What should I do with $2M in equity? Sell?

Buying & Selling Real Estate
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What should I do with $2M in equity? Sell?

Chris Hill
Member since 2019 · 58 posts · 21 votes

I'd love some advice.  I purchased 14 townhomes eight years ago for $120K each, and they are now all worth $350K.   Total value is $4.9M, and I owe $1.6M.   My goal is monthly cash flow.  I'm about roughly $11k right now, but my goal is 30K.  Here are a few thoughts I've considered, but I am sure someone with more experience might have better suggestions.  

1.  Sell 6 of them - Ideally I want to hang onto the 8 newest ones, so I'm considering selling 6.   Rough numbers, I could sell for $2M, and I owe 400k on those six, so I would net 1.6 (I know I'm excluding some costs).  I've invested in Ashcroft syndications and I like that a lot.  The cash flow of those 6 today is about 6k.  If I were to put 1.6 into ashcroft at 9%, its $12K a month, double.  That diversifies me a bit more, local rentals, syndications.  I'd probably split the syndications amongst a few operators.  (Suggestions?)  I cant 1031 into ashcroft so would it be worth it to eat the capital gains?

2.  Cash out refi - I looked at these numbers if I did refi on all 14.  I could get 1.9 in cash, but the payment on the current loan plus the cash is $18K so not ideal.

I manage the 14 properties, which is easy as they are newer, but eventually I want to be more passive. 

In summary, my main question is what would you do with the equity?  My market could drop and I would miss out on those gains.  All you experienced folks, what would you do in this situation?  Happy to provide any details i missed.  

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Bill B.
Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
4y

Don’t forget to subtract at least $200k for capital gains tax (more if you live in a state with income tax) and another $50k for depreciation recapture. (So your $1.6 becomes $1.3 and your $12k becomes a little less than $10k) Then as long as you’re confident these people you know by name alone won’t lose or steal your money or sell the property and return your money and stop paying 9% you should be back to even in just 5 years. (I’m not counting the higher taxes you’ll be paying on the increased cashflow to keep it simple.)

At least you can give up control to an unknown person, that’s a big step for most real estate investors. But I get your point $11k return on $5mil is pretty bad. Less than 3%. 

Ps. It seems like your thinking your market will drop but not the syndicators market? You didn’t say what market you’re in that you think is worse than most? 

Pps. If interest rates rise that will hurt big residential a lot more than SFR as buyers will want higher returns resulting in lower offers. I would bet 90% of the syndicators out there haven't experience a rising interest rate market.

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  • Jake Wiley
    Investor · Charleston, SC · Member since 2022 · 233 posts · 198 votes
    4y

    @Chris Hill - First you could use the equity to Diversify into several assets rather than one large multi, and yes there is a ton of info out there, and more likely than not a partnership to be had with someone on this site to head into a large single multi-fam deal.   However - Invest where you are competent or can bring in competency.   

    The 100% passive strategy would be getting out of the active game of being the owner, manager, chief problem solver, and turning your money over to pros like in a syndication as you mentioned above with Ashcroft.  

    In terms of what do you do when you sell your newly appraised $11M property that's up to you, but if your goal is to have steady and reliable passive cash flow kicking off your desired coupon, then investing in Limited Partnerships or syndications would be an option that has someone else doing all the lifting and you collect checks.     

    In my mind, when you get to the point where you have gotten out of the Rat Race as Robert Kiyosaki would say, you've really got unlimited potential at that point.  It's like having a perpetual free play in football.   As long as you aren't jeopardizing your principal, which is providing your cash flow, you are free to step up and shoot for the end zone every single time.   The more reps you take the more often you score, and the score has the potential to be huge!   To me, that sounds like the way to live and it seems like you are knocking on the door!

    Good luck, keep us posted on where your head is as this plays out.             
     

    0Reply
  • Chris Hill
    OP
    Member since 2019 · 58 posts · 21 votes
    4y

    These are all LTR in Ogden UT. I like the idea, but I don't see enough interest in people coming to Ogden to turn it into an STR.

    Totally agree on the stock market, it doesn’t make sense to take 9% over 25%. However I’ve totally soured on the stock market. Feels like gambling to me. I like the idea of a tangible asset, even though it could totally go south, it feels slightly safer to me.

