Lots of equity, what to do with it?

Real Estate Deal Analysis & Advice
7yFollow

Lots of equity, what to do with it?

Alan M.
Rental Property Investor · San Francisco Bay Area · Member since 2018 · 87 posts · 87 votes

I'm in the fortunate situation of having a lot of equity but without much cash on hand. I need some help on how best to put the equity to use (or to sit on it for awhile)  As background, here's my current real estate portfolio:

-Condo in Boston. FMV $950,000, $340k loan at 4% with about 21 years left, $610k in equity. Cash flow of about $900/month.
-Primary residence in California. FMV $1,650,000, $590k 7/1 ARM at 2.85% (5+ more years until it resets), $1M in equity.
-Brownstone in Boston. FMV of $2.8M, $0 debt, current cash flow of about $6,000/month but can get cash flow to about $10,000/month as the current leases expire. Sadly, I inherited this property because my Mom passed away earlier this month - I want to run it as part of my portfolio and selling it is not an option I'm willing to entertain.
-About $650k total in available HELOCs on the primary residence and the Condo (zero balance, right now)

I look at the above and realize I've got a ton of equity locked up. I get the advantage of leverage, but I'm conservative by nature - I'm going to be fine financially, so I'm probably not up for taking on a huge amount of risk. I also haven't invested remotely before (lived in Boston when we bought the condo and then kept it when we moved) and I work full time, so can't really take on a bunch of properties that I would have to self-manage remotely.

A syndicator that I trust recommended pulling about $800k-$1M out, doing 2-3 deals with 3-4 syndicators, and tapping into some of the remaining equity with a HELOC. I liked that approach, as it's basically multiple eggs in multiple baskets and still leaves some equity to tap into if something comes up. Taking this amount out would also keep the existing properties cash flow positive by a good amount - so maybe we take a loan out for $800k and a HELOC for another $500k to have access to? That would leave about $1.15M in HELOCs to tap into if something attractive came up in the future. Or do I buy some SFH too and just hire a management company?


Sorry, long post. Thoughts and advice much appreciated!

2Reply
151 views

Most Popular Reply

Charles Kao
Specialist · Grand Rapids, MI · Member since 2016 · 1k+ posts · 611 votes
7y
Originally posted by @Alan M.:

I'm in the fortunate situation of having a lot of equity but without much cash on hand. I need some help on how best to put the equity to use (or to sit on it for awhile)  As background, here's my current real estate portfolio:

-Condo in Boston. FMV $950,000, $340k loan at 4% with about 21 years left, $610k in equity. Cash flow of about $900/month.
-Primary residence in California. FMV $1,650,000, $590k 7/1 ARM at 2.85% (5+ more years until it resets), $1M in equity.
-Brownstone in Boston. FMV of $2.8M, $0 debt, current cash flow of about $6,000/month but can get cash flow to about $10,000/month as the current leases expire. Sadly, I inherited this property because my Mom passed away earlier this month - I want to run it as part of my portfolio and selling it is not an option I'm willing to entertain.
-About $650k total in available HELOCs on the primary residence and the Condo (zero balance, right now)

I look at the above and realize I've got a ton of equity locked up. I get the advantage of leverage, but I'm conservative by nature - I'm going to be fine financially, so I'm probably not up for taking on a huge amount of risk. I also haven't invested remotely before (lived in Boston when we bought the condo and then kept it when we moved) and I work full time, so can't really take on a bunch of properties that I would have to self-manage remotely.

A syndicator that I trust recommended pulling about $800k-$1M out, doing 2-3 deals with 3-4 syndicators, and tapping into some of the remaining equity with a HELOC. I liked that approach, as it's basically multiple eggs in multiple baskets and still leaves some equity to tap into if something comes up. Taking this amount out would also keep the existing properties cash flow positive by a good amount - so maybe we take a loan out for $800k and a HELOC for another $500k to have access to? That would leave about $1.15M in HELOCs to tap into if something attractive came up in the future. Or do I buy some SFH too and just hire a management company?


Sorry, long post. Thoughts and advice much appreciated!

I think the reasoning is sound from your friend based on your wants but don't like having a bunch of variable rate debt funding the passive investments especially because if the market changes bank can pull those LOCs out from you in a hurry and you probably are on a 5 year hold commmitment on the passive investments. I would refi out versus HELOC but can see the urge not to because you are having significant prinicpal paydown for now on your ARM. Have you given consideration to investing in real estate full time and quitting the job?

3Reply
See this reply in the discussion

34 Replies

Jump to latestLatest
  • Alan M.
    OP
    Rental Property Investor · San Francisco Bay Area · Member since 2018 · 87 posts · 87 votes
    7y

    @Thomas S. Once again, I never said my goal was to maximize the potential income. The goal was to conservatively tap into the equity. Is there anything wrong with that goal? I have and will have plenty of money. I don't need to maximize the amount of income I get from these properties to be happy, I just don't want to sit on them. Big difference.

    0Reply
  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    7y

    @Alan Miegel. Thomas is a bit of a tough dog on BP sometimes... he sometimes offers good advice but other times (like this thread) he can come across as abrasive.

