$700k equity 2.7% what to do... Not a real estate guy!

Seattle, Washington
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$700k equity 2.7% what to do... Not a real estate guy!

Jay Scott
Member since 2024 · 3 posts · 4 votes

My wife and I own a 5 bed, 4ba 3200sqft on 1 acre in suburbs east of Seattle, bought 2013 for $385k. Refinanced in 2019 at 2.7 with some cash out, house appraised for 1.1 mil at that time, we owe $350k. This is our only property. Mid 700's credit, no cc debt, 1 car payment. 

We have 4 kids, 18 and 22 and both work and support themselves and continue to live downstairs rent free, so they are quickly building savings. Then an 11 and 13 year old. This was not intended to be our forever home as we would want to downsize the residence and upsize the property as kids age and move further away from the exploding development here. But selling this place at any point in time now seems a terrible idea. 

Our income is modest as my wife works part time, let's say around $120k/yr, not a lot of disposable income but we're comfortable. I'm diy with general construction, homebuilding/remodeling and site development background so flipping and brrrr scenarios are appealing as it's work I would be able to complete on my own and through personal contacts in trades. But it seems inventory is low and prices are high, in my uneducated view.

I feel like we were dealt a good hand here and have made good choices to live comfortably in this situation. However, I know next to nothing about real estate investing and I'm constantly wondering if sitting here on this equity and doing nothing with it is merely a wasted opportunity. I feel like we may be in a favorable position to leverage this home and potentially begin a real estate portfolio and/or generate income, but that's merely a guess on my part. I'm looking for some advise on how I should begin to explore my options here, or if there are even any viable options to explore. 

Sorry the long winded first post, I look forward to reading some of your all's thoughts on my situation. 

Thanks, Jay

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Jason WrayPro Member
Banker · Nationwide · Member since 2020 · 2k+ posts · 1k+ votes
2y

Jay,

Do not let a lower rate hold you hostage from buying more real estate and making more passive income. Mortgage rates have been dropping back down since December and they will continue to trend down this year. You may not see a 2.70% come back for some time or ever but you will see 4's and 5's come back. That being said I would take out enough cash that will not stretch you out beyond your means.

Take that cash and focus on cash flow and properties where you can add value or renovate and borrow off the future ARV. Keep in mind as you borrower money and buy more real estate it will return the cash through future equity to borrow and pay off previous debt. It will also offer you a passive income through the rents of the property to help pay the debts off/down.

Might also be a good idea to look at a few other states like Oregon Coast great STR/LTR opportunities. You also have Indiana and Ohio where you can get a good house at a reasonable price point.

[email protected]727-637-4289
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  • Jason WrayPro Member
    Banker · Nationwide · Member since 2020 · 2k+ posts · 1k+ votes
    2y

    Jay,

    Do not let a lower rate hold you hostage from buying more real estate and making more passive income. Mortgage rates have been dropping back down since December and they will continue to trend down this year. You may not see a 2.70% come back for some time or ever but you will see 4's and 5's come back. That being said I would take out enough cash that will not stretch you out beyond your means.

    Take that cash and focus on cash flow and properties where you can add value or renovate and borrow off the future ARV. Keep in mind as you borrower money and buy more real estate it will return the cash through future equity to borrow and pay off previous debt. It will also offer you a passive income through the rents of the property to help pay the debts off/down.

    Might also be a good idea to look at a few other states like Oregon Coast great STR/LTR opportunities. You also have Indiana and Ohio where you can get a good house at a reasonable price point.

    [email protected]727-637-4289
    3Reply
  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    2y

    @Jay Scott

    While you have equity, you do not have a lot of disposable income. A rental property can be very costly and if you have vacancies etc you are paying a mortgage with no income. Can you support that? Most rentals provide very little cash flow during their early years. While leverage is great, it can also be your worst than me. If you take the equity out of your home and buy another home, if real estate values go down, you just lost twice as your home went down and your 2nd home went down.

