Property value up 50% in 3 years, what would you do?

Real Estate Deal Analysis & Advice
10yFollow

Property value up 50% in 3 years, what would you do?

Matt Bowers
Investor · Seattle, WA · Member since 2014 · 12 posts · 3 votes

Hi all - I'm curious what everyone would do in my position. Happy to hear all opinions, and thanks in advance. 

My wife and I are hoping to build a portfolio for long term buy and hold. We have two properties right now. One, we purchased in 2013 for $500k with $100k as down payment. The property is worth about $800-900k now. Lucky. Mortgage is 30 yrs at 3.25%, full payment incl ins and taxes is about $2300/mo. It rents for $5700/mo. 

Now we've got about $450k equity in it... what would you guys do? I'm tempted to hold on to it, but I know other people would 1031 into something bigger?

Sorry if this is in the wrong forum... it was a tough choice.

0Reply
35 views

Most Popular Reply

Chris MasonPro Member
Moderator
Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
10y

@Matt Bowers,

One thing about a 1031 in your situation... there's a good chance that whatever you buy will ALSO have appreciated by some crazy amount. Would that property itself be as cash flow positive if you had to pay $900k for it today? Ehhhh probably not so much.

And then there's of course the standard biggerpockets.com advice to always be mortgaged to the hilt and ever more in debt, which would mean a cash out refinance to pull ~$200k out and buying something else. And of course you're going to start paying interest on that $200k right now, which will pressure you to hurry and buy something even if it's not a particularly good deal. Also, good bye 3.25%. I mostly agree with @Steve R., but would strongly advocate champagne over wine.

However if you want to hedge against some amazing opportunity crossing your desk that you need to be ready for, go open a HELOC for $200k or so (really whatever you can get) with a balance of $0.00. There will probably be a $75/yr maintenance fee - whatever.

Then go make a spam account and get added to some mailing lists of local hard money lenders, investor friendly agents, investor friendly escrow officers, and wholesaler types. And continue to do whatever active looking you are already doing. If something you can't pass up comes along, you've got $200k liquid with the click of a mouse and are ready to jump on it right damn now, and you weren't paying interest on that $200k in the interim for no reason (ok you could take that $75/yr and divide it by $200k and claim you were paying 0.0375%... whatever).

If you think that 'something' that might come up is going to need more than $200k, get a local lender to run numbers and qualify you hitting your DTI with what the payments would be if you maxed out that $200k HELOC. Find someone that will treat you like an intelligent adult, who doesn't put expiration dates on preapproval letters so that, again, you aren't feeling time-pressured to move before you're ready.

6Reply
See this reply in the discussion

28 Replies

Jump to latestLatest
  • Steve R.
    part-time investor/landlord · Calgary, Alberta · Member since 2015 · 66 posts · 27 votes
    10y

    open a bottle of wine and celebrate :)

    3Reply
  • David Dachtera
    Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes
    10y

    @Matt Bowers,

    Purely my opinion ...

    I'd borrow out as much equity as I can and put it into another income property.

    Money that's not working for you is "dead" equity.

    My $0.02...

    David J Dachtera

    "Success is not a destination. Failure is not an event. Success is a process, failure is a choice."
    - DJ Benedict

    1Reply
  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    10y

    @Matt Bowers,

    One thing about a 1031 in your situation... there's a good chance that whatever you buy will ALSO have appreciated by some crazy amount. Would that property itself be as cash flow positive if you had to pay $900k for it today? Ehhhh probably not so much.

    And then there's of course the standard biggerpockets.com advice to always be mortgaged to the hilt and ever more in debt, which would mean a cash out refinance to pull ~$200k out and buying something else. And of course you're going to start paying interest on that $200k right now, which will pressure you to hurry and buy something even if it's not a particularly good deal. Also, good bye 3.25%. I mostly agree with @Steve R., but would strongly advocate champagne over wine.

