. Also, to clarify, the condo in Boston is on a fixed 30 year - so I'm into the principal pay down years and the rate will stay at 4%. My primary residence will adjust in 5 years or so, but the balance and payment will be tenable even if rates go up significantly.

As far as going full-time into real estate, I do pretty well in my day job (sales management for a software company), and I enjoy the work, so I'm not really looking to go full time into real estate investing. I would like to get to the point where I don't have to work if I don't want, and more time to spend with my kids when they get to the age where they can travel, so my goal is to find some good IRRs and get set up where I don't have to work in 8-10 years. I'm for sure done at 53 (so 14 years) but would love to be done earlier.

Thanks again for your response and thought provoking question!

Charles Kao

Specialist · Grand Rapids, MI · Member since 2016 · 1k+ posts · 611 votes

7y

@Alan Miegel I would agree with what you said and not sure if it was clear before but I would only fund the passive investments with fixed debt. Having a LOC to use with flexibility is definitely a good idea but if you are going to use the funds on a long term hold I would term it out.

OP

Rental Property Investor · San Francisco Bay Area · Member since 2018 · 87 posts · 87 votes

7y

@Charles Kao Yes, on any syndication/passive deal I do will be with a fixed loan. The HELOC would only be for down payments on active investments, and then would use cash flow to pay them down quickly.

Dan K.

Rental Property Investor · Boston, MA · Member since 2012 · 257 posts · 139 votes

7y

Hi @Alan M.,

First of all, sorry about your mother -- tough situation I'm sure.

As you realize, it's a great problem to have. Often it's difficult to talk to friends and family about because they don't really understand the "problem."

My first thoughts:

What are your goals? If you want to go all in with RE, invest in RE, but you also have the ability to diversify. You could refinance your mother's old brownstone and get better returns in CD's these days -- and of course could look at ETFs and other investments. Basically "set it and forget it" investments.
As you said, the HELOCs are nice for cash availability when needed
Potentially talk to some local banks about options. I'm currently in a portfolio loan in Boston with a local bank and the service has been incredible compared with multi-national banks
Identify your RE goals. Your risk adverse -- If you lost your job today you could probably live off of the rental income today. Do you want to ramp up your rental income to provide multi-generational wealth?

Nate R.

Real Estate Investor · Austin, TX · Member since 2015 · 214 posts · 234 votes

7y

Originally posted by @Charles Kao:

I think the reasoning is sound from your friend based on your wants but don't like having a bunch of variable rate debt funding the passive investments especially because if the market changes bank can pull those LOCs out from you in a hurry and you probably are on a 5 year hold commmitment on the passive investments. I would refi out versus HELOC but can see the urge not to because you are having significant prinicpal paydown for now on your ARM. Have you given consideration to investing in real estate full time and quitting the job?

This is very much my line of thinking as well. I'm currently looking into HELOC vs. refinance and putting money into syndication deals with 5+ year timeframes. HELOC's can be frozen or called, and interest rates can go up substantially (all the way to 18%). I know duration mismatch -- borrowing short to invest in assets of long duration -- is one of the factors behind credit crises, bank panics and market crashes. It feels safer to refinance out, although the decision is painful since interest rates have risen and many people (like myself) are sitting in sub-4% long term fixed interest rate debt.

I crunched lots of numbers in different scenarios (varying holds, different interest rates) and the refinance always has a lower payment (assuming a 75 max LTV, 28.5 year amortization schedule on the HELOC, prime +1.25 vs. 4.5% at 80% LTV, 30 year fixed), and the total equity + cash out is higher after 5+ years for the refinance vs. the HELOC. The longer the timeframe, the greater the advantage goes to refinancing.

Kay Kay Singh

Rental Property Investor · Fort Wayne, IN · Member since 2016 · 258 posts · 177 votes

7y

@Alan M. It seems from your post that you are very well planned and low leverage in all your assets.Now the question is do you want to be active or passive in syndications.You can get on the GP side of the syndication and make more money but will not have much diversification or you can do what your syndication friend suggested but take more from your home equity since you can also get credit on the interest paid on HELOC if you invest that money in real estate that way you can invest in several syndication deals with several different syndicators then you are well diversified.

