How to best utilize Equity

Question

Hey there Bigger Pockets Community! I'm looking for advice on how to utilize equity in two unleveraged properties I own. So far I have purchased 3 properties using mostly my own personal funds and I would like to start letting the equity I have assist me in scaling my portfolio but I'm not sure the best route to take. Any guidance or opinions are appreciated!

Ryan Thomson · Answer

Biggest decision is whether you keep your current rate or give it up.

If you've got a sub-4% loan, a cash-out refi is probably a bad move right now. On a $400K balance, going from 3% to 6.8% costs you around $800/month more, just to access cash you already have. That's almost $10K a year to fund whatever you're planning.

HELOC is usually the smarter play in that situation. You keep your rate, borrow only what you need, and pay interest on the draw not the whole amount. Rates on HELOCs are variable and not cheap right now, but you're not permanently repricing a good loan.

Third option worth considering: use the equity as a down payment on another property instead of pulling cash out at all. If you're buying in a market where FHA or VA loans are floating around from the 2020-2022 era, you can put that equity to work as a down payment and assume someone's 2.75% rate instead of taking a new loan at 6.8+%. The equity works harder that way because you're not just buying property, you're buying the debt structure too.

What's the equity earmarked for? Renovation, another buy, or general liquidity? That changes the answer a lot.

Joe Villeneuve · Answer

Sell them.  You have $390k in cash that after closing costs, you should end up with at least $300k (probably more, but let's use $300).  That buys you $1.5M in PV (20% DP) and should also give you sizable amount of CF.  Remember, the tenant is paying your mortgage for you while you are profiting from the CF.

Building equity is actually losing money since the equity build (based on appreciation) is building PV on a 1 to 1 basis.  Every dollar of appreciation gets you that same dollar in equity, which is frozen cash.  When that frozen cash is defrosted, and turned into liquid cash, it has a value of 1 to 5...every dollar of liquid cash is now worth $5 in PV.

Also, since you will be buying CF properties, your CF will go up proportionately.

Refinancing will get you part of that equity as cash, but it will also guarantee a loss in CF on that property since in your case you will be adding (subtracting) a mortgage from your current CF.  In some cases, that added mortgage payment can actually cause negative CF.  Especially on properties where they were bought all cash since the original purchase didn't take that mortgage into consideration.

Caleb Brown · Answer

I would say doing a refi or 1031 into others. Happy to sit down with you. When you do a refinance on them it will change your current numbers so you'd need to know how much you want to pull out. Doing a 1031 to roll them into something else can be into a multi family or multiple single families.

Seth McGathey · Answer

@Joshua Oakes glad you had quick answers, as that means you have been thinking about this stuff before, which is important.

You seem to have a good head on your shoulders so if I were you I would trust myself. But here is my perspective.

If your interest rates are significantly lower than the current rates, I personally would consider keeping them even if it is technically more profitable to refinance them.

If they are not all that low of interest rates, then I would refinance them and BRRRR my next property. From personal experience, just buying a turnkey with the money from a past deal is just too slow. If you are comfortable with a BRRRR it is going to allow you to scale so much faster. If you have the ability, you can pair that with house hacking and really use just one property to get your next deal, leaving the others to grow with their likely low interest rates.

And then of course, if you can find the mystical bank that will allow a HELOC on an investment property, jump on it! That is your best bet if you have interest rates you would like to keep. But no matter what, with that amount of equity, you should easily be able to start doing a deal a year if you really wanted to and ran successful BRRRRs each year. But I would limit it to 1 a year until you are really confident with it.

Best of luck!

Austin Moore · Answer

A lot of good options have already been mentioned — refi, HELOC, 1031, or selling and redeploying.

One other route I’d at least ask a lender about is a portfolio-style loan, or possibly a cross-collateralized structure, since you have two properties with no debt. Some local banks or investor-friendly lenders may be willing to look at the strength of both assets together instead of only lending against one property at a time.

I wouldn’t call it automatically better. The upside is flexibility if the lender likes the overall portfolio. The downside is that if it’s cross-collateralized, you may be tying multiple properties together, which can get messier than having clean, separate loans.

For responsible scale, I’d compare cash-out refi, investment-property HELOC, DSCR financing on the next purchase, and a portfolio-style option side by side. The right answer is probably the one that helps you buy the next property without putting too much pressure on the cash flow you already have.

David Krulac · Answer

@Joshua Oakes Been there my self, I had a rental property for 23 years and was at the point where the debt was paid off and I had 100% equity, and would have a large capital gains bill if I sold.  The first thing I did was look into whether that property fit into my long term goals.  It did not.  Since 23 years ago my buy box has changed and I'm exclusively buying newer properties built since  year 2000, with 3 bedrooms, 2+ baths and a 2 car garage.  The property that I had been renting out was built in 1956, had 3 bedrooms, 1.5 baths, and no garage whatso ever.  I ended up selling the property and doing a Section 1031 Tax Free Exchange and bought a house built in 2015, 33% more square footage, 3 bedrooms, 2.5 baths and a 2 car garage, and paid the same price as the sold price of the 1956 house.  I did have to pay some money out of pocket, but I felt it was worth it because I was exchanging for a larger, newer house, that fits my new buy box.  My capital gains tax and my depreciation recapture would have been about $56,000 Federal and about $7,000 state tax, if I had sold.  To me it was a no brainer to do a Section 1031 tax free exchange and roll over that $63,000 over into a new investment rather than pay the $63,000 in income taxes.

Joshua Oakes · Answer

Seth - Great questions:1. Between the two unleveraged properties, I'm at ~390K

2. As Far as goals: Long Term - I want to supplement my income to build wealth and financial freedom. Short Term - I want to put myself in a good position to scale responsibily.

3. I am a buy and hold for the long term investor.  I have considered flipping but want to build a solid foundation of Long Term rental properties before I venture out into flipping.

Seth McGathey · Answer

Hey Joshua, exciting place to be with equity to use! Before we can really help you I think it is best if we know.

1. How much equity you have.

2. What is your longterm and short term goals in real estate?

3. What is your preferred investment style?

David Krulac · Answer

@Joshua Oakes  BTW, we talked about 1031, and the stepped up basis, when I did Bigger Pockets Podcast #82

How to best utilize Equity

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