    However if you want to hedge against some amazing opportunity crossing your desk that you need to be ready for, go open a HELOC for $200k or so (really whatever you can get) with a balance of $0.00. There will probably be a $75/yr maintenance fee - whatever.

    Then go make a spam account and get added to some mailing lists of local hard money lenders, investor friendly agents, investor friendly escrow officers, and wholesaler types. And continue to do whatever active looking you are already doing. If something you can't pass up comes along, you've got $200k liquid with the click of a mouse and are ready to jump on it right damn now, and you weren't paying interest on that $200k in the interim for no reason (ok you could take that $75/yr and divide it by $200k and claim you were paying 0.0375%... whatever).

    If you think that 'something' that might come up is going to need more than $200k, get a local lender to run numbers and qualify you hitting your DTI with what the payments would be if you maxed out that $200k HELOC. Find someone that will treat you like an intelligent adult, who doesn't put expiration dates on preapproval letters so that, again, you aren't feeling time-pressured to move before you're ready.

    6Reply
  • Zach Quick
    Investor · Bentonville, AR · Member since 2014 · 759 posts · 379 votes
    10y

    @Matt Bowers What kind of buy and hold portfolio are you wanting to build? I think telling us your endgame may help us give you more opinions and options.

    At first glance it seems you could probably do better than doing nothing whether that's cash out refinancing or 1031. That's not the best return on your equity just judging by the monthly gross.

    Congrats, by the way.

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Matt Bowers  if you don't need the cash flow.. you could just use all the cash coming in and maybe throw another 2 to5k a month at it and pay it off as fast as possible.

    ONe tenant in a High end home is a breeze to manage so think of your time and your peace of mind along with other things.

    the most successful RE folks I know have substantial amounts of free and clear properties.. they can weather any storm.. I don't like this leveraging up Idea like @David Dachtera suggests... I saw way to many people get killed financially when things turned..

    And who said west coast no cash flow no deals here.. I would like to see anyone who invested in other markets that can match your success  IE out of west coast   .. but then again you had the 100k and the credit to buy that kind of property.. most folks starting out just can't do pony up that kind of dough so they go searching for the next best thing which is less expensive cash flow.

    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    4Reply
  • Robert Blanchard
    Littleton, CO · Member since 2014 · 195 posts · 72 votes
    10y

    Have you considered buying a multi unit property?  I do not know what a 12 - 16 unit building in your area runs, but those can be a great money maker if you buy one that needs some help and then go in and fix up units as the lease expires.  Then you can charge premium rents and increase the cash flow and the quality of the tenants in the building.

    In Seattle, those "Apodments" are big right now. If you could get zoning approved to change a larger house into a multi, and put 6 of these Apodments into it, the cash flow might be as good as your current property.

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Robert Blanchard  apts  100k to 150k a door in seattle and Portland.

    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    0Reply
  • Aaron Vergason
    Rental Property Investor · Erin, NY · Member since 2016 · 130 posts · 32 votes
    10y

    @Matt Bowers first of all I'm impressed by your interest rate and term length. Did you buy it as owner occupied? I never see rates or terms like that.

    Also it looks like your taxes are super low! Maybe $5500 a year? Our houses in NY are $4,000 in taxes and that's for a 120k house. LOL.

    What kind of property is this? If it's a decent sized multifamily and if you haven't raised the rent 50% in the past three years, but basically maintained them then I would probably use some equity to buy another well cash flowing property. Since it sounds like you want to grow that's a good way to do it.  If you have been raising the rent with the market going up, then I would be more hesitant. Market could go back to 2013 levels and if rents dropped way down too it might not cover the extra 200k debt service as well.

    Would it make sense to use the equity to pay off your other investment or does that make this much cash flow as well?

    If this is some mansion that you rent out I'd sell it. 

