Need advice on best use of rental property equity

9 Replies

BP-

I currently own one rental that has increased in value substantially. It’s low maintenance and I have a great long term tenant. I’m now considering pulling out some of the equity (around 200k) and buying another investment property. My question is...should I invest the equity in multiple properties using a portion of the 200k as down payments and build a broader portfolio of properties or should I look for just one quality property in that range and pay cash?  The market I live in (Denver) is expensive and competitive so I will likely be looking out of state to get quality at a better price and possibly buy turnkey properties to simplify things. 

Thanks in advance for your help


This is a very common way to scale up and grow your portfolio.

If you can leverage financing on the front end when buying a new property, that's great. 

But in a competitive market, you may be better off paying cash and then doing a cash out refinance on the new property after you own it free and clear. Some lenders will want 6 months of seasoning on the new property before refinancing, but that gives you time to stabilize it, spruce it up, raise rents, etc, to maximize the value prior to the refi.

@S Anderson That's great you have equity and have the ability to pull some of it out of your rental via cash out refi or a Investment HELOC. That's a tough question. I'm in Denver too, and I like having my properties within driving distance of me vs. out of state where you are reliant a great property manager or friend/family. I know that you can get better cash on cash returns out of state, but Denver has its own benefits too: diverse economy, great beer, net migration is positive with no signs of slowing down, awesome weather, etc.

It sounds like you want to spread your risk over multiple investments, there are condos/townhomes that you can buy in Aurora that would fit your criteria.... ~200-250k for a 3/2 turnkey place, and you can probably rent them out for 1850 easily, so with 25% down for each, you can purchase 3 of them right here in your background, be cash flow positive, and still get some nice long-term appreciation. 

Hey @S Anderson .  Congrats on your success!  And I agree that it is a great time to lever up.  

Great question. Like everything, it depends. After doing REI for over two decades, I've come to appreciate the power of diversification. If possible, I would spread that money over a few properties in a few locations. Since you will likely be remote anyway, it seems you might as well spread your risk even further. Good luck!

Thanks again for all of your advice! I’ve been looking in the Denver area but I just can’t wrap my head around the prices but I’ll keep searching. I like the idea of spreading out over a few locations. There are less expensive cities south of Denver and I’m also researching turnkey because I’m really interested in investing out of state but not in a position to handle it myself.  
Thanks!

Pulling money out to buy turnkeys is definitely what my plan is in the future. I agree with Paul Moore that diversifying the portfolio is the best use of money. Also, purchasing a turnkey with all cash will even help you with negotiating with the purchase price. I recently closed on a turnkey with Martel Turnkey last year so let me know if you want to connect and talk about that strategy. 

@S Anderson Sounds good. They have a good system and the renovations are really nice as well. Currently, they are a lot in demand so they don't have much inventory.