    I have roughly 200K in syndications with Ashcroft right now, and so far so good. I do like the idea of diversifying additional funds into other syndicators and property types. Thank you for all your suggestions!

    0Reply
  • Bud Gaffney
    Rental Property Investor · Boston, MA · Member since 2019 · 2k+ posts · 1k+ votes
    4y

    Cash out refi and buy more :)

    2Reply
  • Derek Schetselaar
    Lender · Lehi, UT · Member since 2019 · 39 posts · 15 votes
    4y

    @Chris Hill Congrats on the success man! 

    Great suggestions so far! I especially like the suggestions to stay the course and keep on the "boring" part of what you know in real estate. I think there is great power in the system that you have perfected. 

    I would also consider the area that you are investing. When I grew up Ogden was the boondocks, but with home prices going up in SLC Valley and UT county is has pushed more and more people out to Ogden, Syracuse, Layton etc. I don't think that will stop with the increased building in that area. 

    Yes I think diversification is mightly important, but the risk would also be very small if you were living off 10k of the 20k you make monthly with all the houses paid off that I think the diversification risk minimizes. 

    Hope this helps man! 

    0Reply
  • Austin F.
    Investor · MI · Member since 2015 · 227 posts · 478 votes
    4y

    Here's one more thought. Pull out a line of credit secured against the 14 (12?) you already have. Use that line as the down payments on more properties (Utah is a growth market short and long term). Pay down the line aggressively with your current cash flow, rinse, repeat.

    No cash-out refi so your loan pay down timeline stays the same, yet unlocked equity to acquire more properties. 

    1Reply
  • David Lilley
    Rental Property Investor · Dallas, TX · Member since 2016 · 261 posts · 170 votes
    4y
    Originally posted by @Adam Christopher Zaleski:

    Based on your personal situation, the most common advice from all the posters is that you should avoid the syndications. It's a little weird that you still want to do that. If you really want to still do it, please start off with a very small amount of money. 

    The stock market (S&P 500) did 25% last year. I don't understand why anyone would want to do a syndication for 9%.  

    The first 80K of capital gains is at 0%. If you quit your job and sold one townhouse a year, the first 80K of capital gains would be 0%. 

    The S&P 500 has averaged about a 10% return for the last 50 years or so. If you were to invest in the stock market, put it into an S&P 500 index fund.

    Syndications can return much more than 9%. You may make 9% on your money from annual cashflow alone. Then, you receive additional upside at the sale. For an example, we have two deals under contract to sell right now. One will return approximately 2x equity multiple to investors in less than 2 years and the other 2.8x in just over two years. This doesn't happen with every deal, but when you invest in areas like Dallas, these kind of returns will continue for several years at least. In addition to that, you have all the tax benefits that stocks don't give you.

    0Reply
  • Chuck Webb
    Houston, TX · Member since 2011 · 115 posts · 70 votes
    4y

    Sell and invest in multi-family.

    0Reply
  • Kelli Meade
    Real Estate Broker · Huntsville, AL · Member since 2018 · 11 posts · 3 votes
    4y

    Cash out. Refi.Become an Accredited Investor and buy equity in some of these large privately owned developer of REITs companies. If you invest the entire. $2MM, you'd need at least 30% in equity in a company that's truly worth $4.7MM. At least, that's what I would do.

    0Reply
  • Account Closed
    Member since 2021 · 217 posts · 190 votes
    4y

    I purchased 14 townhomes eight years ago.

    The immediate problem is there is now where you are going to go now in 2022 to get the same price/rent ratio you got starting back then.

    And I think the reason you are debating/hesitant going all in on syndications is because you know deep down they are pissing in the wind compared to the stability of the property you already own and control yourself.

    You are facing a problem Howard Marks addresses in his latest memo

    https://www.oaktreecapital.com...

    I short, he recommends not slaughtering cash cows unless you've got some certainty of a better home for the money, or if the cows are drying up.


