What to do with equity from appreciation?

Question

Like many of you, I have been buying properties during the past 5 years and now find myself with some decent equity in each of them. I bought in the North SF Bay Area and the market is going pretty crazy here. I have a range of $50k to $125k just in appreciation in each of the properties I bought.

My question is, what would you do with that? I am a buy and hold investor, and all of the properties currently cash flow. I would like to increase my cash flow, but am open to any suggestions...

Mike H. · Answer

I would sell all your properties and then become a hard money lender and lend it to your new BP friend Mike in Illinois at very reasonable rates.  Thats what I would do with it if I were you. :-)

I would think it would depend on what you're goals are short term and long term.  And also what you think pricing will continue to do there.

But at some point, it just doesn't make sense to have all that equity sitting there making you a few hundred bucks a month. I would think you'd want to cash out at some point and either re-invest in areas that will provide better returns. Or possibly in larger multifamily properties that would include their own management so your income is truly passive.

There are a lot of variable there. How much are they cash flowing? Is 50k in equity getting you $250/month in cash flow? If so, that may not be that bad if you believe pricing there is going to continue going up for the next couple of years like it has. Add in your principal paydown and you're getting 15 to 25% returns on that money.

Why fix it if isn't broken. Keep it there.

At some point, pricing increases will come back down to earth and will be closer to that historical number (3% a year - maybe california is a bit higher though).  But if you have 100k in equity making 4 or 5k in cash flow and 4 or 5% in appreciation, then you might want to consider investing it somewhere else.

Although that first option might be something to at least consider, I think a lot depends on your goals - short and long term - and your threshold for risk.

For me, I would probably keep the equity in there a bit longer while prices continue rising and then cash out when I see the lull. I'd say cash out now but I'm not sure how much houses in california really cash flow and I don't think its ever a good idea to have houses that are at 0 for net cash flow.........