Property with 1.3 million in equity. What to do with it?
Rental Property Investor · Portland, OR · Member since 2020 · 12 posts · 4 votes
Property with 1.3 million in equity. What to do with it?
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Stephanie P.Pro Member
Washington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votesQuote from @Garrett Ayers:
I recently inherited a triplex that is completely paid off. I renovated each unit and now I am looking to leverage equity to buy another income property. Any advice on what kind of properties I should be focusing on? How do I get the most out of an equity loan? Is it possible with little or no cash?
Actually, something the others didn't touch on is location. If you inherited the property and it's 1.3M in DC or Maryland or California or New York, then it may be smart to sell it and deploy the proceeds in a more landlord friendly state. The point is, make the most of this life changing windfall.
18 Replies
- Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes3y
You want to leverage as much as possible, first make sure the property still cash flows after to pull the cash out. Second use the cash to close on as many properties as possible.
- 3yJason WrayPro MemberBanker · Nationwide · Member since 2020 · 2k+ posts · 1k+ votes
Garrett,
Your in the best position to be in with having a ton of equity and being able to use it to help take out some cash to buy more investment properties. You can do a couple of things you can take out a line of credit or take out some cash through a refinance. You also can do both so that you have access to liquid reserves sine cash is king and also have a line of credit as a back up for renovations or repairs.
When you buy multiple rental properties you mut have PITI reserves and that mustt be in liquid reserves like cash in an account or savings. A HELOC or line of credit cannot act as a reserve or an asset for PITI reserve requirements. Once you buy more properties you can always refinance them down the road and pay off the HELOC or replace the cash taken out of the Tri-plex.
Values are starting to drop a little in certain areas so now might be a great time to start.
- Real Estate Agent · Los Angeles, CA · Member since 2018 · 2k+ posts · 1k+ votes3y
You have a couple of options:
1. You could leverage it with a cash out refi and invest in other assets. The pro is you keep the triplex and buy more. In terms of what to focus on is a very personal question. Some people like big apartment buildings, others like STR. I think you need to figure out your sweet spot between your expertise, goals, and time invested. For example at one point I wanted to get into apartment building investing, so I started learning about the mortgage options, locations, etc. The con with the cash out refi as mentioned earlier is that you can only max out the loan to where you are still cash flowing. Typically you can cash out up to 75% loan to value. But with these higher interest rates, that doesn't mean you should. Maybe it is at 50% LTV, which is $650,000 and using that as a down payment and closing costs might be a purchase price of about $2,550,000 in additional assets. That, coupled with your current triplex would be about $3,900,000 worth of real estate.
2. You could sell it and use the equity that way. The pro of this is if you take the net proceeds of your $1,300,000 asset (about $1,222,000), you could in theory buy around a $4,800,000 asset.
In both cases, you could buy $0 down theoretically because you are leveraging the triplex. You just have to figure out the numbers. On the surface, unless you live in the triplex as a house hack, it might make sense to sell and go big with a DSCR loan so that the income is based on the property, not yourself.
- Lender · Los Angeles, CA · Member since 2017 · 916 posts · 647 votes3y
@Garrett Ayers congrats, you inherited a gold mine. You can do a cash out refinance and use the rents you receive to qualify for the loan. Cash out proceeds will cover the loan costs, now you have cash to buy the next property, qualifying the same way (with the rents on the new property divided by the new debts) called DSCR loans.
You're in a great position. Well done.
- 3yStephanie P.Pro MemberWashington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votes
Quote from @Garrett Ayers:
I recently inherited a triplex that is completely paid off. I renovated each unit and now I am looking to leverage equity to buy another income property. Any advice on what kind of properties I should be focusing on? How do I get the most out of an equity loan? Is it possible with little or no cash?
Actually, something the others didn't touch on is location. If you inherited the property and it's 1.3M in DC or Maryland or California or New York, then it may be smart to sell it and deploy the proceeds in a more landlord friendly state. The point is, make the most of this life changing windfall.
- Investor · Member since 2021 · 591 posts · 695 votes3y
@Garrett Ayers another consideration is: how easy is this property to manage, what's the property's current cashflow, and how does that cashflow align with your lifestyle and your goals?
For instance, if I had an A grade property that was super easy to manage, and its cashflow was enough to cover all my living expenses and provide me with a comfortable lifestyle, and my main goal was to have a ton of free time and not have to work very much, I might consider just keeping the property and not do anything that would screw up its cashflow (obviously, a cashout or HELOC debt will reduce your cashflow).