Charles Kao

Specialist · Grand Rapids, MI · Member since 2016 · 1k+ posts · 611 votes

7y

@Nate Reed

One more thing to consider if you have a 401k is borrowing against the 401k. The interest in the 401k loan you are paying is actually being paid to your actual 401k at prime plus 1

so you are growing the money in your 401k which right now is actually probably more consistent and stable than the stock market. Obviously if you can't pay it back there are issues there but its a nice way to take on debt and not show up on your credit report.

Thomas S.

Member since 2016 · 13k+ posts · 12k+ votes

7y

It appears as though you are primarily speculating on appreciation. The amount of dead equity you presently have (4.4M) is being seriously underutilised in real estate. Based on a opportunity value of 10% that is a potential income of $440K per year. Your present income (positive cash flow) from your properties is presently $83K per year.

My advice would be to entirely rethink your investment plans. Your money is not working for you at all. Does not make financial scenes to hold on to any properties.

Ivan BarrattBusiness Member

Investor · Indianapolis, IN · Member since 2015 · 764 posts · 953 votes

7y

@Alan M. thanks for sharing and glad you're looking at unlocking your equity. The ROE calculation looks way too low.

Haven't read the other responses so not sure if this has already been said or not but here it goes...

I would recommend new first mortgages (with a cash out up to 70/75% leverage to remain conservative) now while rates are falling.

There's a saying in investing. It goes, "Don't bet long with short term money." Real estate, as you know; is a long term game in most cases. HELOC's are typically short term money in that they have adjustable rates and call options. Taken to the extreme using HELOC's to invest in more property brought a lot of portfolios down in 2008.

Hope this makes some sense.

3 Reply

OP

Rental Property Investor · San Francisco Bay Area · Member since 2018 · 87 posts · 87 votes

7y

@Thomas S. As I stated, I just inherited one of the properties...I'm not speculating, I'm holding onto the property I grew up in. Sure, it's sentimental, but I'm not selling it and I'm trying to understand how best to use the equity I have, short of selling it.

Also, the Brownstone will cash flow about $10,000 a month once I get the 3rd unit rented out.

OP

Rental Property Investor · San Francisco Bay Area · Member since 2018 · 87 posts · 87 votes

7y

Thanks, @Ivan Barratt - I agree on the fixed rates/terms on long-term investments....so long with long. The only situation where I would use the HELOC for a downpayment is with significant cash flow coming in (as I currently have) and paying down the HELOC rapdily.

The other thing about the HELOCs is that they're unlikely to be called...the LTV, even with the HELOCs, will be around 50%, so very little risk the banks call the HELOCs because of valuation drops.

Eric Schultz

Investor · San Diego, CA · Member since 2016 · 265 posts · 305 votes

7y

Alan Miegel I would agree with your dilemma being too much equity in property. You get zero return from equity in a property. That is why I’m always confused by other investors that are rushing to pay off a mortgage, especially when the debt payment is outsourced to the tenants and the property has positive cashflow. Find “your” arbitrage. Cap Rate - Interest Rate = Arbitrage Many great ways to achieve this simple concept have already been shared.

Robert C.

Investor · San Francisco, CA · Member since 2016 · 338 posts · 444 votes

7y

@Alan M., Given your emphasis on being conservative, I would refinance either the Brownstone or the Primary. I would prefer the Brownstone, since you have no debt there and a really low rate on the Primary, however you'll have to do some comparative analysis since the former is a triplex and will probably get a higher interest rate. At the same time, 5 years goes by fast and the Primary will be adjusted before you know it.

As a conservative investor myself, I cringe a little when I think about syndications at this point in the cycle because it puts all the control in someone else's hands, and the money gets locked up in another way during a time when markets could transition. That could be personal bias, though. However, I could see myself (if I were in your shoes) selling the condo and taking a chance on an opportunity zone fund since that's the "it" thing right now and there are some pretty amazing long term tax advantages. You can defer your gains, and potentially release some of your equity for other investments. I don't know Boston's condo market, but San Francisco condos have pretty much been flat or down since 2014/2015. You may also have some extra advantages if you lived in that condo 2/5 previous years with a capital gains exemption.

