Hi Everyone - This is a beginner question, but that's where I'm at. I recently purchased a single family home in the PNW, minor cleanup and I developed immediate equity, and have it rented with decent cash flow. I put about 60% down, and have a small non-recourse loan. The question is this: Now that this property is moving forward appropriately, how can I leverage the equity I have in that property to expand? Is that even advisable? My objective is to build a nest egg that I won't touch for 20 years or so, and I have a pretty small appetite for risk in this portfolio. Thanks always for your input.
I assume when you are saying "I" you mean your Ira LLC.
If you want to use more leverage get a bigger non recourse loan. The risk should be the same.
You are probably locked into where you are for the current time. A refinance into a higher LTV non-recourse loan could free up some additional capital, but how much the lender would go could be limited on a recently rehabbed property. Certainly feel free to speak with your lender and see what is possible. Over time, as the property value after rehab seasons, you pay down the note a bit, and receive additional cash flow, re-configuring the financing on the property might produce more bang for the buck. Assuming the numbers work, you can pull additional equity from the current property as a means to make additional investments within the LLC.
Other than doing cash our refi and getting to 50% non-recourse loan; I don’t see any other way. Also, this being in an IRA; your options are limited.
This is why I don’t recommend owning RE in IRA.
An IRA is a tax shelter. Tax on the income is either deferred (Traditional IRA) or eliminated (Roth IRA).
Rental real estate is an example of a type of real estate investment that can be a tax shelter on its own. Rental real estate often generates losses for tax purposes even when there is positive cash flow. This is because of the depreciation deduction that can be taken on the investment.
When properly executed, rental losses can be used to offset other income which effectively shelters that other income from income tax. This can result in significant tax savings.
If an IRA has rental losses, the IRA is generally not paying tax so there is no tax to shelter.
If an individual has rental losses, there is an opportunity to shelter other income, including W-2 or business income, from income tax. This results in not paying tax on that other income and those tax savings mean cash in your pocket.
You might consider a larger non recourse cash-out loan from a non recourse lender such as First Western Federal. We do cash-out refinances up to 60% of your purchase price with an allowance for the hard cost of improvements invested into the property.