Experts on Equity.. What would you do?

[Christopher Giannino]

So I'm less than a week away from closing on my first deal. I had found a FSBO property on Zillow.com and I could tell the owner was very motivated to sell. In less than 20 days on the market the owner dropped the price, which was already slightly below market value, by $10k. After the owner did the second $5,000 price drop I decided I had to go see this property. About two days after viewing the property, I put in an offer even lower than the already low list price and my offer was automatically accepted. I'm very familiar with my market and from the beginning I knew that the property was going to appraise for higher than what I was paying for it.

Fast forward to a month an a half later, I just received my appraisal and it ended up appraising for $30,000 more. I'm very fortunate that from day one I will have instant equity and never had to swing a hammer. My intentions for this property was to live in it for about a year (maybe two years max) and then keep it as a rental. Since I knew this was going to be my strategy upfront, I made sure I did all my calculations based on the fact it was going to be a rental. When I eventually move out, I will be cash flow positive $275 which turns out to be a CoC return of about 8.6%.

With everything being said, I want to pick the brains of all the equity experts out there. I intend to live in this property for at least a year. I intend to buy future investment properties. I have about $25,000 in debt (student loans at 6.7% APR and a car loan at 2.99% APR.) I have about $30,000 in cash available for future purchases. How could I leverage this equity and put it to best use?

[Ian Kurela]

There are going to be more calculations involved with this decision but just keep in mind that debt is cheaper than equity. The property will always (most likely) increase in value and that value of equity that the bank (you) will hold will also appreciate. I would think that the best decision (without making any hard calculations), would be to continue to pay off the student loans with your cash reserves and normal income. Obviously the student debt over the car loan due to the larger interest rate. Then once you move out, simply use that CoC return of 8.6% to pay for your student debt loans. You will be able to take advantage of your increasing equity in the home from someone else paying the mortgage and you will also simultaneously be paying off your personal debt.