    0Reply
  • Robert C.
    Investor · San Francisco, CA · Member since 2016 · 338 posts · 444 votes
    10y

    @Matt Bowers, It seems you got an owner-occupy mortgage. If there's any chance that you and your wife lived there for 2 years in the last five, just sell and take the gains tax free! Then you have all the time in the world to do what you want with it.

    If that's not the case, you can probably tell by other people's responses that you have a bunch of options. I had a multifamily property in a similar situation. Bought in August, 2013, and I ended up selling at double the purchase price, then 1031 exchanged into another property in a slightly better neighborhood with greater NOI. I only took a 50% loan on the new property so I'm not over-leveraged in case anything happens in the market.

    1Reply
  • Paul Brockmann
    Northborough, MA · Member since 2015 · 57 posts · 10 votes
    10y

    Congrats!  I think it depends on what you want to do.  

    Do you want to trade up in the rental "scene" and do a 1031 exchange?  It would probably entail more management since it will probably be more doors/tenants.

    Do you like this property?  It seems like it is treating you well, but why is its value increasing?  Is it a long term positive changes?  If so, maybe take out the additional equity and purchase another rental property or other investments (no parties allowed, lol).  

    I think I would certainly take advantage of the low interest rates and the additional equity.  I would diversify my money and split that "earnings" across several sectors.  

    0Reply
  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    10y

    If you think the future is bright in your current market, I would hold onto it. Cash flow is how we pay our bills....but appreciation is how we truly build wealth.  If you sell it now for $800k, and in 5 years it is worth $1.25 you are going to be really kicking yourself.

    [email protected]301-893-4635Podcast Guest on Show #192
    District Invest Group546 Reviews
    WebsiteView Page
    1Reply
  • Jason Dillard
    Real Estate Broker · Greer, SC · Member since 2013 · 548 posts · 271 votes
    10y

    "but appreciation is how we truly build wealth" 

    Is there anyone else that disagrees? 

    I must be really strange.  I was taught to capture equity on the purchase.  Appreciation is having cake and eating it too.  An investor can create a deal out of thin air.  It is  much easier to make an even bigger transaction with this kind of equity and property.   My stagnant equity is always for sale... Or even better:  I continually attempt to spent it forward into a property that benifits me more. 

    I would be looking to buy better benefits,  with the equity,  than you are getting now.  

    0Reply
  • David Dachtera
    Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes
    10y
    Originally posted by @Jay Hinrichs:

    @Matt Bowers  if you don't need the cash flow.. you could just use all the cash coming in and maybe throw another 2 to5k a month at it and pay it off as fast as possible.

    ONe tenant in a High end home is a breeze to manage so think of your time and your peace of mind along with other things.

    the most successful RE folks I know have substantial amounts of free and clear properties.. they can weather any storm.. I don't like this leveraging up Idea like @David Dachtera suggests... I saw way to many people get killed financially when things turned..

    And who said west coast no cash flow no deals here.. I would like to see anyone who invested in other markets that can match your success  IE out of west coast   .. but then again you had the 100k and the credit to buy that kind of property.. most folks starting out just can't do pony up that kind of dough so they go searching for the next best thing which is less expensive cash flow.

    Yes - you do need to be careful not to over-leverage.

    On the other hand, too much dead equity can be a burden, also.

    Finding the right balance for you is part of being a business professional.

    David J Dachtera

    "Success is not a destination. Failure is not an event. Success is a process, failure is a choice."
    - DJ Benedict

    0Reply
  • Kenneth Fetzer
    Flipper · Carlsbad, CA · Member since 2016 · 28 posts · 5 votes
    10y

    Good quote.  Thanks

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Jason Dillard  

    I agree with your premise in non appreciating  markets were its a given that appreciation is not going to happen at any appreciable rate .... in those markets your NUTS to buy anything that can't cash flow significantly and or you have bought it under market ( IE retail value)

    And it really depends on your ability to scale and run an operation.. you need a crap load of doors bringing in 200 a month to make any serious money  like a 100 or more. Most folks cant or never get there.