    6Reply
  • Account Closed
    Rental Property Investor · Denver, CO · Member since 2019 · 78 posts · 66 votes
    4y

    @Chris Hill Did you run the numbers to calculate the return on the townhomes after you do cash out refis? My experience is those levered returns beat the syndications. I invest in and like both. But, the rentals I own yield twice as much as syndications (and I don’t have to guess which syndicators and projects are going to do well since I know how my rentals perform).

    1Reply
  • Chris Hill
    OP
    Member since 2019 · 58 posts · 21 votes
    4y

    If I cash out refi all 14, my 1.6 debt currently owed goes to 3.5 owed (taking  1.9 out).  It’s a 17k mortgage.  With gross rents at 22, cash flow goes to 5k per month.  If I successfully invested 1.9 in multiple syndications at 10% it’s roughly 16k per month.  So monthly cash flow would be about 21k per month from syndications + rent.  That’s a good number but seems tight/risky to me so being so leveraged? I think that would be 14 years to pay back the 3.5 loan. 

    Honestly at that point my brain is fried! Not sure what percent retuen that scenario would be.  

    Would you consider that path? 

    If I refi just the three already paid off, take out 750k, with new loan payment, cash would go up 3k a month to 15k.  The seems more tolerable.  Thoughts?  Minimal leverage or all out?

    0Reply
  • Joe S.Pro Member
    Investor · San Antonio · Member since 2020 · 3k+ posts · 3k+ votes
    4y

     Keep in mind it would be extremely hard to reap 2 million in equity if all you had was 2 million in equity. If you sold then there would be closing cost, ,realtor fees, and then Uncle Sam would want his portion.

    Keep in mind example I gave above was simply if you sold the properties. Also if you sold at the peak of a market you will be buying back in at the peak of the market. There’s no real way of knowing that there will be a drop in real estate pricing.

    1Reply
  • Sam McCormackBusiness Member
    Real Estate Agent · Cincinnati, OH/NKY · Member since 2021 · 1k+ posts · 833 votes
    4y

    @Chris Hill

    You have a lot to work with, ever think of 1031 exchange? With 2M as a down payment you could definitely get a nice apartment complex and get the cash flow you want after a few years of increasing the value of the property and inflation. Especially in a nice appreciation friendly area!

    Hope this finds you well!

    [email protected]859-443-4952
    Sam McCormack Realtor
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  • Wade Woo
    Real Estate Consultant · Manassas Park, VA · Member since 2019 · 74 posts · 19 votes
    4y

    Sell the 14 townhouses with a lease with option to buy.  $4.9M - $1.6M = $3.3M

    Withhold 1/3 for taxes, $1.1M

    $3.3M - $1.1M = $2.2M

    $2.2M = 44 rental property with cash flow of $22k per month.  

    In 5 years $2.2M doubles to $4.4M.

    $4.4M = 88 rentals with cash flow of $44k per month  exceeding your $30k per month goal.

    0Reply
  • Brian Plajer
    Rental Property Investor · Chalfont, PA · Member since 2021 · 189 posts · 90 votes
    4y

    @Chris Hill is there any way/benefit to sell the 6 and 1031 the proceeds into the remaining properties?

    0Reply
  • Jim K.
    Rental Property Investor · Charlotte, NC · Member since 2017 · 271 posts · 259 votes
    4y

    I'm not the biggest fan of townhomes, but have you considered doing a modest cash out refinance? You can get a fixed rate 30 year loan around 3.6-4.0% interest. 

    You'd avoid capital gains/recapture taxes, maintain the cash flowing units, and have extra cash to invest into deals or syndications.

    0Reply
  • Daniel Sperling
    Lender · Baltimore, MD · Member since 2019 · 37 posts · 34 votes
    4y

    This may be sacrilegious feedback for this community but if you don't want to take on additional debt and doors via cash out refi, I would continue paying down the current mortgages and dollar cost average into a low cost index fund and eventually transition in a top-rated property manager to manage your current portfolio and make that component more passive.