On the other hand, if my goal was to work really hard to build up a larger portfolio of additional properties, and/or if this property's cashflow wasn't nearly enough to cover my living expenses, and/or if the property was a hassle to manage, then I might consider one of the options others have mentioned (e.g.; cash-out, sell, etc.).
You said you inherited this property, which makes me assume that you've never managed a rental property before? (If that's true, then I'd suggest managing this property for 6-12 months to see how you like it before putting in all the effort to acquire more properties--there's nothing worse than buying a portfolio of properties only to discover that you hate owning and managing properties (or hate managing the PMs who are managing the properties) :)
If you do already have PM experience, and if your goal is to work hard to acquire more properties, then you might consider whether house hacking this triplex would improve your DTI and/or your cashflow, and enable you to qualify for better financing that you could then use to acquire more properties (I don't have enough info about your circumstances to know whether this would work for you, but it's worth considering).
Based on your question, it sounds like you're not yet sure of which leverage options fit you best (this depends on your current financial circumstances and your goals--which, of course, we don't know). So, I suggest talking with some experienced lending pros who can review your financial circumstances and your goals, and help you understand which options are available to you.
As for what types of properties to focus on, that all depends on your circumstances and your goals; different REI strategies all have their own pros and cons, so if you're not sure which strategy fits you best, I suggest studying up (e.g.; listen to podcasts, read books, review the forums, watch YouTube videos, talk to REI pros, etc., etc.).
Good luck out there!
- Rental Property Investor · Portland, OR · Member since 2020 · 12 posts · 4 votes3y
Basically, I started managing the my grandmothers assets in 2018 when she got sick. I first sold our small commercial building using a 1031 exchange and pulled a small cash boot from it to help pay for new medical and care costs. I then purchased 2 properties in Riverside all cash. Rented them out for two years then sold this past year in March and April of 2022 when the market was on fire.
My property is easy to manage, I am currently house hacking, living in the smallest unit. We don't want to move yet, we really love Culver City. I would like to start building up a larger portfolio, focusing on small multifamily properties, preferably properties with space to build an ADU.I guess my questions was more towards the lending side of it, but I'll definitely take all the advice I can get. Maybe just start in this expensive LA market on property at a time.
Open to any suggestions, thanks.
- Rental Property Investor · San Francisco Bay Area · Member since 2022 · 1k+ posts · 1k+ votes3y
I did a refinance on a paid off California property to do renovations and have some extra cash left for a downpayment on a future rental. I'm not a big fan of HELOCs but I can see how some people like them, can draw money as needed.
I'm not sure what your goals are but I'm buying out-of-state, mostly looking at SFH or duplexes (very few of these) in the Midwest and Tennessee. Florida Panhandle area is a possibility. The Midwest price points are much lower out-of-state and I can cash flow immediately. I'm looking at SFH from $120,000 to $230,000 (this being on the high side) that are ready to move in. I could buy 2 to 3 houses for the same price as buying one SFH out in the Central Valley with negative cash flow for now (vs. the Bay Area where I am).
If I go with a turnkey company, a tenant would be in place. If I buy something that needs work, I could find something for under $100,000. The one thing about California is historically it's appreciated a lot over the years so there are some investors still buying here. I have a SFH in Indiana. It went up significantly in value, about 70% from 2013 to 2019/2020 but percentage wise I think that's still lower than a Bay Area property in 6 to 7 years time. I'm trying to find that balance of cash flow and appreciation. Good luck!
- Rental Property Investor · Oregon City, OR · Member since 2020 · 324 posts · 780 votes3y
Definitely keep the triplex. I'd look at HELOC or Refi options and make sure your investment is still profitable when the equity is pulled. If it is, great. I'd then consider how much equity I can pull.
I'm an out of state investor and would buy multiple properties out of state. Right now build to rent is having great success. With the equity you pull, you could probably buy multiple brand new duplexes.
You're in the driver's seat here. Lots of great options.
- Rental Property Investor · Murrieta, CA · Member since 2020 · 338 posts · 343 votes3y
@Garrett Ayers
I would be careful "pulling out as much cash as you can". That dream can become a nightmare real quick. You have a couple options:1. refi pull money out, making sure you are CF+, and buy something else. I suggest out of CA or tenant friendly states. You see the UST yield curve is extremely inverted which is not a good sign for economy. Considering it takes on avg 16mo after the first inversion of 2/10's and it inverted last Mar. I would be careful. Curve is putting a higher probability of FED lowering rates, but low rates do not necessarily mean easy money.
