what would you do with 500k equity free and clear?

26 Replies

Hello.

I own a condo in Long Beach, CA, free and clear, that is worth around 500k. I have good tenants in it who pay rent of $2290/mo. I've been getting antsy to reinvest but don't have the savings to do it. What would you do? Would you refinance this property with cashout and use the cash as a downpayment for a SFH that would increase in value more than a condo? Would you sell the condo and use the full 500k as a downpayment on an SFH? My markets are very expensive: Southern California, Long Beach and Santa Barbara areas in particular. I would love to get a duplex to rent long term in one and short-term the other. I could transfer my tenants into the new place, or not (my markets are highly rentable). WWYD??

Thanks in advance.

Personally I would look to cash in on that property and invest in other markets & better cash flowing areas. Perhaps other asset classes as well.

For yourself, take a step back and consider what you want to get out of your investments in general, and how much time you have to dedicate to finding and managing them. Begin with the end in mind!

thanks Taylor! I am definitely thinking about cashing in on the property and turning it into two incomes instead of one. I'm very familiar and comfortable with CA markets but they are so high I know I'm missing out. Then again, rents are high too. And down the road, I am looking to have a flexible short-term rental/income that doubles up as a vacation property as well. But it's great to hear your perspective and tips, thank you! 

@Jennifer Gardner congrats, that's an awesome position to be in! I just recently sold one of my luxury condo rentals around the same price. At minimum I'd recommend refinancing at a really low rate, and lock in long term financing at some of the lowest mortgage rates in history. I personally made the decision to sell our condo because it didn't cashflow well and the HOA fees were high ($640/m), and I didn't like that I wasn't getting loan paydown on that portion. We were right under 5 yrs of ownership, and we could use capital gains exclusion if we sold. Ultimately we sold at a really good time in the market, and now I'm looking to pick up some quadplexes with the proceeds as a downpayment. If it was me, I would sell; $2,290/m isn't a great return on $500K in equity. If you sold, you could look into doing a 1031 exchange to defer the capital gains, and use the ~$450K proceeds as a down payment on a MFH in the $1.5 - $1.8M range which at a decent CAP rate would bring you much better returns than what you're getting now.

@Jennifer Gardner Have you considered investing in cash flowing markets like the midwest? A lot of west coast and east coast investors have sold their condos and other related smaller properties and taken the cash and put it in a market like KC, Omaha, OKC, Des Moines, etc...by deferring taxes and using a 1031 Exchange. We have helped show lot of people how to do that here into KC. 

@Brendan Miller I am super interested in something you said here and inspired in general by your response. Thank you! You said you sold just under the 5 year mark and "could use capital gains exclusion if we sold." What is this loophole? I did the 1031x with my previous property to get this one in 2017 so it will be under 5 years when I sell as well (looking at 2022). You have inspired me to get a SGH in Santa Barbara AND build an ADU in my backyard in Berkeley but I don't know how you came up with the $1.5-1.8M range and I am intimidated by such large figures as I've never taken out a mortgage for more than 300k. Thanks again for your help!

@Jennifer Gardner they IRS exclusion that I referenced only applies if you utilized the property as your primary residence for at least 2 of the past 5 years (which I did in my situation). If you used a 1031x to purchase the property, then you won't qualify, even if you used it as a primary residence.

As for the $1.5-$1.8M range, those are rough numbers, but let's say you list and sell your condo at $500K, and then let's conservatively say $50K for closing costs (6% commissions + other stuff; this likely high). Again, if you did a 1031x you shouldn't owe capital gains on that. You could use the $450K as a down payment on a property and secure a loan at 75% LTV (so roughly $1.8M purchase price at the high end). You'd still want to keep a reserves account, which is why I put the $1.5M on the low range.

@Jennifer Gardner congrats on your condo! I didn't see how much you payed initially for your condo, so can't really say how much your PITI is, but my advice would be to re finance out so that you essentially break even monthly, then take that & invest in a section 8 multi family to balance out your portfolio. If you're lucky enough to own a break even asset in your areas, I'd hold onto this (even though though your % return from cash flow isn't great, how about your yearly appreciation?) If you balance your portfolio between a greatly appreciating asset & a high cash flow asset, then every few years you'll be able to borrow more from your condo to put into sec 8 type assists, & after awhile ideally your cash flow would make you financially free.

@Jennifer Gardner  Great question, you are in a great spot with the condo. I would suggest that you cash out refi the property, take that cash then deploy it to some properties that are cash flowing for you. I would cash out enough that you are still getting a great return on the money in the condo.

@Nerissa Lowe CAP rates vary by market, but I'd consider 5 - 6 CAP rate decent where I'm at. At the current $2,290/m rent, the property will still have expenses like property taxes, insurance, plus HOA fees which are all likely high in CA, so the cashflow is probably pretty low compared to the $500K equity.

First of all, do a cash-out refi because that money doesn't count as income. So no tax implications. If you sell, you have to pay taxes on that money. Plus, by leaving 20-30% equity in the property, you can still get some cash flow every month and the property will continue to appreciate over time. Best of all worlds.

THEN, I would do one of 2 things. You could either break that $400,000 into EIGHT different syndications. If you are not an accredited investor, you could find some Joint Ventures to invest it in passively too or find syndications open to non-accredited investors. OR, you could be an active investor in one or many deals.

Forget SFH. LOL. You could own 100's of doors immediately with that kind of investment. If you want to chat more, message me :)

@Jennifer Gardner I would not sell any property in CA that is cash flowing. You have the best of both world--an appreciation asset that is also producing income. I would pull money out in a refi and invest in more affordable markets in the Midwest. Personally, I like Indianapolis, Kansas City and the Quad Cities where you can still get good COC returns.

I'd take the equity and buy a vacation property to do a short term rental. You could also find cheaper areas to do 20% down, BRRR, or flip. Research long distance investing and start building a team if you go that route

@Jennifer Gardner . Congrats on your success so far! The answer depends on your goal. If you want to be actively involved in managing your real estate, I would agree with @Caleb Brown .  I would buy a high cash flow Airbnb/VRBO property. A friend of mine is helping investors buy cabins in Gatlinburg that cash flow 60% cash on cash or more annually. You could buy a few of them with less than your equity from a refi.

If your goal is to focus on your life, your business, and or your family, I would definitely recommend investing passively. You could do that through local options or find a few syndications like @Andrea Foley said.  Happy investing!  

thanks for the comment @Paul Moore . For you and @Caleb Brown , do you have recommendations on how to research good deals on vacation rentals? I'm looking in the Santa Barbara area and know that they are strict about airbnb permits up there. But I think that's ultimately where I'm going to zero in on for the STR/vacation rental. Thank you both for inspiring me to pursue it!