    1Reply
  • David Lilley
    Rental Property Investor · Dallas, TX · Member since 2016 · 261 posts · 170 votes
    4y
    Originally posted by @Chris Hill:

    If I cash out refi all 14, my 1.6 debt currently owed goes to 3.5 owed (taking  1.9 out).  It’s a 17k mortgage.  With gross rents at 22, cash flow goes to 5k per month.  If I successfully invested 1.9 in multiple syndications at 10% it’s roughly 16k per month.  So monthly cash flow would be about 21k per month from syndications + rent.  That’s a good number but seems tight/risky to me so being so leveraged? I think that would be 14 years to pay back the 3.5 loan.

    If I refi just the three already paid off, take out 750k, with new loan payment, cash would go up 3k a month to 15k.  The seems more tolerable.  Thoughts?  Minimal leverage or all out?

    Chris, the answer is leverage yourself to the point you feel comfortable. 


    Originally posted by @Daniel Sperling:

    This may be sacrilegious feedback for this community but if you don't want to take on additional debt and doors via cash out refi, I would continue paying down the current mortgages and dollar cost average into a low cost index fund and eventually transition in a top-rated property manager to manage your current portfolio and make that component more passive.

    Good advice. Everyone's situation and preference will vary. Your returns will be less if you are lower leveraged, but if that means sleeping good at night, the trade off may be worth it for you.

    0Reply
  • Tony Kim
    Rental Property Investor · Los Angeles · Member since 2018 · 844 posts · 1k+ votes
    4y
    Originally posted by @Daniel Sperling:

    This may be sacrilegious feedback for this community but if you don't want to take on additional debt and doors via cash out refi, I would continue paying down the current mortgages and dollar cost average into a low cost index fund and eventually transition in a top-rated property manager to manage your current portfolio and make that component more passive.

     This is exactly what we are doing, except we are buying up REITs instead of indexes since we are already heavily invested in the S&P and tech.

    To the OP, if in 10 years you will be able to pay down most of the debt, then I have very little doubt that you will be at 30K by then. Rents will continue to go up... keep deploying the additional revenue you get into various investments such as syndications or stocks. 

    1Reply
  • Adam Christopher Zaleski
    Investor · Pueblo West, CO · Member since 2014 · 310 posts · 213 votes
    4y
    Originally posted by @David Lilley:
    Originally posted by @Chris Hill:

    If I cash out refi all 14, my 1.6 debt currently owed goes to 3.5 owed (taking  1.9 out).  It’s a 17k mortgage.  With gross rents at 22, cash flow goes to 5k per month.  If I successfully invested 1.9 in multiple syndications at 10% it’s roughly 16k per month.  So monthly cash flow would be about 21k per month from syndications + rent.  That’s a good number but seems tight/risky to me so being so leveraged? I think that would be 14 years to pay back the 3.5 loan.

    If I refi just the three already paid off, take out 750k, with new loan payment, cash would go up 3k a month to 15k.  The seems more tolerable.  Thoughts?  Minimal leverage or all out?

    Chris, the answer is leverage yourself to the point you feel comfortable. 


    Originally posted by @Daniel Sperling:

    This may be sacrilegious feedback for this community but if you don't want to take on additional debt and doors via cash out refi, I would continue paying down the current mortgages and dollar cost average into a low cost index fund and eventually transition in a top-rated property manager to manage your current portfolio and make that component more passive.

    Good advice. Everyone's situation and preference will vary. Your returns will be less if you are lower leveraged, but if that means sleeping good at night, the trade off may be worth it for you.



    "Chris, the answer is leverage yourself to the point you feel comfortable."

    This is the answer. Only you can answer it. As a reference point, in the book, "The millionaire real estate investor" the average equity position for people who own more than 1 million in equity in real estate is 40% equity/60% leverage. I personally like to be 40% equity or above at all times. I might go a little under 40% if I have a ton of cash for some reason. For example, if I just completed a cash-out re-fi. However, once I deploy that money back into another deal, I will make sure that I'm at least 40% equity. I always have at least 6 months of mortgage payments in my checking. It helps me sleep at night. 

    You have intimate knowledge of how to manage the townhouses. I would want to keep them and capitalize on this knowledge. If you sell them all and go into a different rental market, there is going to be a learning curve that is going to cost you money. 

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  • Stewart VanValkenburg
    Provo, UT · Member since 2016 · 53 posts · 15 votes
    4y

    I am curious,  what did you decide to do? 

    0Reply
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