2. 1031 sell it and move it to a landlord friendly state and probably dramatically increase the CF you are getting. Best time to have done this was the same time you sold your Riverside properties. Then again usually with a 1031 when you sell your property it's at a high and you buy into a high so it's harder to find a "great deal". I like this option b/c I prefer to have as little gov. intervention as possible, so I do not want to invest in a blue state where the actively tell you they want to take your stuff. Just a personal preference and everyone makes their own decisions.
3. Hold on to the property CF, I assume pretty well on a paid off property in LA, for the time being and move that money into 4wk T-Bills making 4.2% till you find out what you want to do and let the Q4 economic numbers filter through the system. While you're waiting research where you want to invest and what you want to invest in SFR, MF, Industrial, office, etc. When you see a deal, you can make your move. Th advantage of this if we go through a rough recession, you are CF+ and so you will have a big buffer. Especially if your tenants are having problems paying rents in CA it can take 6mo+ to get some people out.
This is not the time to be taking major risk. This is a risk-off environment, and you want to be ready to move when the time comes. Be fearful when others are greedy and be greedy when others are fearful.
- Bay area, CA · Member since 2021 · 383 posts · 306 votes3y
Quote from @Garrett Ayers:
Basically, I started managing the my grandmothers assets in 2018 when she got sick. I first sold our small commercial building using a 1031 exchange and pulled a small cash boot from it to help pay for new medical and care costs. I then purchased 2 properties in Riverside all cash. Rented them out for two years then sold this past year in March and April of 2022 when the market was on fire.
My property is easy to manage, I am currently house hacking, living in the smallest unit. We don't want to move yet, we really love Culver City. I would like to start building up a larger portfolio, focusing on small multifamily properties, preferably properties with space to build an ADU.I guess my questions was more towards the lending side of it, but I'll definitely take all the advice I can get. Maybe just start in this expensive LA market on property at a time.
Open to any suggestions, thanks.
Oh man, over $1M of equity!! The amount of CASH FLOW that money generated is huge if done right with the right people. I would have been retired by now!!
- Real Estate Agent · Rancho Cucamonga, CA · Member since 2018 · 82 posts · 36 votes3y
Repeat the process. Cash out refinance, and invest in more properties that cash flow :)
With that liquidity, you can look into commercial if you want more passive investments. - Lender · rate.bid · Member since 2022 · 324 posts · 62 votes3y
I am sure if a property does in fact have a million+ in equity, there are lenders who'll likely lend and depending on what type of loan, may be determined by other credit factors. The exact % of equity will vary with lender or specific loan program. Depending on what you invest proceeds in, you obviously want to ensure the cash flow is sufficient to service the note or risk loosing both the initial property and the equity.
- Lender · Member since 2020 · 331 posts · 209 votes3y
Quote from @Garrett Ayers:
I recently inherited a triplex that is completely paid off. I renovated each unit and now I am looking to leverage equity to buy another income property. Any advice on what kind of properties I should be focusing on? How do I get the most out of an equity loan? Is it possible with little or no cash?
ROE. Return on Equity. Are you getting the best return on this property or could you sell and use a 1031x in a different market, utilize leverage and purchase other properties/units that will generate a better return on the $1.3mm? I just listened to Kathy Fettke's audiobook "Retire Rich with Rentals" and she had an example with this exact situation. An individual inherited a property in Cali for $800k. It would generate something like $2500/mo in income. She realized she could sell the property, use a 1031x to avoid taxes and purchase something like 8 SFHs that were generating $1k each in income, so $8k total.
- 3yScott TrenchPro MemberRental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votes
I'm going to be a devil's advocate and bring up the possibility of selling the property.
This is $1.4M in straight equity you can pull out - and, (talk to your accountant), you may have inherited it with a stepped up cost basis.
I'm not a bull on the LA property market right now, so why keep it? You can likely sell the entire property, tax-free.
So, to answer the question of what to do, I'd do this:
Take out a piece of paper and envision the lifestyle you want to live. Estimate how much money you need, what assets you need to be invested in, and what kinds of returns you need from that portfolio to passively maintain that lifestyle.
Then, assuming you have your current net worth, plus $1.3M (property value less costs to sell). How would you invest in order to achieve that goal?
