What do I do with all this equity?

26 Replies

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?

Hi Shannon,

In my opinion, consider refinancing (or HELOC'ing) your SFH and taking the equity and deploy it on rentals. The equity is stagnant in your home but it can be used to generate income, create tax benefits/writeoffs, and potentially appreciate in value.

I prefer multifamily apartments (5+ units) but you will generate more profit/unit with 1-4 units.

Would love to hear what you decide to do!

-Nathan

@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.

Thanks for your thoughts @Nathan Platter and @Greg Scott . It does seem like investing in a multi-family at some point is the way to go, mostly because, from what I understand, I can qualify for more financing (in addition to using my home's equity) for that type of vehicle (as opposed to w/ a SFH) based on the potential rental income of a 5+ unit building.

@Nathan Platter You wrote that the equity in my home can be used to "create tax benefits/writeoffs." Can you explain what you mean by this or point me to a resource?

@Greg Scott Getting 15-20% seems like a lot of return on a new investment; I do want to hear about your experience investing in properties you've never seen. The out-of-state turn-key rental companies kind of scare me; not sure if that's what you did. I'll PM you. Thanks, again. 

Hi @Shannon Allaire , what I'm about to write is neither tax nor legal advice but is how I best understand the law as it currently stands.

Upon acquiring a building, the IRS allows the owner to depreciate roughly 3% of the building value from the owner's income. If the $150,000 property has land worth $50k (meaning the building itself is worth $100k), the IRS allows the landlord to collect the first $3,000 of profit without having to pay income taxes (3% of $100k) 

Additionally, any cost of improving or maintaining the property is considered a business expense, so it reduces the taxable income the property may produce.

A CPA/lawyer would be the best person to explain all of the details about owning rentals, but it's the owning a rental that creates the tax benefits, not so much the pulling equity out of your home.

Hope that helps!

Hi @Shannon Allaire ,

I was in a situation kinda similar to yours. I bought a sfh primary residence in East Oakland. I was looking into investing out of state and took a trip to a couple cities in the midwest. Ended up recently purchasing another primary residence here in Oakland. Would love to here what you end up deciding!

@Shannon Allaire

Equity is a good "problem" to have.  I house hack a duplex here in Oakland that I bought in 2016 and I own a condo in Concord that I rent out that has positive cash flow. Like @Greg Scott said I bought out of state. Since last year I've closed on two duplexes and one SFR in Cleveland. Why Cleveland? Because in C Neighborhoods you can get the 3 % rule and property out there is A LOT LESS than out here. Not only that but there is an abundance of renters out there. I looked at Milwaukee as well.....and still may do something out there....but I flew out to Ohio twice last year.....connected with a couple of agents and property managers before I went out there and have been doing things out there ever since.

If you want more details feel free to PM me.

Take out the equity and then I would buy residential rentals in Cleveland, Ohio! Once you have acquired your loan limit of 10 loans I would begin upgrading to apartments and multis and you grow out your portfolio. You can buy C class area homes for 55-65k and B area homes for 70-100k. They will all cash flow nicely and you can have a PM company handle all the leg work. Its my favorite strategy just write checks and collect bigger checks!

Originally posted by @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?

Welcome to the site Shannon. Many folks on the west coast find themselves in your exact situation. It's not really that complicated to buy out of state. It only becomes complicated when investors try to over complicate or over think everything. Whenever you are buying a property out of state you should do a few things to ensure it's as smooth as possible.

  • Don't buy in the roughest neighborhood in the urban core. Pick a solid B-Class suburban area. Perhaps a nice 1950's built bungalow.
  • Always hire a 3rd party property inspector to give you an unbiased feel for the home. The reports are 40-90 pages long and go through the entire house in great detail.
  • Get an appraisal. If your using financing the bank requires this. This is good. The bank isn't going to let you blow their money. They have more skin in the game then you do.
  • Make sure you get clear title. If using a lender this is a non issue. They will make you do this. It's those maniacs that buy homes cash via quit claim deed off of craigslist that really get screwed.
  • Make sure your property manager is a licensed real estate brokerage.
  • Understand you can not eliminate all risk, only mitigate it. If you are risk adverse real estate, (especially out of state) is not for you.

I am going to take the contrarian stand here.

if your not experienced at being a landlord.. then just do value add to your present home.. don't tough the equity leave it there and let it grow..

this nation almost collapsed with refi out spend it on properties that failed..

If you have experience and deeper pockets and one of your out of state deals went wonky and it did not affect you that's one thing.

I am personally a big believer in leaving your personal residence equity ALONE and safe from high risk investing which most rentals are in most areas.

Solid advice by @Nathan Platter , @Shannon Allaire . Agreed there. I have seen recently where banks are tightening up their valuation on properties. Might just be my local market, but in one scenario the bank pulled comps in a separate zip code (worse schools, that dropped their valuation). I appealed it by providing a comp 2 blocks away (that sold within the last 6 months) but was still denied the proper valuation. Hope you have a much better experience, but HELOC is the direction I would go.

Thanks @James Wise , In your response you mention that I should "Make sure your property manager is a licensed real estate brokerage." Why? And, how common is it that real estate brokerages also run PM departments?

Thanks @Jay Hinrichs Appreciate the more conservative POV. I still haven't moved on the equity and the fact that it is my primary residence is a big deal. 

Thanks @Jay Helms Appreciate your POV. Didn't know banks were tightening up. I'm in the SF Bay Area, though, where valuations are insane. On your advice, why do you think a HELOC is better than a re-fi?