    Dont have FOMO in real estate

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  • Troy DeLong
    Real Estate Agent · Lansing, MI · Member since 2020 · 169 posts · 91 votes
    2y

    @Jay Scott It's good that you've got the gears turning in your head. Without putting too much thought into this, my 'thousand foot aerial view' is this....

    It sounds like you are in an expensive / higher end location outside of Seattle. What is keeping you there? Jobs? Family? Schools? 

    For that size house for just four people (Wife, two younger kids and you), it sounds like a lot and could be a good opportunity to downsize. Are there more reasonably priced areas in your region that you and the family could downsize too? 

    I believe HELOCs are great when...
    A) Rates are decent 
    B) You have plenty of equity to get you a decent pile of cash to play with 
    C) You would like to stay in your house / keep the property long term. 

    For your situation, I would lean toward selling your house on-market, cashing out, moving to another region where the housing is more affordable than +$1million dollar appraised homes, pay cash for your new home, then with the leftover cash, buy one rental and see how it works out for you. 

    Paying cash allows you to negotiate better on the property and is more enticing to sellers. But you need to make sure you and your agent are confident you're not overpaying.

    Now, all that being said, I also think it would be a great idea to do some value add projects to the properties (Personal residence and rental property) and do cash-out-refinances on the buildings when rates become more favorable and you're up and running with the rental. Rinse, repeat for another property. 

    All that said, this is just my OPINION without diving too deep into your situation. Best of luck! 

    - Troy 
     

    2Reply
  • Alan AsriantsBusiness Member
    Real Estate Agent · Philadelphia, PA · Member since 2019 · 1k+ posts · 1k+ votes
    2y

    There are multiple ways you can be creative with 700k in equity. 

    1. HELOC - you can pull a HELOC and use it for a short term investment strategy like flipping. This is better for shorter turn around times where you can make your money back quickly. This is not a great resources for longer term projects like buy and holds. THE beauty of a HELOC is that you can use itw whenever and however much of it as you want. What you take out is what you will have to start paying for

    2. Refinance - by refinancing you can take money out of your home tax free, but you will suffer higher rate and payment. Don't over extend your self. This cash you pulled out should make more for you and not be a way to increase your debt even more. For example. You take out 200k to put on a downpayment for a property that is cashflowing you and lowering your monthly expenses even more than what you had at 350k mortgage with a 2.8% rate. In other words: say your current payment is 2000/m if you cash out and refi your payment to 3000/m and you have 150k in equity. that 150k downpayment on a rental property should bring you more than 1000/m in cash flow. This makes this worth it. even if it is less though - you now own two assets paying themselves off - so also a win if the numbers aren't quite there

    Selling and moving to a different area that is cheaper for me is usually not the best move. Pun intended. This is because you are changing your world around, dragging your kids and family along with it which is tough for anyone. 

    [email protected]267-767-0111
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  • Jay Scott
    OP
    Member since 2024 · 3 posts · 4 votes
    2y

    Relocating isn't an an option right now. I have a well established business here and 2 kids still in school. What about looking at a way to get my son involved. He's a full time employee of mine, making around $60k, maybe a bit more this year with insensitivs and OT. This may be a whole separate topic... He's in a good spot with zero debt obligations other than a gas card he has been using to build credit for 3 or 4 years. With him being able to live with us rent free while still making a decent amount of money for being almost 22 and good spending habits, is it worth exploring options to use our situations together to procure real estate in some form or fashion? Or just best for him to keep saving to buy a starter home on his own in a few years? 

    1Reply
  • AJ WongBusiness Member
    Real Estate Broker · Oregon & California Coast · Member since 2022 · 822 posts · 696 votes
    2y
    Quote from @Jason Wray:

    Jay,

    Do not let a lower rate hold you hostage from buying more real estate and making more passive income. Mortgage rates have been dropping back down since December and they will continue to trend down this year. You may not see a 2.70% come back for some time or ever but you will see 4's and 5's come back. That being said I would take out enough cash that will not stretch you out beyond your means.

