What do I do with all this equity?

[Shannon Allaire]

Hey Moguls,

Newbie looking for advice on the best use of the ~$170K in equity I have in my SFH in East Oakland. I bought it in late 2015 and my home's value has gone up a lot. Currently, I live in one room and rent out the other two to friends, whose rent is helping to pay off the ~350K I have left on the mortgage. (It is not technically "cash flowing," but their rent pays most of the mortgage.) The house is in quick walking distance to the Fruitvale BART station.

I'm interested in using the equity to buy some other investment that WILL cash flow, but I don't know what. I could possibly qualify for another conventional mortgage, I could take out a HELOC to put a down payment on something (But where? Oakland is so expensive. Do I go out-of-state?) but I don't know. Or I could build a tiny home in the back of my lot, an ADU, or add to the house. Or, I could wait and see if the house's value goes up even more.

Any advice?

[Greg Scott]

@Shannon Allaire

Here is the thought process I would go through:

1) Your current property is not only a rent property, it is also your home.   That requires a little different focus.  You should be certain you are comfortable with any changes.  

2) From a pure financial perspective, the $170K is completely dead equity.  It isn't helping you in any way.  I would look at getting it out of there.  Let's say you take out $100K at 5%, that is $5K extra interest you will have to pay, but if you are a smart buyer you should be able to get 15-20% on your new investments, putting $10-15K in your pocket every year.

3) The easiest way to ease into this new framework would be to get a HELOC and use it to buy a few properties. HELOCs are short-term instruments so I wouldn't stay in a HELOC. I would look to do a rate & term refi after a couple years and move the HELOC debt into a long-term mortgage. Alternatively, you could just do a cash-out refi now and do it all in one chunk.

4) Yes, I would also look to buy out of state.   I've had properties in 6 different states.  I've had some properties that I've owned and sold, made a ton of money and never even saw them.  It is very possible.  Private message me if you want more gory details on ways to do that.