SFR with 50k equity what to do with?
Investor · Arlington, TX · Member since 2016 · 18 posts · 3 votes
Hello all, I have a SFR that i have about 50k equity in, I have a 15year note, payments are 995 and it rents for 1250 a month, Im thinking about selling next summer, my question is should I sell this property and invest the funds into a 4 plex or multi-family units or should i jump into the buy and flip game? I have a stable W2 but i am feeling that I either need to acquire more property to build my portfolio quicker. I have tried getting a heloc but since it is not my primary I have not had any success. So my question is what would you do in this scenario, I greatly appreciate all and any advice
Hey Derick,
I recently ran into a similar problem. Had several rentals with tons of equity but didn't want to sell to access it.
I ended up finding HELOC's on investment property through local credit unions. If you find one in the area where the property is located, and you also live there, there is a great chance they will underwrite for you.
I also found out Wells Fargo will do them. I have a contact there I can refer you to if you'd like.
As far as flip or long term, I'd say find a way to do both. That's how I think. Keep just enough equity for the 20% most hard money lenders want you to put down, and invest the rest. Or, flip 3 houses, then buy one. By then you should have enough bank rolled that every flip you do can go to buying another rental. If you buy the rental first, you won't be able to flip. If you flip first (and don't lose money), you'll still be able to buy the rental.
Let me know how else I can help.
-David
Hey Derick,
I recently ran into a similar problem. Had several rentals with tons of equity but didn't want to sell to access it.
I ended up finding HELOC's on investment property through local credit unions. If you find one in the area where the property is located, and you also live there, there is a great chance they will underwrite for you.
I also found out Wells Fargo will do them. I have a contact there I can refer you to if you'd like.
As far as flip or long term, I'd say find a way to do both. That's how I think. Keep just enough equity for the 20% most hard money lenders want you to put down, and invest the rest. Or, flip 3 houses, then buy one. By then you should have enough bank rolled that every flip you do can go to buying another rental. If you buy the rental first, you won't be able to flip. If you flip first (and don't lose money), you'll still be able to buy the rental.
Let me know how else I can help.
-David
Thanks for the response David, I did try Wells Fargo but I was not approved, I have a 685 fico, you can forward me your contact and Ill reach out to them, Ill also try the local credit unions in the area, however, I dont live in that area but ill still try them out, so were you able to access the equity in all of your rentals?
Thanks for the response David, I did try Wells Fargo but I was not approved, I have a 685 fico, you can forward me your contact and Ill reach out to them, Ill also try the local credit unions in the area, however, I dont live in that area but ill still try them out, so were you able to access the equity in all of your rentals?
If the current property has been performing to expectations/satisfactory then would refi to a 30 year note provide the cash flow to invest in another property sooner? Or maybe you can pull out equity via a refi vs a heloc?
If the current property has been performing to expectations/satisfactory then would refi to a 30 year note provide the cash flow to invest in another property sooner? Or maybe you can pull out equity via a refi vs a heloc?
Pulling out the equity for a rental is next to impossible out here in texas, I just got a tenant in so I will sit on it for a year and sell it, I was originally going to keep it for the 15 year term and pay it off but I want to pull the equity out and buy 2 properties 1 being a rental and the other a buy and hold
I would sell and sit on the cash. I keep thinking with oil prices going down now is not the time to add leverage in Texas. Wait for the FC FC and defaults in 6-12 months.
Just got a tenant in so im going to sit on it for one year, not sure how the oil price going down would affect adding leverage here, we were not hit hard by the real estate crash that happened years ago, so my goal is to sell this property in a year and buy 2 properties, 1 being a flip and the other being a buy and hold
I would suggest you have a clearly defined goal as to what you want to accomplish. That will help you to decide what to do next. As far as what I would do?
This is tough because it is so specific to area, but I am a buy and holder that only cares about cash flow (although I only do 10-15 years notes so that contradicts my statement). That particular property does not allow for long term positive cash flow so I would probably sell and purchase a property that does cash flow.
Thoughts?
I think you need to determine what can be done with the capital before deciding how to access it. For instance, $50,000 will not buy you to much in my area short of investing an hour away or in an area you probably don't want to invest in.
Another aspect to consider is your calculations for the property. I understand you have a 15 year loan which is raising your PITI but a $250 margin every month might be setting you up for failure. You are paying down the mortgage quicker but, as you are currently witnessing, are not able to access any capital for future growth. I don't have a sound answer for you because I don't know the whole picture but I would suggest getting out of the 15 year mortgage at a minimum.
Playing devil's advocate and looking for your thoughts.
