Pulled equity.... now what?

Question

Suppose you had a paid off rental property and were able to pull $200k in equity for your next investment.  Given that the cashout refi is still a mortgage, what would be the best way to use the $200k?

1) use the full $200k as a down payment and use more leverage to buy lets say a $750k multi family - in other words leverage to the hilt as interest rates are low!

2) use the full $200k to be a cash buyer of a property and get a smoking deal and then pull out the equity again to buy another? (hard to do this in southern CA).

Thanks in advance!

Gerard Pechal · Answer

@Curt Davis Good point, I was just thinking about what great opportunities there would be for $200k in DFW... possibly much more in other markets

Gerard Pechal · Answer

I personally love to leverage my available cash, and in this case would do so to develop or acquire a quadplex or multiple duplexes in an appreciating market (your #1). Seems this way you'll realize the greatest ROI without literally having all your eggs in one basket... ROI with 5-10% appreciation on a single $750k property vs. multiple $200k properties is not quite the same once you factor in multiple closings, etc.

If I had $200k cash right now, I'd probably purchase a $600k quad @ 20% down conventional (assuming max 60% ARV without repairs), rehab & optimize NOI and either a) hold for at least 1 year then flip, or b) hold for long-term income w/ HELOC for next purchase.

Of course this all assumes your DSCR is acceptable to your lender. A higher debt service may require you start with those smaller properties to pass loan criteria

In the end it depends on your cash flow objectives and how many properties you want to manage

Curt Davis · Answer

How about use those funds to buy rental homes in other states where you can get far better deals then compared to CA unless your not comfortable doing long distance investing.  Just giving you another option to consider.