I'm kind of "meh" on having a ton of HELOC money. In your case, since you don't plan on leveraging much, it's a "why not get it" scenario. But I tend to see people who aren't active investors don't actually end up using their HELOCs all that much. Certainly not over $1 million worth, since the rates are not great, and you'll probably figure out a way to refinance other stuff if you need that much for an investment. It's really just a mental security blanket for more passive investors imho.

Wesley WhiteheadPro Member

Rental Property Investor · Depends on where my employer sends me · Member since 2018 · 171 posts · 142 votes

7y

@Lee Ripma I concur with your assessment

Thomas S.

Member since 2016 · 13k+ posts · 12k+ votes

7y

@Alan M.

"I'm holding onto the property I grew up in. Sure, it's sentimental,"

No one is going to be able to help you with that approach. You can not make business decisions if you can not detach from emotions. Good luck.

Brit F.

Rental Property Investor · DFW · Member since 2017 · 143 posts · 120 votes

7y

@Alan M.,

Condolences about your Mom's passing.

Going the CO-refi route, closing costs and rates will be high, and it requires tenant compliance with the appraisals, which may also trigger the need to make unexpected repairs. Personally, I like to avoid refi's with tenants in place. It's no fun to hold up a future deal b/c you have a pending repair and re-appraisal. But, if you've been heavily involved operating your rentals, especially the inherited one, that might mitigate repair risk.

Going with the HELOC, the lender may not do an appraisal. Have you considered using the HELOC for other short term debt investments? You could be a private money lender (short term, high interest) and/or crowd fund commercial or residential? Local syndication would be fine too, but if you're sourcing from the HELOC, I'd prefer a high cash yield and maybe no equity at all - unless you're confident in return of capital in 3 yrs or sooner (am nervous about where we are in the economic cycle). I love the notion of making money off the interest rate spread using lender $.

Caleb Heimsoth

Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes

7y

@Alan Miegel. I’d sell the condo take that money and invest in syndications. I’d keep the brownstone for now. I wouldn’t refinance it. You don’t want that much debt I don’t think, unless you have a very high paying job. I wouldn’t take debt and invest in syndications that’s risky. If you want to free up equity, I’d sell.

OP

Rental Property Investor · San Francisco Bay Area · Member since 2018 · 87 posts · 87 votes

7y

@Thomas S.

Well let’s see, I have a million dollars to play with. How about offering something constructive for what I am investing instead of criticizing what I am not?

Ivan BarrattBusiness Member

Investor · Indianapolis, IN · Member since 2015 · 764 posts · 953 votes

7y

Great points @Alan M.! Sounds like you are on the right track.

For my small deals; I sold them all. Thanks to the new tax plan I've been able to reinvest proceeds (WITHOUT a 1031!) into new, larger projects that generate enough year 1 losses (via cost seg and accelerated depreciation) to cover over my passive gains. Further, they cash flow day 1. Simply put, large apartment communities beat small mfam in every meaningful catagory.

Like you, I'm constantly looking at my Yield/Return on Equity vs Cash on Cash.

Originally posted by @Alan M.:

Thanks, @Ivan Barratt - I agree on the fixed rates/terms on long-term investments....so long with long. The only situation where I would use the HELOC for a downpayment is with significant cash flow coming in (as I currently have) and paying down the HELOC rapdily.

The other thing about the HELOCs is that they're unlikely to be called...the LTV, even with the HELOCs, will be around 50%, so very little risk the banks call the HELOCs because of valuation drops.

Thomas S.

Member since 2016 · 13k+ posts · 12k+ votes

7y

@Alan M.

"How about offering something constructive for what I am investing instead of criticizing what I am not?"

You are sitting on a fortune that is dying a slow death as equity in real estate because you have a emotional attachment to a inanimate object. I have given logical business advice which you do not agree with. Your properties are not good investments as they presently stand and rents are not sufficient to support refinancing to maximise the use of your equity. You are forfeiting a minimum potential income of $360K per year. It is your right to ignore any advice you dchoose.

Oleg Shalumov

Rental Property Investor · Teaneck, NJ · Member since 2016 · 567 posts · 291 votes

7y

@Alan M. first of all sorry about your loss. I know it is not so easy to lose someone that close.

It sounds you have a lot of equity available, and from what sensed in you post you would like to stay passive. In this case I like you friends idea of investing with a few syndicator (like $100K each project).