To build up cash or to build up equity

Real Estate Agent · Kansas City, MO · Member since 2021 · 26 posts · 14 votes

As of July 7th, I am now a homeowner!

I would appreciate everyone's opinion here. I have short-term rental arbitrages and this new house will be my 10th STR. I purchased the property for what it appraised for so it has no equity.

My question is, should I take a chunk of my profits from the STRs and build up enough equity that I can eventually take out to buy the next property or should I take a chunk of my profits and set it aside to where I have enough to purchase the next property. Thanks!

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Nathan GesnerBusiness Member
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Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
4y
Quote from @Zac Vaughan:

As of July 7th, I am now a homeowner!
I would appreciate everyone's opinion here. I have short-term rental arbitrages and this new house will be my 10th STR. I purchased the property for what it appraised for so it has no equity.
My question is, should I take a chunk of my profits from the STRs and build up enough equity that I can eventually take out to buy the next property or should I take a chunk of my profits and set it aside to where I have enough to purchase the next property. Thanks!

What's the difference? The higher leverage you have on a property, the better return it will get, but the more risk you take. I would have at least 20% equity in it, then save the profits for the next purchase.
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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
4y
Quote from @Zac Vaughan:

As of July 7th, I am now a homeowner!
I would appreciate everyone's opinion here. I have short-term rental arbitrages and this new house will be my 10th STR. I purchased the property for what it appraised for so it has no equity.
My question is, should I take a chunk of my profits from the STRs and build up enough equity that I can eventually take out to buy the next property or should I take a chunk of my profits and set it aside to where I have enough to purchase the next property. Thanks!
If what you are saying is you are thinking of taking a chunk out of your profits (cash flow) and putting it back into the property to buy equity, and think this is a good thing, then you need a math lesson in vectors. Every time you take your cash flow and put it back into the property, you ares spending money...and buying equity. That means you are agreeing to pay more for the property...with every payment you make.
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Andrew Kennedy
Member since 2022 · 20 posts · 39 votes
4y
In the words of David Greene: Run the numbers. Investors are cash-poor because their money is in properties at work. Having liquid cash is useful, but it depends if you're maxed out on mortgages or can't get financed. I personally got involved in real estate because I came into a sum of money and due to inflation, it is consistently losing purchasing power. Because LTV doesn't allow 100%, you're going to lose some liquidity on a HELOC as well, so you need to run the numbers for what makes sense with your goals. If you plan on purchasing properties, line up using equity vs cash in line with your goal whether it means purchasing in 1 month, 3 months, 6 months, or a year later.
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Jacob Trogan
Lender · Kansas City, MO · Member since 2016 · 142 posts · 71 votes
4y
If the whole market decided to lose 10% of its value (probably won't happen blahhh blah blah). IF this happened how good is your so called equity now? I would save your cash and use that to invest. I understand paying off your primary residence early can create mental peace but thats all it does. Having a lower mortgage balance will not help you in any way. You will still have the same monthly payment. If you paid off your house completely that is a different story and somewhat freeing. Use your cashflow to buy a deal that will then profit enough to pay off your primary residence if that is your desire. I personally would not pay off your house early. Also I see you are in KCK I may be interested in using you for a property to arbitrage on Airbnb.
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