I am new to BP but have had my first rental SFH since 2011. While I definitely jumped head first into this deal and make some mistakes, I did have some help with some experienced people around me. I also lucked into a greatly appreciating area of Houston, so I have a good problem to ask about today. I have the real estate bug now and am looking to get out of the corporate world down the road. via real estate investing.
I would like to pull money out of my first rental home, which has appreciated substantially since 2011, in order to continue funding buy and hold rentals. My issue is that I can potentially pull out enough equity from the home to send my cash flows into negative territory. Is this an advisable move? I would use the equity to purchase homes that would generate positive cash flow of course, but I am just looking for some general advice around the idea as a whole. I realize I haven't provided much in term of numbers, but I can if that would be helpful to evaluate the decision. Right now, I am just more interested in hearing people's thoughts and experiences around the idea altogether. Obviously I may have issues even getting a refi loan if my cash flows get too negative, so I will have a ceiling regardless.
I am fairly confident that the home I would pull the equity from will continue to appreciate as that area of Houston has great long term potential, and nearby homes are constantly being torn down or renovated which is driving the land values up. I also have a great long term tenant in the property.
I appreciate any input anyone has on this!
FYI - I will be away from the computer a bit for the long weekend, but I will definitely catch up on responses!
I know common sense tells you NOT to go negative on a property, if you can, but since we are in the real estate investing business, when did common sense ever make sense?!
Please take the preceding with a hint of sarcasm....But on to your question....Personally, I feel that you need to balance out the pro's and cons of (potentially) going negative on cash flow vs. the gains of pulling out equity.
First of all, using conventional lending, an underwriter may catch this fact and kick out your file. I'm not saying they will, but it is a possibility. Lenders are very suspect on income-ratios when it comes to investment properties. Just because your loan officer/mortgage banker says it fits guidelines doesn't mean the underwriters won't deny it. That's actually their job.
Second, although the rental market is hot, what is your comfort level (i.e. "reserves") when it comes to vacancies? Are you prepared to weather the storm? What about maintenance? Worse, what about unexpected personal losses not even related to real estate (job loss, health issues, catastrophic event, etc.)?
Again, you need to balance out your comfort level with the amount of risk you are willing to undertake. One major factor, I would think, is that the rental market is hot and should continue in this manner.
It sounds like you are in a great part of Houston - good jobs, in-demand properties, appreciating values, etc. This bodes well should you decide to pull the trigger and cash out the equity. Best of luck.
Rather than thinking about going negative, think about what income the equity will create for you in your next deal. Add these amounts up, rather than just looking at your current deal, and I bet you are not negative at all!
If it does not cash flow at 70-75% LTV, then consider other options - this property is not a great rental (at least not anymore as a SFH in that submarket). What if you do a 1031 exchange? You can't invest future appreciation and you can only borrow out part of the appreciation you already have. Selling with a 1031 gives you access to all that you've gained (less selling expenses and commissions) - tax deferred. Or - sell it outright and pay the tax so you have more flexibility on where you invest the remainder. Or - tear it down (or move it off) and build several high end town homes if you're in one of the areas in Houston where that's still being done profitably.
Here is some info on cash out financing....
If you will have negative cash flow, why wouldn't you increase the rent? Houston is a hot market for investors.
This gives me a lot to think about, thanks for the help! I don't need the cash right away, and am closing on my 2nd next week. When things subside a bit and I get #2 rented, I will be evaluating what to do with #1! I like the idea of a 1031 but haven't ventured into the multi-family world just yet.
@Brian Slater What did you end up doing? Any thoughts or advice?
@Maxwell Lee Well, it took me awhile, and I actually acquired another property in between, but I have decided to sell this house and look to move up to a small MF or similar. It was a great first REI for me.. I made lots of mistakes but my selection of area outweighed my mistakes, so I am going to do ok on it. I made much better decisions on my other 2 homes (I hope!) so this was a great learning experience as well.
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