In my "analysis" of that property, long term there may be profit but it's unlikely to have + cash flow. If that was my only property I would not want to carry negative cash flow for long. Especially since equity is it's strongest trait and that can fluctuate with the values in the area.
Thoughts?
Playing devil's advocate and looking for your thoughts.
In my "analysis" of that property, long term there may be profit but it's unlikely to have + cash flow. If that was my only property I would not want to carry negative cash flow for long. Especially since equity is it's strongest trait and that can fluctuate with the values in the area.
Thoughts?
This is my only property right now, I have seen homes in the 80k range that would make good rentals, I have occasionally saw flips at 60k in your opinion is the 250 monthly is not enough for this property I own? if I could raise another 30k I would buy all cash, I don't want to refi again since I just did a couple of months ago and that would just add more to my principal balance. Ill sell it next summer and try to acquire 2 properties. Originally my goal was to keep this rental for 15 more years and have a free and clear property for when I retire. I appreciate you sharing your thoughts and comments
I think the deciding factors would be determining how much of the $995 is going to building equity and what other factors are in place to offset the negative cash flow.
Basic expenses of 5% for vacancies, 10% for repairs, 10% for property management, and 10% for cap ex means the $1250 in rent only brings in $812.50 in income. Of course these numbers aren't absolute.
Due to the negative cash flow he is having to come up with an estimated $182.50 a month over the long haul. The major issue, at least as I see it, is he is generating profit but can't access any of it. If he has other sources of cash flow he could hold onto it for a while but as you said, equity is very market dependent. Also, I think very few of us would agree that using cash flow from one property to pay for negative cash flow on another is a wise idea. Unless of course he is expecting, with reasonable certainty, huge appreciation.
If it were me I would determine my ability to raise the rent, determine the cash flow with a 30 year mortgage, and then determine how much of the 50k in equity I would have after paying for real estate fees if I sold. One thing to consider, there is a high possibility switching to a 30 year mortgage will only reduce costs enough to avoid a negative cash flow. The switch may only bump him up to $0 in cash flow but he will have to pay closing costs to obtain that.
I think you need to determine what can be done with the capital before deciding how to access it. For instance, $50,000 will not buy you to much in my area short of investing an hour away or in an area you probably don't want to invest in.
Another aspect to consider is your calculations for the property. I understand you have a 15 year loan which is raising your PITI but a $250 margin every month might be setting you up for failure. You are paying down the mortgage quicker but, as you are currently witnessing, are not able to access any capital for future growth. I don't have a sound answer for you because I don't know the whole picture but I would suggest getting out of the 15 year mortgage at a minimum.
50k here can get you in a rental and a flip since there are properties to be found in the 70-90+k range, I don't want to refi again since I just did a couple of months ago and have not recovered my closing costs yet
The $250 is not your cash flow. That doesn't allow for any vacancy and maintenance. If you subtract out 10% or 20% of rent for v&m you don't have much of anything left.
Going back to the fact that my area is different than mine, here is how I calculate things.
1. I max out at 60X's monthly rent, so if that is bringing in $1250 then $75k is the most I would pay.
2. I want 12% CoC ROI with a 15 year note. To further complicate things, I use 30% as my vacancy and maintenance number.
In your case I would take rent - 20% (I use 30 but most people laugh at me.) then subtract out principle, interest, taxes, and insurance. Whatever is left is what I would count as long term cash flow. If that number is less than $100 then your margins are super thin. Meaning there is plenty of room to be losing money.
I completely agree with Jacob. You don't have any cash flow. Subtracting 20% of your rent puts you right at your monthly mortgage payment. Also, like Jacob, I think when you factor in vacancies, repairs, property management, and cap ex 20% is really low.
Another question, when you state you have $50K in equity are taking into consideration the costs of selling the property? We were recently looking at selling a rental and our $80K in equity turned into $65K pretty quick. That was with our agent reducing selling fees from 2.8% to 1.7%. Its a whole other topic but this is an example of why it might be beneficial to be licensed.
The $250 is not your cash flow. That doesn't allow for any vacancy and maintenance. If you subtract out 10% or 20% of rent for v&m you don't have much of anything left.
Going back to the fact that my area is different than mine, here is how I calculate things.
1. I max out at 60X's monthly rent, so if that is bringing in $1250 then $75k is the most I would pay.
2. I want 12% CoC ROI with a 15 year note. To further complicate things, I use 30% as my vacancy and maintenance number.
In your case I would take rent - 20% (I use 30 but most people laugh at me.) then subtract out principle, interest, taxes, and insurance. Whatever is left is what I would count as long term cash flow. If that number is less than $100 then your margins are super thin. Meaning there is plenty of room to be losing money.