@Brian Garlington Thanks for sharing your experience. I really appreciate it. I do have Qs for you, I'll PM you. Just wanted to say a quick thanks. 

Originally posted by @Shannon Allaire :

Thanks @Jay Helms Appreciate your POV. Didn't know banks were tightening up. I'm in the SF Bay Area, though, where valuations are insane. On your advice, why do you think a HELOC is better than a re-fi?

On a re-fi, you start paying interest the moment it closes and on the full amount. With a HELOC, you only pay interest on your outstanding balance. Does that make sense?

Originally posted by @Shannon Allaire :

Thanks @James Wise , In your response you mention that I should "Make sure your property manager is a licensed real estate brokerage." Why? And, how common is it that real estate brokerages also run PM departments?

 It's illegal in all (or almost all) states for anyone other then a licensed real estate professional to run a property management business. So obviously you want to work with a company that is operating above board. On top of that there are added protections such as strict trust accounting standards that are enforced by that state's division of real estate.

@James Wise   also selling real estate in any form without a licesne IE wholesaling

I finally got fed up and got a state of Oregon investigator from the DRE to engage in an E mail with me.

"

The Agency is well aware that unlicensed “wholesalers” are rampant in our jurisdiction. Addressing the problems is like trying to put out small individual fires in a forest that is burning. The Agency’s investigations are complaint driven, so we rely heavily on the public, and our licensees to bring these individuals to our attention"

So another state is going to start cracking down on all this illegal selling of real estate and they are relying on the public and Brokers to turn the wholesalers in.

I’m in a similar boat of having built up equity from a Bay Area home that I’m looking to leverage. I’ve made the decision to look out of market so my money goes further, but the problem I have is figuring out where. I’ve heard of Clevand, other parts of northern OH, and Memphis. But what tools do folks use to investigate market trends & neighborhoods prior to visiting?
@James Wise I’d love to pick your brain at some point on this if you’re open to it?

Originally posted by @Shea Stringert :

I’m in a similar boat of having built up equity from a Bay Area home that I’m looking to leverage. I’ve made the decision to look out of market so my money goes further, but the problem I have is figuring out where. I’ve heard of Clevand, other parts of northern OH, and Memphis. But what tools do folks use to investigate market trends & neighborhoods prior to visiting?
James Wise I’d love to pick your brain at some point on this if you’re open to it?

 Pick away. I'm down to answer any questions here in the forums.

I am a Realtor in the Bay Area. I also have experience in Property Management and out-of-state investing. Property values around here have skyrocketed in the last 7-9 years and I wouldn't be surprised if we see a price correction in the next 1-3 years. The demand for housing in the Bay Area has been inflated by investors from overseas who need a place to park their money. Chinese investment in the Bay Area is decreasing due to increased restrictions by the chinese government (source). With that being said, I still believe that the Bay Area offers the best opportunity for appreciation in the long run. If your current financial situation allows you to be cash flow negative on your home in Oakland then I recommend refinancing and using the equity to purchase out-of-state turnkey properties as some of the other bp members suggested.

If you want to sell your property and use your equity to maximize your cash flow then I recommend you take the following steps:

1. Turn your property into a rental property.

2. Take out a HELOC to make improvements to your home that will maximize the sales value. HELOCs are only a good option if you can pay back your balance quickly.

3. Sell your home.

4. Initiate a 1031 tax-deferred exchange so you don't pay capital gains tax on the home. You can only complete a 1031 exchange with investment properties (that is why you need to move out and rent the property before selling).

5. Take the proceeds from your property in Oakland and invest in single family or multifamily homes in markets that provide higher cash flow. 

If you do this properly you should be able to achieve about $2,000/month in cash flow with your $170k investment. I would be happy to discuss these steps in further detail if you like - just PM me. 

FYI - I work as a buyer's agent and I am only licensed in California. I wouldn't be able to represent you in the sale of your oakland property or in the purchase of any out-of-state properties, but I am happy to help you come up with a plan to make the most of your equity.

First off, congrats @Shannon Allaire on purchasing your home in late 2015 and house hacking, which I consider you are cash flowing in that your friends are helping you pay off your mortgage.

I was in a similar situation as you. I bought my home in Oakland 2 years ago and since then, the home value has gone up. I agree with @Nathan Platter in that I didn't want the equity in my home just sitting there. I wanted to use that equity to generate more income. Make my money work for me to make more money!

Last year, I was able to do a cash out refinance, pulled the equity out, which happened to be the same amount of my down payment, and use that money to purchase a 2 unit property in Sacramento. Now I'm looking to refinance that property or 1031 into a commercial multi-family with 5+ units.

Before even deciding whether to refinance, or take out a HELOC, or sell your home, etc, figure out what is your end goal? Do you really want to manage investment properties out of state? Or do you want more hands on experience and invest somewhere closer? Are you more interested in single family homes or mfh?

I think once you narrow your focus on what you're interested in and what matches your current lifestyle to achieve your end goal, you'll better understand how to use your equity.

Good luck on your journey!

Sherwin - I’d love to hear more about your investigation into Sacramento. My goals are to acquire a 2-4 unit building that is cash flow positive in a semi decent neighborhood where I’m not constantly worried about rent getting paid (this staying away from section b but I don’t need 700+ credit scores either).

Join the Largest Real Estate Investing Community

Basic membership is free, forever.

By signing up, you indicate that you agree to the BiggerPockets Terms & Conditions.