    If you want to keep the home you grew up in, I think that’s fine. I think you should sell everything else though and invest in funds/passive investments to give you 10 percent or so return per year. Spend the income you need and reinvest what you don’t.

    1Reply
  • Jason Dillard
    Real Estate Broker · Greer, SC · Member since 2013 · 548 posts · 271 votes
    7y

    These 3 situations have different tax consequences if you dispose.  Don't forget to factor that into your decision with help from your CPA.  

    I agree with others in this thread.  Your inherited property is an awesome gift, but it's not a good use of that much equity.  Imagine buying that property as an investment.  Actually taking after tax cash from your bank account and paying full price for it.  Would you do that?   The equity in that property is providing a set of benefits.  Could you get a better set of benefits with something else?  Your 10k a month can go to 20k pretty easily.  If you leverage up you could get more cash flow, more tax shelter, more appreciation, and more diversification.  So, your a buyer for 10m in real estate.

    0Reply
  • Phillip Richardson
    Rental Property Investor · Middletown, CT · Member since 2015 · 45 posts · 11 votes
    7y

    @Alan Miegel I would agree on Syndication advice. Leverage other’s money.

    0Reply
  • Taylor L.
    Rental Property Investor · RVA · Member since 2016 · 5k+ posts · 4k+ votes
    7y

    @Alan M. I'm sorry for your loss. 

    Syndication is a good route, If you choose to go that way I would encourage you to start developing relationships with syndicators across a few asset classes. I actively syndicate and I invest passively and just prefer to do business with people I know like and trust, as the adage goes. Being based in SF you can probably find a decent number of events in your own back yard to meet syndicators. 

    If you're willing to travel for networking, there are a number of syndication events around the country including The Real Estate Guys, RE Mentor, Michael Blank, Best Ever Conference, and on and on.

    I would generally recommend not telling folks how much you have to invest until you get to know them a bit. It does look like you're an accredited investor, so you'll have access to more deals than if you were not.

    SFHs are a great way to go too. A friend of mine based in the SF Bay area pulled equity out of his primary residence and bought 12 doors throughout the midwest through turnkey operators. This is a great way to go, but it is more active than passively investing in syndications, full stop. As a SFR investor with a property manager you will be managing your manager. Whether you're up for that is your call.

    Personally I would be very careful about overleveraging properties in high end coastal markets. It might be lower risk to just sell the condo so you can go earn more return on equity.

    Would be happy to talk more offline, just send me a connect.

    1Reply
  • Noi K.
    Rental Property Investor · Los Angeles, CA · Member since 2019 · 30 posts · 7 votes
    7y

    @Alan M. first, sorry for your loss. And thank you for opening this thread. I am in a similar boat - too much equity and not enough cashflow - so the conversation in this thread is very educational. Big difference is that I am aiming to convert the equity into cashflow more aggressively, but still managing passively.

    I am in small MF and SFR currently, but looking seriously into bigger MF, NNN and syndications. I want to cashout refi as much as I can, but since the cashflow is low, lending is a bit problematic to me. This may not be the case for you but it would be a good idea to talk to a couple of lenders to find out how much money you can cashout first, if you haven't already. I would be hesitant to use HELOC to fund longer term investments. I also want to get out of SFH in next several years as they are not "passive" even with property managers.

    It doesn't seem that increasing the cashflow is not a priority for you.  Have you thought about maybe putting a portion of your funds into bonds and/or dividend stocks?

    0Reply
  • Alan M.
    OP
    Rental Property Investor · San Francisco Bay Area · Member since 2018 · 87 posts · 87 votes
    7y

    @Noi K. Thanks for jumping in.

    I think I'm settling into using a fixed term loan, maybe about $1M, to fund a large multi family and to buy into some syndication deals. The CF from the syndication deals and the Brownstone would cover the debt payments on a $1M loan, and I'd still have a good amount of equity and positive cash flow coming in on top. I really just want to use any cash flow to acquire more assets that will cash flow in the future, so this fits into that model - and then can wash/rinse/repeat from there and do the same again in 3-4 years.

    The advantage of borrowing against the Brownstone is that it's a residential loan, not commercial, so could have a 30 year term on it (i.e. very very fixed). I'd only use the HELOCs to cover short term things that would be immediately paid down by CF. 

    0Reply
  • Justin M.
    Rental Property Investor · Denver, CO · Member since 2018 · 36 posts · 12 votes
    7y

    Sorry for your loss, that is a terrible situation to go through :(

    I posed a similar question recently as I am in the same situation, lots of equity not being used. I do not have quite as much equity as you but the replies here help just the same.

    I ended up taking a $100k HELOC on my primary and I'm still trying to figure out what to do with my rental properties (about $300k equity between them, but on very low fixed interest rate terms). I've yet to deploy any of the money though, searching for the right opportunities.

    Good luck!

    0Reply
  • Noi K.
    Rental Property Investor · Los Angeles, CA · Member since 2019 · 30 posts · 7 votes
    7y

    @Alan M. Nice!

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