Investor · West Monroe, LA · Member since 2015 · 196 posts · 70 votes
I am looking into building capital for larger investments. To this point, I have only been flipping for capital, I usually leave all of my equity in my rental properties. However, I know other investors who pull equity from rentals as a way to raise money. I am not a fan of this model, since it reduces cash flow, but is this a viable option for raising money? Or is this more like building a house of cards that will eventually catch up to you since you've stripped your cash flow by pulling equity?
Rental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes
7y
This is all dependent on your risk tolerance. It's a viable option but how much equity are you comfortable stripping for other investments? How much reserves do you have in place currently? Some experienced investors preparing for a slow down and hording cash, but it's only a house of cards if the foundation is cracked and about to collapse.
Lender · Ft. Lauderdale, FL · Member since 2019 · 156 posts · 98 votes
7y
@Austin Works
Pulling equity out is a really good viable option BUT only if you can do it in the following manner:
1-Buy deeply discounted property and do the BRRR strategy. Deeply discounted is key, so put on your wholesale hat looking for distressed properties.
2-Also the trick is to find a property that has a large ARV relative to what you bought it in spite of any substantial rehab costs. This is very important for last point.
3-Pull out ALL the Equity from the property. Max it out. Accept that you are reducing your cash flow to almost break-even point. Be okay with it to prepare for the last point.
**4-Split the equity you've taken out 2 or 3 ways and use it as a down payment across 2 or 3 cheaper properties.*** This KEY. Yes, you are buying cheaper properties but you still have multiple cash flow from 2 or 3 properties. All properties should have either potential for increase of future cash flow or appreciation should you want to sell. There's no additional borrowing or out-of-pocket costs for your next 2 or 3 purchases because you're using the equity from your highly valued ARV property from step #1.
Over time you could even combine the 2-3 properties and pay with ONE mortgage note with a Non-QM portfolio loan if you like or keep them all separate. Either way your portfolio just increased by 2 or 3 overnight.