Real Estate Agent · Manassas, VA · Member since 2017 · 9 posts · 4 votes
Hello Bigger Pockets!
My main question is how much money do you leave in your rentals? I've got one rental property worth $280k, about 60% LTV (115k in equity). I just closed on my first "Live in Flip" and I'm moving in there next month (this should be fun). I'll then be turning this house into a rental property. This one is worth $400k, about 55% LTV (180k in equity). If I do REFI, I should probably do it before I move out? (thinking yes)
I'd love any feedback. I'm not scared of risk and have told myself that I should just pull money out of both up to the 80%. Then take that money and buy one or two more rentals. What does everyone think about this?
Old dude here. Once I had enough rental income to cash flow life, I went to 100% dead equity. Personally, debt bugs me and I prefer not having a dog in the fight regarding what the markets are doing. If we hit another good buyer's market E.g. 2008-2012, I might leverage up 20% or so. Not during a seller's market though. I wish you good fortune.
I have 85+ SFR's, 30+ Multi doors. and 6 Commercial properties. None of the SFR's have a mortgage and 4 of the six commercial properties are mortgage free. The Multi's have a few mortgages representing maybe 30 percent of equity. Could I acquire more properties quickly with mortgages? Sure. But interest is an expense I've almost eliminated entirely, As a consequence, while I can't acquire as many properties as a highly leveraged investor, the ones I do acquire are paid for going in. Overall a 12?% cash on cash return and I sleep as well as if it where invested in treasury bonds.
@Josh Bustle leave the equity "in the property" and get a line of credit on it. This way, you can have that debt available even if the values of the properties drop, and, if you don't use it, you won't be underwater on your mortgage. I can't remember who said it on the BP podcast but the idea is get your credit lines when you don't need them. You'll tend to get better rates and higher loan values. Have fun!
I'm probably around 40% LTV across the portfolio. Quite a bit of equity. As much as I like to tell myself that I'm an aggressive investor, the actions I take I guess show otherwise.
@Terrell Garren
@Jay Hinrichs
I couldn't agree more... I probly have 3 or 4 million of dead equity and I could care less...it feels great not owing anybody ANY money.
And it has absolutely no effect on my ability to continue to buy more rental properties... If I find a potential rental house that I want to buy then I just go buy it and then I rehab it and rent it..how can this be done? Hard work, saving money and letting your rents build up...
It's gonna feel good during the next market crash when all these over leveraged investors that have been reading too many books and listening to too many podcasts go belly up..I will be buying their houses at the auction sale.$150 net a door..1% rule...BRRRR until you are covered up in mortgages....what nonsense...
@Terrell Garren I really appreciate your comment, as in addition to Bigger Pockets, I am also a big fan of Dave Ramsey. He was very successful in real estate and then lost everything doe to being over-extended.
I hate this term dead equity. You can pull major cash out so it isn't dead. Also, where else can you keep your reserves where you get those kind of returns? You might suppose (incorrectly) the effective return is only the current interest rate you can get. It would be hard to find an investment that pays more surely and steadily and with that kind of return.
Hate to bring up a painful subject, but who is going to pay an that over-leverage mortgage when YOU are dead? Won't the estate be insolvent?
@George M.
I agree with George on this. Less headaches and good cash flow outweighs more properties to deal with. I’m new at the real estate game. Only been doing it for 4 years and have slowly acquired 6 properties. Two have been paid off with cash and the other four have 15 year loans with 20-40% put down as down payments. Most of you say I have way too much in equity and should pull some out and buy more properties. I would rather sit on only 6 properties cash flowing $3,500/month after all my expenses vs 20 properties and 20 loans cash flowing about the same. There has to be a point when we are content with good cash flow and less headaches. Find that number and quit swinging for grand slams. You will have more time for more meaningful things in your life..like spending quality uninterrupted time with your family 😊
so comes down to few assumptions....i recommend maxing out equity in a residential personal house to jump start your way freedom. i call it slow burn flip to brrr combo method.
its ok go ahead newbie buy at 100% no money down to get equity to gain cash flow.
i love using banks money to access my equity to gain increasing cash flow each month while force appreciation via increasing finished living square feet adding bed or bath if dont buy at wholesale.
i bought 3 primary homes in last 15 yrs all 100% LTV listed on retail Mls with help of realtor, then added value thru fixing up important stuff and expanding square footage, adding insulated useable spaces, and then moving out after only having signed rental agreement lease and using lease to help qualify for the next loan by covering previous mortgage.
i maxed the equity out fixed them up rented them while listing for sale and till sold. all must be done thru forced appreciation and rehabbing by adding square feet or adding bathrooms or adding bedrooms or garage...create something to change value quickly. it has worked for 15 years with no money down.
long term equity is useless unless you have great credit,
must have cash flowing rents or cash flowing job or cash flowing cosigner to qualify for loan most lenders i hear.
so i prefer to reduce my risk of loosing my job, my health my sanity of my time for money instead of 1 man company owned by 100% of my own efforts i now learned leverage my efforts thru buying "doors" and filling em with tenant/employees aka renters having 1-2% of their paycheck each month in exchange for place live is good deal.
money from many different trees instead my own tree.
isnt this really about cash flowing using OPM, or having good credit to access equity to gain cash flow?
short term cash flow is king but dah king can't qualify to access the equity to turn it into more cash flow without a prior source of cash or credit plus cash.
long term need both. as the king ages he should pay down his cash flow debt so King can pass along to his family what i call hitting the rental reset button by paying forward and paying down all my rentals to give the next generation i love a hand up to pass along my biggest gold mine possible....
