How to tap into equity
@Adam Joachim, need more information. Rather than writing out my questions again, here they are on an earlier thread:- https://www.biggerpockets.com/forums/12/topics/550...
(And lower down in that same thread, my other question about "how else")...
#4 All Forums Contributor
- Plymouth, MI
Only one option that will work....sell. Here's why.
If you are getting only $600/month in CF now, and assuming you get all $100k out in a loan of some type, your added/new MP would be over $500/month leaving you with way too small of a CF remaining.
Sell the property, and buy a better one, or two of these. This is actually an ideal situation. It allows you to start the process of flipping your cash and having your cash compound itself, over and over again.
Joe, if the place is flowing good and has equity, do you have any good resources for refi's that let you pull $$ out a closing? Not every bank will do that (I'm 0 for 2). I'm working on maybe a 3 year plan for a big refi and I want to start building that relationship now. Thanks!
#4 All Forums Contributor
- Plymouth, MI
Originally posted by @Norm Parker:
Joe, if the place is flowing good and has equity, do you have any good resources for refi's that let you pull $$ out a closing? Not every bank will do that (I'm 0 for 2). I'm working on maybe a 3 year plan for a big refi and I want to start building that relationship now. Thanks!
PM me
#2 General Landlording & Rental Properties Contributor
Your best option on this property would be to sell. You do not provide any info on the value of the property or your rent so very little information to work from. Selling still looks like your best option.
Keep in mind any property that can not produce positive cash flow with a hypothetical 100% financing will never have true positive cash flow. You end up buying cash flow at a rate of $2 in for every $1 out. This is extremely expensive cash flow. Your 100K in equity is presently buying approximatly $400 in cash flow at a cost of $800/month due to it's oportunity value.
Sounds like this property has a low return on equity, time to sell. Trade it for a better asset
Just for clarity, I purchased the property with a 0 down VA for $162,000 and renovated while I lived there. My mortgage is $1,025 and I rent it for $1,600. It’s currently worth around $255,000 and I owe $153,000. I’ve held it for 3.5 years.
I'll double down on my position
sell sell sell
100K tax free and cost you just about nothing? Take it while you can, it's unlikely you'll stumble across that opportunity again. There is no good rental option here imo
I know this thread is old, but selling is the worst choice. Nobody here has factored in the appreciation of homes in California. Doesn't that have value in itself! Homes in California don't typically cash flow as well as homes in other parts of the country. The reason for that is because the homes are steadily increasing in value and investors are willing to take a smaller cash flow in exchange for building equity. It's the same logic that goes into paying a higher p/e ration on stocks that have higher earnings growth. Had the poster taken the advice of others on this thread he would have most likely missed out on a return of $150k for his $100k investment, even factoring in today's market conditions.
This doesn't even factor in California's tax laws that only allow property taxes to go up 2% a year regardless of the homes current value.
#4 All Forums Contributor
- Plymouth, MI
Quote from @David Mirza:Selling is the best choice, and for all the reasons why you said it was the worst. When a house gains equity, it gains $1 for every $1 of appreciation. That means the value of the total equity is decreasing in value...not increasing. When you buy a property with a 20% down payment, that 20% represents your initial equity...that you are paying for, and it is actually equal to 5 times in property value. So, when you combine the $1 of equity = $5 in property value at the purchase, with the $1 of equity = $1 of appreciation (increase in PV), that increase is actually diluting the value of the equity.
I know this thread is old, but selling is the worst choice. Nobody here has factored in the appreciation of homes in California. Doesn't that have value in itself! Homes in California don't typically cash flow as well as homes in other parts of the country. The reason for that is because the homes are steadily increasing in value and investors are willing to take a smaller cash flow in exchange for building equity. It's the same logic that goes into paying a higher p/e ration on stocks that have higher earnings growth. Had the poster taken the advice of others on this thread he would have most likely missed out on a return of $150k for his $100k investment, even factoring in today's market conditions.
This doesn't even factor in California's tax laws that only allow property taxes to go up 2% a year regardless of the homes current value.
Example:
1 - Buy property
PV = purchase price = $100k
DP = initial equity = 20%/$20k
2 - Property appreciates 20%
PV = $120k
Equity = 33%/$40k
3a - Keep property
Equity = 33%/$40k
PV = $120k
3b - Sell property, and reinvest
Equity = 20%/$40k (wait,...equity gained from paydown of principle pays closing costs)
PV = $200k
Property appreciates 20% for both properties...
4a - Still keeping property
PV (increase $24k) = $144k
Equity (increase same $24k) = $64k
4b1 - Impact on sold scenario
PV (increase $40k) = $240k
Equity (increase same $40k) = $80k
4b2 - Sell
PV (5 x equity again) = $400k
Equity (same as if we didn't sell it) = $80k
This is an exponential return...the most powerful application of algebra that can be applied to REI.
These numbers, and the distance between them, grow even wider when you are in a State like California where the equity growth from appreciation is much higher than the example shown here.
#1 Market Trends & Data Contributor
Quote from @Joe Villeneuve:
Only one option that will work....sell. Here's why.
If you are getting only $600/month in CF now, and assuming you get all $100k out in a loan of some type, your added/new MP would be over $500/month leaving you with way too small of a CF remaining.
Sell the property, and buy a better one, or two of these. This is actually an ideal situation. It allows you to start the process of flipping your cash and having your cash compound itself, over and over again.
this one i agree rather than continous refi
@Joe Villeneuve, I understand what you are saying but I would rather do a cash out refi and use the funds from the refi to purchase more properties. In your example you forget to add paydown of principal to the equity in scenario 3a. For scenario 3b you forget to include capital gains taxes and real estate agent fees.
Each scenario is different but each time you sell a house and buy a new one you have the following expenses:
1.) capital gains/recaptured depreciation
2.) 5% payment to real estate agent
3.) Title/Closing cost
4.) In california your property taxes on the new house would go up unless you do a 1031 exchange
#1 Market Trends & Data Contributor
Quote from @David Mirza:
@Joe Villeneuve, I understand what you are saying but I would rather do a cash out refi and use the funds from the refi to purchase more properties. In your example you forget to add paydown of principal to the equity in scenario 3a. For scenario 3b you forget to include capital gains taxes and real estate agent fees.
Each scenario is different but each time you sell a house and buy a new one you have the following expenses:
1.) capital gains/recaptured depreciation
2.) 5% payment to real estate agent
3.) Title/Closing cost
4.) In california your property taxes on the new house would go up unless you do a 1031 exchange
My reason to sell in CA, the IRR return in CA for next 2022-2032 would be much slower than 2010-2020. It's guaranteed 100% for sure.
IRR in 2010-2020 era is 12%, for the next decade maybe 5-6% ? Investing in CD is better.
I have a few houses that I started to sell.
Not going to move it to the midwest though :) lol
#4 All Forums Contributor
- Plymouth, MI
Quote from @David Mirza:
@Joe Villeneuve, I understand what you are saying but I would rather do a cash out refi and use the funds from the refi to purchase more properties. In your example you forget to add paydown of principal to the equity in scenario 3a. For scenario 3b you forget to include capital gains taxes and real estate agent fees.
Each scenario is different but each time you sell a house and buy a new one you have the following expenses:
1.) capital gains/recaptured depreciation
2.) 5% payment to real estate agent
3.) Title/Closing cost
4.) In california your property taxes on the new house would go up unless you do a 1031 exchange
Read it again.