Leveraging Equity In The Best Way

[Kinsey Harris]

We have a rental property that we were gifted by my parents. We are finishing up the rehab and are about to rent it out. We want to leverage the fact that its owned outright and take the equity from that property and put it into our next rental, but we are unsure of how to best utilize the property to get us the most cash.

This property is in a B-/C area- sales price for a property like this is currently about $125k, approximate rental would be $1k.

We want to get into a multi unit with the funds we will have access to but curious which option makes the most sense. 

Option 1. Sell the property since it's a single family and not what we are wanting our buy box to be. Then 1031 into a multi family, or even 2- we live in a rural area and could potentially capture 2 properties with the sale price of what is there (We also have money available to add to this if needed)

Option 2. Keep property, rent it out, then refinance it taking the equity that would still allow us to cover our expenses in the current rental. 

Option 3. See if we can find a lender that will give us a line of credit using the current rental as equity. 

Option 4? Open to any and all suggestions. 

We have done some fix and flips, but this is our first long term rental and we want to fully capitalize on the gift we have been given. 

Thank you so much for any and all suggestions you guys have! 

[Dave Foster]

@Kinsey Harris

Deciding what kind of investor you are is as important as how that property will perform. Depending on how hands-on or off you want to be with your investment properties, that would certainly be a huge factor in how you choose to scale as an investor.

Secondly, the 1031 exchange might be a good option for you if you do decide to sell. Because it will allow you to use all of the profit and take depreciation to purchase more real estate than you could if you had to pay the tax first. And you can use the 1031 to purchase any type of investment real estate anywhere in the country.

But the 1031 is only going to be beneficial if there is profit and depreciation that would have to be recaptured. If you were gifted the house a year ago, you will need to find the basis on which it was gifted to you. This will tell you if you even need to do a 1031.