"that is a mortgage free cash flowing building in a great location."
cause we can't take cash or equity with us after we all die. cause its all blessing from God anyways.
3 big takeaways.
1. get equity to build cash flow to...
2. get cash flow to build equity to gain more cash to finally
@Terrell Garren The issue with that is that you would then expect to get similar returns to index funds, so why put in all the work associated with real estate? Buy and hold real estate is specifically because of it being much easier to leverage than anything else.
@Terrell Garren The issue with that is that you would then expect to get similar returns to index funds, so why put in all the work associated with real estate? Buy and hold real estate is specifically because of it being much easier to leverage than anything else.
Smart question Noah. Diversification, ability to cash flow when the financial market underperforms and the enjoyment of running a small business.
Honestly the only folks calling this "dead equity" in reality don't have a clue of what equity is. They are likely hocked across the board out of necessity. Scrub out all those loans and what do they own? Most likely little or nothing. Lets be real the bank owns these properties. I guess if it makes you feel better your name is on there somewhere ok. That makes you a REI investor...whopeee ! I am with you @Mark Fries
@Josh Bustle Don't refi, just HELOC. Use the money for some additional projects and keep building that equity pool until you've got a fat 1M commercial line of credit to play with :) Unless you absolutely plan on spending every dollar of that REFI money on primo rentals that you really want- not just stuff you're buying to put the money to use.
@Terrell Garren Fair points. I would argue that cashflowing when the markets are down is not important because buy and hold real estate and stocks are both long-term investments. You know the markets are going to go up and down at times. The point-to-point “passive“ income it spits out to you is not important. If you’re in your accumulation phase, then gains in real estate or stocks go back into the market. When you’re in your retirement phase, then you can create your own passive income by selling what you need when you need it. The 4% Rule is what allows you to create that passive income from stocks even when the markets are down, and there’s no doubt that they’re far more diversified than real estate (assuming we’re talking about owning the total market in index funds in some (whether that’s via VTSAX and chill or by buying and holding a portfolio of ~100 stocks across all sectors).
I directly compare buying stocks with buying REITs since REITs provide fully passive and diversified investment and their expected returns are without leverage like with index funds. If I were to buy properties with cash or leave a substantial amount of cash in them, then my expected long-term net returns will essentially be like REITs, but with less diversification. However, real estate is inefficient, unlike stocks, and so you can argue that you can play the value/appreciation game in directly buying and selling properties in a way that simply cannot do with stocks. The tax benefits of depreciation and deducting business expenses are also more significant than tax-loss harvesting, so it’s not so cut and dry. Still though, I feel that a moderate amount of leverage is necessary for the numbers to make sense with the effort put in.
First off, "Owner Occupants" tend to get better financing terms from the bank while living in the house. So definitely, if you are going to pull out equity, do it while you are still living there.
Secondly, the name of the game is ROI and passive income. So should you take out equity? Yes, if it increases your return on investment and increases your monthly passive income.
Just make sure to avoid increasing your risk in the process. Lock in a fixed interest rate and avoid the moving interest rates.
@Josh Bustle- I think it depends on your goals. For me I'm thinking the same thing on my rental, what do I do. For me I'm only willing to pull out as much equity that still allows that property to cash flow for me. That being said I'm also not afraid of risk and I would pull out negative cash flow IF I found a deal that would easily offset my loss in cash flow. So something like a four-plex at a great deal. I would recommend at the worst though 70-80% LTV so if the market ever dips it's hopefully not more than 20% before you can react to it.
Like I said totally up to you and your goals I think everyone has their own opinion but you should do what is best for your goals in RE.
Unless the deals are plentiful and profitable, there is no such thing as "dead money." I see an awful lot of people leveraged up to their eyeballs right now. I bought a LOT of property between 2009 and 2013. A good percentage of it was from people who really believed the party would never end. If you have plenty of equity, you can always pull some out. You can't pull what you don't got.
Equity: Equity is the difference between the value of the assets and the value of the liabilities of something owned.
Net Worth: The total assets minus total liabilities of an individual or a company.
Dead Equity = Net Worth
Replace Dead Equity with Net Worth and see how the discussion changes. There is way to much "equity shaming" taking place on Bigger Pockets.
Leverage is risk, more leverage is more risk. Risk can lead to reward, more risk can lead to more reward. It can also lead to financial ruin. It is a balance and changes over time. Often when you are young, starting out you will take more risk. You have nothing to lose. As you acquire assets, you reduce risk, because you have more to lose.
I'd say pull as much equity out as you can. That's the beauty of RE over stocks or other investments. Leveraging banks and people loaning you ridiculous amounts of money secured by property.
@Josh Bustle, I like the idea of pulling out as much equity as possible as long as all the money is put into more assets. The mistake a lot of people make is they pull out their money for expenditures. And yes, you should be refinancing while you still live in the property because you will get better terms that way. Even if you own the property in an LLC and are taking out a commercial loan, lenders find it more favorable that it is owner occupied and give better terms. Best of luck to you.
FYI ...RE has no advantage over stocks in the leverage dept. In fact way less. In stocks with a margin account you can lever 4X your balance. You can only take less then 1x your equity in RE so study up young man. The more you know !