When/If to Pull Out Equity?

Question

I'd like to hear any strategies/philosophies regarding pulling equity out of your property to finance renovations or another acquisition. Obviously, the answer to the question "When do I pull out equity?" is completely dependent on all sorts of facts and circumstances surrounding the property and financials. Note: My current strategy is the accumulation of passive income multi-family rentals.

So, does anyone have any strategies/philosophies they'd be willing to share? Anything from big picture stuff to small picture stuff. I've never pulled equity out of a property, but have always thought to do so to grow my portfolio. The question is..... when?

Thanks in advance.

John Warren · Answer

@Steven J. Umana I have built my whole portfolio through this strategy. I was able to buy and then subsequently refinance most of my initial investment out of my Lyons four unit in 2015/2016. This jump started my portfolio from 0 units in 2015 to 33 units in 2018 though the acquisition of my apartment building in Berwyn, IL. I believe you should always pull out the cash as long as you are not hurting the returns on you current portfolio too much. I think this is especially true for younger investors who can really benefit from time being on their side. Obviously, each time you "fleece" your property, you will get less cash flow from it, so you don't want to pull equity just because. It is part of a disciplined approach to investing.

Matthew Enos · Answer

I am a believer in pulling out equity. Pulling out equity does not necessarily mean that you are over leveraged. For example: if you buy a house for 30K, rehab it for 20K and the house is now worth 100K, I would refinance some of the equity out. I do the math two ways to try to find the sweet spot on how much equity I would like to pull. First is to determine the amount of financing that the rent can support. I start with the rent and subtract repairs, property mgmt, taxes, insurances, and how much cash flow I desire. This will leave you with the amount available for Principal and Interest. I then determine how much mortgage that PI can afford.

Second is to determine the maximum amount of mortgage based on value. In this case I know the bank will finance up to 80% LTV

I then use both calculations and go with the lower of the two.

The overall goal is that I have financed all my seed capital back out of the project and I'm still sitting around 70% of ARV.

The other thing to consider is equity is your money and generally speaking return on equity is going down each year (your money isn't working as hard). Refinancing equity out and reinvesting it can increase your ROE.

Max T. · Answer

30 yr conventional loans are the best! I have never pulled out any equity but I have "tapped" it a few times with HELOC for short term projects (<1 yr) like a flip. I have a lender that does 75% LTV on investment properties.

Steven J. Umaña · Answer

@Matthew Enos great insight.  I like the idea of pulling my seed money out to keep it rolling. Thanks.

Thomas S. · Answer

"The question is..... when?"

When you decide parking cash in real estate is a poor use of money. That an asset must be used for it to be able to earn it's keep.

Steven J. Umaña · Answer

@Max Tanenbaum the HELOC route is the way I would go - I misspoke above. Why pay closing costs and a new loan title premium to refi when you can just get a HELOC?? Unless your first mortgage has adverse terms....

Steven J. Umaña · Answer

Thanks @John Warren for this insight.

I currently have a duplex that is cash flowing really well, and had some arbitrary "five-year hold then refi" rule in my head, which I've been to questioning lately.....

If I do refi to pull out equity for the acquisition of another, similar building, I am approximating that I will need to pull out around 40/50K (if I don't take a partner/investor and use a conventional lender). I'm not sure I have that equity built into this property yet. Perhaps I shouldn't be so focused on finding a similar building, and be more focused on acquiring more units? Its hard not to try to duplicate a good investment, but I may be kidding myself on finding another one of these properties at the right price.

I think I just need to get the appraisal done and see where I stand equity-wise.

@Michelle Bright - sounds like a great purchase!

When/If to Pull Out Equity?

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