    Whereas, West coast real estate over time pays its self off, is very liquid, and it appreciates over time with regularity.    

    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    0Reply
  • Jacob Pereira
    Real Estate Agent · Austin, TX · Member since 2014 · 636 posts · 486 votes
    10y

    @Robert C. has the same idea I had when I first read your question, but I'll take it one step further. First, a few assumptions:

    You bought it as owner occupied (I'm assuming this because of your VERY favorable rates)

    You've lived in it for at least a year (that's kind of the rule of thumb minimum for owner occupied)

    If these assumptions are correct, you still have time to ensure that can have lived there for two of the last five years. I would move back in long enough to ensure that you've lived there for two years and then pull out all the capital gains tax-free, provided that it doesn't appreciate so much that you make more than $500k profit ( a nice problem to have). After that, follow @Steve R.'s advice and open a bottle, although I tend to agree with my fellow marine @Chris Mason that this calls for champagne, rather than wine. 

    0Reply
  • Walter Key
    Realtor · Keystone Heights, FL · Member since 2015 · 340 posts · 118 votes
    10y
    Originally posted by @Matt Bowers:

    My wife and I are hoping to build a portfolio for long term buy and hold.

    If your goal is to continue to acquire more property, then it goes without saying that you should tap your current equity and use it to fund more deals. HOW to tap the equity become the real question. HELOC, Cash-out REFI, Sale and 1301, etc? Just my $.02...I'd probably take out a HELOC so the money is ready to go as soon as I need it but I'm not committed to a loan immediately. You could potentially use the HELOC to fund multiple down payments and use the cash flow from the new rentals to pay back off the HELOC, thus clearing up funds for more properties in the future.

    0Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    10y

    The reality is, contrary to what some see as a great property is not over the top and you could do much better.

    Rent                                       $5700

    Monthly payments                 -$2300

    Other expenses (30%) -$1710 (30% being very low on a SFH)

    Return on equity (5%)            - $1875

    Cash flow                                - $185/month

    The property itself is not cash flowing at all and if not for your equity return, which could be far better elsewhere, this is a dud without appreciation. 

    I would cash out and reinvest in a apartment or some form of multi plex that will actually cash flow positive and appreciate. Your money has passed away, buried and forgotten.   

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Thomas S. High end SFR in our area will not way run 30%

    I suspect he self manages... as there is no need when you have a single tenant that can afford 5,700 a month probably a higher up at Micro

    These type of tenants often leave the home as clean as the day they moved in... other than touch up for paintings that were hung etc.

    and your correct in our area on the west coast appreciation is what we invest for..

    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    0Reply
  • Isaiah Klavitter
    Investor · Crossville, TN · Member since 2014 · 10 posts · 1 vote
    10y

    @Thomas S.

    The fact that he owns the property and has some of the actual expense data, would you still use 30% to analyze future expenses?

    Due to the rent of $5700 you are expecting $1710 in monthly expenses, but an exact carbon copy house in the Midwest will only anticipate $500 for monthly expenses. Why after you already have some of the expense numbers (minus future capital expenses) would you assume such high expenses?

    New at this and just trying to understand. Thanks!

    0Reply
  • Levi T.Pro Member
    Rental Property Investor · Tucson AZ / Nice FR / Washington DC · Member since 2016 · 1k+ posts · 1k+ votes
    10y
    Originally posted by @Matt Bowers:

    Hi all - I'm curious what everyone would do in my position. Happy to hear all opinions, and thanks in advance. 

    My wife and I are hoping to build a portfolio for long term buy and hold. We have two properties right now. One, we purchased in 2013 for $500k with $100k as down payment. The property is worth about $800-900k now. Lucky. Mortgage is 30 yrs at 3.25%, full payment incl ins and taxes is about $2300/mo. It rents for $5700/mo. 

    Now we've got about $450k equity in it... what would you guys do? I'm tempted to hold on to it, but I know other people would 1031 into something bigger?

