I'm writing this today, because I'm torn between a few options for what to do with my home (rental) appreciation (equity)? I have a few homes, but will use one of them as a specific example for purpose of this discussion. I bought a property in Las Vegas a few years ago, and have been renting it out with a decent cash flow: $300/month. I just checked my homes value, and it has appreciated a good amount: +$50,000. I originally financed my the home conventionally (20% down, 30yr fixed). I am weighing a few options, and would like to get any opinions and considerations for choosing one....and if there are other suggestions, I'd be open to them too!
1. Cash out Refinance: If I cash out refinance, my new mortgage+ins+tax payment increases about +$300/month and therefore will not be cash flow positive (after factoring repairs, mx, capex, etc). But I would be able to use that cash-out (~$50K) for a new down payment on another similar rental that will cash flow about $300/month (so I'd consider a $150/month/rental net cash flow per se; but would have 2 properties).
2. Sell & upgrade: By selling, I could possible take that $50K gain and 1031 exchange into a bigger/multi-unit home that could potentially get me an increased cash flow/month. I haven't found such a property yet (haven't looked for one), so this would be theoretical; and maybe my cash on cash return is lower, but my goal of increasing passive cash flow takes a positive step forward.
3. HELOC: I could establish a HELOC for the $50K (or more) and utilize this as a bridge to securing longer-term debt on the new rental property, or any other project. This would be similar to my fourth option, but can begin thinking of creative ways to use this equity on credit line basis. I don't have a current project in mind yet.
4. Do nothing: My original strategy was to never sell a property, and to eventually get them all paid down to where I can eliminate my debt service on them (and thus increase my cash flow) toward retirement. So, this option is in line with that aspect. Plus, not knowing how the market & economy can fluctuate in the future, it may be nice to have some of that padded equity to lean on if needed.
My overall goal is to continue growing my current (and future potential) cash flow ($$), not necessarily maximize ROI or cash-on-cash return. I don't necessarily need this equity to buy my next property; I'm currently postured to continue using other people's money and other streams of income to finance future deals. But with this good bit of appreciation I have (on this property and a maybe a few others), I'm interested if there is a smart way to leverage it in line with my growth strategy.
Thanks for reading, and hope to glean some considerations to factor. Thanks.
I’d sell and 1031 exchange personally
Absolutely option #2 in my opinion. It has the most positive long term benefits.
Pull your equity out regardless of your decision since it is now dying a slow death and costing you lost income on it's opportunity value.
Leverage increases cash flow. Paying off properties is where cash goes to die.
There is no better way to reduce your ROI to almost nothing than by allowing it to accumulate as dead equity.
@Damon Wong I'm going to just join the choir and say Option 2 is the best of the four. It has the most flexibility and upside. Depending on how much equity you have in the property and its total value, you could turn that one decent property into a tidy little portfolio of leveraged properties in cheaper markets with cashflow of about the same amount, each. I could be more specific using the numbers here in birmingham if I knew the value of your current prop and the debt/equity split.
I would agree with the others for #2, but if the window closes on the super low interest rate environment, it would make other options more enticing.
Free eBook from BiggerPockets!
Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!
- Actionable advice for getting started,
- Discover the 10 Most Lucrative Real Estate Niches,
- Learn how to get started with or without money,
- Explore Real-Life Strategies for Building Wealth,
- And a LOT more.
Sign up below to download the eBook for FREE today!
We hate spam just as much as you
Join the Largest Real Estate Investing Community
Basic membership is free, forever.