I have been averaging about 10% over the last few years in v&m and I have been managing it myself, the area rents quickly, in the past 6 years its been vacant for 5 months total, still I am kind of getting tired of the "mental" responsibility that being a landlord carries, especially when managing it yourself, having a property manager in my case would make the numbers even worse.
At a minimum, I think this conversation illustrates why it is so easy to lose money in real estate. You need to be ridiculous (realistic) with you calculations in order to protect yourself.
Another question, when you state you have $50K in equity are taking into consideration the costs of selling the property? We were recently looking at selling a rental and our $80K in equity turned into $65K pretty quick. That was with our agent reducing selling fees from 2.8% to 1.7%. Its a whole other topic but this is an example of why it might be beneficial to be licensed.
Yes, i have considered the costs, the property is valued now at 135k, mortgage is 82k, so in a year it should (hopefully) appreciate to 142-145k range with the morgage being at 80k
If those numbers do reach that they may offset the negative cash flow when you go to sale. I just hate speculating on appreciation.
At a minimum, I think this conversation illustrates why it is so easy to lose money in real estate. You need to be ridiculous (realistic) with you calculations in order to protect yourself.
I believe its easier to lose short term versus long term, long term allows you to pay down the principle and hopefully expect some appreciation, i think the final goal should be to have properties free and clear some day, if you buy right and hold the property, manage it well, i see it hard to lose money over a 10+ year term doing the buy and hold scenario, on the other hand you can easily lose money buying and selling several homes yearly. I have done this since 99, with only one situatuion where I lost money in a vegas home that i waited too late to sell, if i would have sold it at the right time I would have cleard 100k+ in just a 3 year time span - oh well im sure alot of other people can say the same thing. I believe its much easier to lose money in other investments (stock market, etc) than real estate.
That is what I really like about real estate. We aren't relying on a CEO or hedge fund manager to determine our profits. We get to take our future into our own hands. I never like to compare down but investing in anything is better than what most of Americans are doing on a yearly basis. I think if we all just keep pushing forward and helping each other along the way we will make it in the end.
You simply can't count on appreciation...it may never come. In your case, why not just sit on the house and let your renters pay it off for you? You just refinanced.....why if you were thinking about selling in a year? There is a potentially large correction coming in real estate and that equity you think you have will be swallowed up either on the property you have now or the two you are thinking of buying...which will then be upside down. If you keep the current property which seems to have performed well....you ride it out on that one, while you build up to be able to purchase the next one AFTER the correction at cheaper prices. Many disagree with me and that's fine....but plan conservatively or switch to shared housing which has less risk than single family rentals and higher net rents. Either way, as Jacob posted on another string.....appreciation is just icing on the cake....when you get it AWESOME but don't count on it...and if you do.....your profitable deal on paper become a loser in real life.
You simply can't count on appreciation...it may never come. In your case, why not just sit on the house and let your renters pay it off for you? You just refinanced.....why if you were thinking about selling in a year? There is a potentially large correction coming in real estate and that equity you think you have will be swallowed up either on the property you have now or the two you are thinking of buying...which will then be upside down. If you keep the current property which seems to have performed well....you ride it out on that one, while you build up to be able to purchase the next one AFTER the correction at cheaper prices. Many disagree with me and that's fine....but plan conservatively or switch to shared housing which has less risk than single family rentals and higher net rents. Either way, as Jacob posted on another string.....appreciation is just icing on the cake....when you get it AWESOME but don't count on it...and if you do.....your profitable deal on paper become a loser in real life.
Good post, I agree with you, i do believe a correction is coming, but with investors now having to put more skin in the game and not being able to drive up prices like they did years ago with no money down products and loose lending requirements, i dont think it will happen this year maybe 2 or 3 years down the road and that also depends on what region you are talking about, we didnt really feel the crash out here and we didnt experience the double digit appreciation either , i wasnt thinking of selling when i refinanced, a few months after i did it, my tenant moved out so that got me to thinking about changing my goals, i was in a 6.15 30year loan still paying pmi, so the fixed 15yr @ 4.375 was a better deal for me, and yes counting on appreciation is not good because its not guaranteed, i may end up keeping it because I like the idea of having it paid for in 15 years.
That upcoming correction does concern me. I'm in the Denver area and we have had the double digit appreciation in the past few years. I'm worried the correction will wipe out the gains I've had and I'm constantly thinking about how to prepare for it.