    Sorry if this is in the wrong forum... it was a tough choice.

    I assume it in Seattle Washington area. Knowing what I know about the region from real estate and tech industry news, which is just enough to be dangerous, I would not take any equity out. Nationwide, all markets are on the high end at this time and could be peaking. Everyone has been talking about how that area has been over extended in real estate for years now, one days it will hit and people are going to lose their shorts.


    If you take equity, you could be putting yourself into the same position as many others did in the bubble. If you want to take the money, sell the property and 1031 to something else, that way your closing that door on risk and opening a new one that hopefully has even more upside. Another option is just keep on buying and holding, then count your blessings and try and find another.

    0Reply
  • Matt Bowers
    OP
    Investor · Seattle, WA · Member since 2014 · 12 posts · 3 votes
    10y

    Thanks everyone so far! I thoroughly enjoyed reading all of your answers. I even read them aloud to my wife to make sure we're both getting the same info. 

    @stever23 thanks for this, I laughed out loud. We have had plenty of wine lately (we are in Chile!) so I guess I'll count it. 

    @chrism93 Thanks for the HELOC advice. If we don't sell, this seems like a no-brainer.

    @zq4444 at the moment we have done small houses that are split into a few units. That's where the opportunity was. I want to have 15-20 units. We have 5 right now. (2 units in one place, 3 in the other.) 

    @jlh thanks for saying the counter argument. That's good to hear. Yeah, @r2chi2, it was owner occupant. We lived there for 26 months. Right now is the first we've considered selling... We don't want to. As far as finance, paying off the other loan makes sense, the rate is .625% higher. 

    @aaronv5 what makes you say "if it's some mansion you'd sell it?" in our case it's 3000sqft and the basement rents out separately from the upstairs. 

    1Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Matt Bowers  well of course that changes things.. if you can take your 500k tax free by selling I think that is a strong option.

    I have done that 4 times since 2001.. and being we had those big run ups in the Bay ARea and even Oregon.. I pocketed more money than I could have ever owing rentals.. then I did it twice again from 2010 to 2014 and my current house.. so there is multi million  of tax free money .. and my Lake O house has shot up like yours were its up close to 400k... ( I built this one though so probably 150k is builder profit).. either way.. all owner occ all sold and NO tax paid..

    decisions decisions...

    I love the top shelf Chilean cabs.  Not much on Malbec though or I have just never had a good one.

    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    1Reply
  • Leslie Pappas
    Professional · San Francisco, CA · Member since 2014 · 876 posts · 301 votes
    10y

    Hi @Matt Bowers, if you're an accredited investor and you decide to 1031 exchange, you might consider reinvestment into DSTs. They are hands-off, institutional grade real estate investments, and they allow you the option to diversify. If that interests you, you can start to learn more at my website. Please let me know if I can help. Leslie

    0Reply
  • Gallagher Wilson
    Real Estate Investor · Seattle, WA · Member since 2016 · 30 posts · 12 votes
    10y

    @Matt Bowers I'm in a similar boat on my current home.  We bought around $310k in 2011 and comps in the neighborhood (Shoreline) are $550-600k.  Talking to a friend who's an accountant, his suggestion of selling to reset basis on the growth for tax reasons can be a good idea.  And, as many in here mentioned, you remove a lot of risk buy resetting that way.  Only downside is how hot the market it, and you're buying high because your selling high.  Maybe sit on it for a year or two and see what happens.  I know that drives the "your moneys not working for you" crowd nuts, but waiting to reinvest till it cools off a bit could make sense, based on your risk tolerance. 

    I've also considered investing in a more stable market (Kansas City seems to come up a lot on the forums), not an appreciation bet, but seems to be steady cashflow and you could land a couple multi's out there on good mortgages with that equity spread between as down payments, and a pad for rehab/capex.  Good for you, whatever you decide!

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free