    Take that cash and focus on cash flow and properties where you can add value or renovate and borrow off the future ARV. Keep in mind as you borrower money and buy more real estate it will return the cash through future equity to borrow and pay off previous debt. It will also offer you a passive income through the rents of the property to help pay the debts off/down.

    Might also be a good idea to look at a few other states like Oregon Coast great STR/LTR opportunities. You also have Indiana and Ohio where you can get a good house at a reasonable price point.


    Good points JW. If it's COC high returns, look no further than Coastal Oregon. Let me know if you'd like a link to our existing and permit eligible STR's? There are roughly 50 properties for the moment from Bandon through Lincoln City, to Pacific and Bay City.

    541-800-0455
    Sesemi | STR Brokers powered by Fathom Realty 516 Reviews
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  • Dave Skow
    Lender · Seattle, WA · Member since 2014 · 2k+ posts · 899 votes
    2y

    @Jay Scott- thanks ...you are in solid shape ...but  getting started with rentals or house hacking will take some  funds and  also ability to pay more expenses than usual at times  ....if you  sell - you will have some funds to  work with ...depending on where you  consider buying - the sales proceeds may not go  far ...you might consider look for a small rental in a lower priced area  to begin with so you can get a  feel of how the process and numbers  work ...down payment of  15% of the purchase price   Plus  loan costs are  needed 

    1Reply
  • Brian Kloft
    Investor · Arizona & Oregon Coast · Member since 2023 · 128 posts · 113 votes
    2y

    A couple of thoughts here. First you need to talk with your tax person. From my understanding if you sell your house you are going to have to pay capital gains taxes. As a married couple you only get a $500k increase in value tax free. Sounds like you don't want to sell it but that is something to be looking at to make sure that you don't get hit with an unexpected tax bill either now or in the future. 1031 may be an option if you do certain things right.

    Second, since you have 1 acre in what I am assuming is a desirable area, have you thought about adding on an ADU? Since you already have the property, it might be the most economically beneficial option for you and a good starting point into real estate rentals. Obviously I have no idea of your property layout for if this would even make sense.

    0Reply
  • Jay Scott
    OP
    Member since 2024 · 3 posts · 4 votes
    2y
    Quote from @Brian Kloft:

    A couple of thoughts here. First you need to talk with your tax person. From my understanding if you sell your house you are going to have to pay capital gains taxes. As a married couple you only get a $500k increase in value tax free. Sounds like you don't want to sell it but that is something to be looking at to make sure that you don't get hit with an unexpected tax bill either now or in the future. 1031 may be an option if you do certain things right.

    Second, since you have 1 acre in what I am assuming is a desirable area, have you thought about adding on an ADU? Since you already have the property, it might be the most economically beneficial option for you and a good starting point into real estate rentals. Obviously I have no idea of your property layout for if this would even make sense.

    Thanks for the insight. The adu isn't an option on the lot. I guess simply put, having access to a large chunk of equity through say a HELOC seems to be a good starting point. I'm understanding the limiting factor being my wife and I's income and if it would allow us to to cover the payment on the equity loan while it's being used for whatever investment we decide. Say If we are able to pull x amount of dollars in a HELOC and incorporate my son's income and 0% DTI in to the equation. What if anything is the best use of that money either short term or long-term (flip, brrr, rental, etc.)? Or is the answer just nothing and keep going business as usual? Which is fine too! Thanks for the input so far.

    1Reply
  • Dave Skow
    Lender · Seattle, WA · Member since 2014 · 2k+ posts · 899 votes
    2y

    @Jay Scott- if you can access ample funds from HELOC for a down payment on a rental - run the numbers to see how these look when including the HELOC payment ( the full amortizing payment and not the interest only payment )/ the new rental loan and the potential rental income ....my guess is that the cash flow wont be there

    1Reply
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