Design the portfolio. Maybe it looks something like this:
- $500K in equity in ~$2M in cash flowing real estate in carefully selected "hybrid markets" that offer great cash flow.
- $500K in loans/bonds - generating 6-10% interest ($30-$50K per year) in simple interest
- $300K in stocks and bonds.
If you have other assets, mentally convert them into cash and add them to the pile to get your dream portfolio.
This exercise will help you get a great framework for how to invest.
If I was starting with a blank sheet of paper and $1.3M (after closing costs) in after-tax cash, I would likely not turn around and invest it in a single LA Triplex, personally. But, if after taking out your blank sheet of paper, you conclude that you would in fact, put the money to work in this way, it will be very freeing.
This exercise may take you a few months. No harm in sitting on the property while you make your decision! There's no rush, only good options here, thanks to your Grandmother who clearly thought well ahead.
- 3yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesTruth times 100.
Quote from @Ruchit Patel:
Quote from @Garrett Ayers:
Basically, I started managing the my grandmothers assets in 2018 when she got sick. I first sold our small commercial building using a 1031 exchange and pulled a small cash boot from it to help pay for new medical and care costs. I then purchased 2 properties in Riverside all cash. Rented them out for two years then sold this past year in March and April of 2022 when the market was on fire.
My property is easy to manage, I am currently house hacking, living in the smallest unit. We don't want to move yet, we really love Culver City. I would like to start building up a larger portfolio, focusing on small multifamily properties, preferably properties with space to build an ADU.I guess my questions was more towards the lending side of it, but I'll definitely take all the advice I can get. Maybe just start in this expensive LA market on property at a time.
Open to any suggestions, thanks.
Oh man, over $1M of equity!! The amount of CASH FLOW that money generated is huge if done right with the right people. I would have been retired by now!!
A series of rick questions:
1a - If you have a property that is paid off, and the property is worth $1.4M,....and you keep it, How much total equity do you have?
1b - How much property value do you have?
1c - How much cash flow do you have?
2a - If you took the same property in question 1a, and sold it, then took the profits and reinvested them as 20% DP's, how much equity would you have?
2b - How much Property Value would you have?
2c - How much cash flow would you have (at least compared to the CF in questions 1c)?
3a - One year after making the above decision (that being going with option 1 or 2), and all the properties in question appreciated 5%, how much PV would you have if you stayed with option 1 above? What about option 2 above?
3b - How much equity would you have with either option 1 or 2 above?
3c - How much CF would you have with either option above?
4 If you repeated question 3a above and applied it to both option 1 and 2, how would you answer the same questions posed in questions 3a, b, and c above? - Real Estate Agent · Los Angeles, CA · Member since 2020 · 48 posts · 28 votes3y
Hi Garrett,
Condolences on your grandmother passing, but that's great she left you with an amazing asset. Since you are currently house hacking the property and want to continue, your idea to leverage the equity there is very smart. I would definitely heed the warning of others to be careful not to pull every cent out of it just yet, you want to make sure that the new loan you take on (with these current interest rates) is manageable and your property cashflows enough to satisfy your property & life expenses. My thought would be to pull out enough cash to put a down payment on another multifamily (keep in mind that as an investment property & not your primary residence, and a multi rather than a SFR, the lender may require 25-30% down and a certain amount of reserves). It is possible that these interest rates will continue to rise, and may take several years to go back down. You can refinance again once the rates are where you want them, and use that money for your next property. If you are planning to buy out of state, you will likely be able to buy more properties, but if you buy in LA you want to be strategic about how you allocate the funds so that you can create long term wealth for yourself and your family.
I'm an Agent & Investor in LA. I own small multifamily rental property in LA. My first property started as a 4plex house hack and turned into a rental. I definitely learned some tricks of the trade along the way, and I'm happy to share my ups and downs. I specialize in small multifamily properties on the westside cities of Los Angeles (Santa Monica to Culver City), and prices are becoming more affordable in certain areas. I'm curious to hear about your criteria and plans for your next property. Get in touch if you'd like to continue the conversation. I always make myself available for fellow BP investors!
- Investor · Fairfax, VA · Member since 2015 · 1k+ posts · 797 votes3y
First thing to do is to calculate your return on you equity. If your return on your equity is significant you might just want to keep that puppy or cash out refi to expand. If the equity is underperforming say like 2% then you might consider trading it into a property via a 1031 that has a higher return on equity.
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