How to get $ out of free and clear rental homes

Question

I own two rental homes in California that I purchased for around $275K each absit 8 years ago.  Today they are valued at around $625K each.  No mortgages.  Great renters and rent totals  about $4500/month from both when combined.  However, I feel like I should be able to get more dollars out of my original $550K investment.  The equity just sits there.  Thoughts?

Joe Villeneuve · Answer

Your equity is your cash that has gone and died.  It represents what "could be" your cash.  That means your money paid face value for these properties.

Sell them.

Right now, your paid (your cash) $1.25M for properties whose PV total $1,25M.  If you sold the properties, and invested the proceeds as 20% DP (let's take out 10% for CC), you'd be paying $1.125M for a PV of $5.625M.  Big difference!

Cash flow right now is based on the initial value of the property.  So, if the current CF is based on properties worth $550k, that means by selling, and expanding your portfolio, the new CF should be at least 10 times what it is now.

You're losing money...big time.  Sell.  Keep your cash moving forward and working for you, instead of retired and working for nobody.

Larry Turowski · Answer

I agree with @Joe Villeneuve.  When you don’t sell you’re essentially buying the property from yourself at the current value. Would you buy these all cash at 1.25M right now to gross 108k/yr?  I didn’t think so.

If you’re bullish on the appreciation and want to keep them, fine, but pull out the equity and put it into other cash flowing deals.

Christopher Cole · Answer

The most obvious option is to refinance! You'll be able to pull out equity tax free, and then extra tax write offs with the interest paid on the properties.

A more conservative approach that I have favored in the past as well is to get a HELOC on the property. It can be more difficult finding a bank that'll do it for non owner occupied, but make enough calls (try credit unions in the area), and you'll get one. I like this approach because I have the cash sitting there, ready to be spent, but you aren't paying interest till you use it. The downside is the interest rate will be a bit higher and variable.

Basit Siddiqi · Answer

@Michael DavisAs others have mentioned, look to do a cash-out refinance and deploy the capital on investments that you think would generate higher than the interest rate that you are paying.Best of luck

Larry Turowski · Answer

You can do either, but there are fewer banks that will do a HELOC on a rental.

Joe Villeneuve · Answer

Buying correctly will always be that.  What the market is, impacts it, but doesn't restrict it.  In this case, it just delays the next time you can flip your cash through it.

In the case of rental properties, if the property cash flows, it cash flows.  Deals are made, not found.

What makes a deal is two things:1 - Using as little as possible out of pocket (cash).  This is the actual cost to you...and should be the total cost to you.  It should be restricted to the down payment only.2 - The terms you establish/negotiate for covering the rest.

The number 1 goal of any rental property is to recover your cost (cash) ASAP...assuming you ONLY buy properties with positive CF.

Michael Davis · Answer

@Joe

@Joe Villeneuve. Sorry, I was not clear.  If I am bullish on home price appreciation for the next 5 years, then your approach makes great sense.  Sell the properties I have now and use those funds for a 20% down on many more rental homes.  HOWEVER, it seems to me that the real estate market is extremely high and likely due for a correction. So, I am not so bullish on real estate appreciation for the next 5-7 years.   Is now really the time to sell existing and buy additional homes using the proceeds from sale of free-in-clear homes as a deposit?

Joe Villeneuve · Answer

You lost me right after you wrote,..."...if bullish on appreciation...".

Joe Villeneuve · Answer

You don't find deals, you make them.  They are always out there, in plenty, if you know how to recognize opportunity.

Michael Davis · Answer

@Joe

@Joe Villeneuve Yes!  I agree if bullish on appreciation then start using leveraged money to get more of the total appreciation.  However, if you are NOT bullish on further housing appreciation sell and pay taxes on rental property ?  Taxes on rentals seem brutal, so if you aren't doing 1031 exchange, better have something amazingly good as a replacement.  And right now, with the market at all time highs and housing at all time highs...seems difficult to know where to go as replacement for $53400/yr cash.

How to get $ out of free and clear rental homes

Most Popular Reply