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REAL ESTATE What would you do with the Equity?

What should I do with the $70k?


  • Total voters
    31

PEERless

Bronze Contributor
Jan 23, 2008
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The situation: A positively cash-flowing condo bought for $175k with $35k down has increased to $210, effectively doubling my equity to $70. What should I do?

Limitiations:
  • This is my largest investment, so don't lose it.
  • Try to keep it sheltered in a 1031 or some similar device.
Otherwise, I am open to ALL suggestions. The more creative the better. Thank you all.
 

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Yankees338

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Jul 24, 2007
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I'd say it depends on how much you're cashflowing. If you could use that $70k to get into another investment that would cashflow more for you, I'd probably look into that (assuming it's a big difference...if it's minimal at this point, you're probably better off just sticking with it until you have more equity).
 

Russ H

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Are you planning on doing a FSBO? And refuse to pay other realtors?

That may limit your market. Otherwise, you need to factor in 6% realtors fees (unless the buyer pays where you live).

I'd just get a HELOC on it, and use the money for other investments-- OR--

Refi the first, if I can get a lower rate right now (pretty good chance of that, 30 yr rates dropped through the floor last week).

-Russ H.
 
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PEERless

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Jan 23, 2008
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Well, take the poll! Half the fun is in the colorful bar-graphs!
 

Runum

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I'm in a similar situation. I would say refi if it will still cashflow. Then reinvest into something else that may be below market value. Maybe REO? Good luck.
 

phlgirl

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Aug 29, 2007
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I would want to calculate to determine which scenario provides the best return. If your equity position is 70k, take your annual cash flow (deduct all expenses) and divide it by your 70k equity investment. What is the return percentage?

If you were to purchase replacement property (or add an additional property), what would the return look like in that scenario? Are you able to locate cash flowing properties in your area?

Russ has a good point - you need to factor in the selling expenses (realtors fees, closing costs, 1031 fees, etc.) when doing the math on the 'sell' scenario.

I try not to sell investment properties - particularly if the property rents easily and is relatively low on the management scale. That said, if I find that my alternatives offer a significant increase in return %, it's certainly worth a serious look.

If you go with the HELOC, try to get one with a good fix option. Otherwise, as Russ said, refi the whole thing, at a low fixed rate.

good luck.
 
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PEERless

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Jan 23, 2008
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I have a 5.75% rate now, so the rates will have to get a lot better to be worth the cost of refinancing.

I am loving the advice, folks, thank you.
 

Russ H

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Peerless-

Is your 5.75 rate fixed, or an ARM? 30 year fixed rates were in the low 5's last week for conforming loans.

********

PEERless said:
Well, take the poll! Half the fun is in the colorful bar-graphs!
I don't see how taking the poll answers the questions I asked you:

-Are you planning on doing a FSBO?

-Are you refusing to pay other realtors commissions?

6% of 210,000 is over $12,000. That's over ONE THIRD of your gain, not counting if you have additional closing costs or need to perform for the buyer (repairs, etc).

-Russ H.
 
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PEERless

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Jan 23, 2008
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The 5.75% is a 30-year fixed. To clarify: this situation is still hypothetical. I own the condo and it cashflows, but it's brand spankin' new and hasn't appreciated yet. I just wonder what a smart person should do with a doubling of equity.

Russ, your questions point out some costs that are not part of my simplistic equation. I suppose FSBO would be the way to go to save money (but what about my time?). Commissions and closing costs will take big bites out of my money. I see why some have suggested the "hold" option. Thanks for the great input.
 

biophase

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Hold on to it. $70k is not that much equity if you sell. If you get $205k for it, minus $10k realtors and $2k closing costs, you pocket $53k. If you pay cg taxes of $4k on it, you end up with only $49k in your pocket, $14k profit.

You have a good loan and cashflow. If its an easy property to keep rented, hold on to this one for the long haul. It will make you alot of money.

I would get a HELOC on this property just to have one. I'd get a no cost HELOC and just let it sit there or use it sparingly.

If you decide to hold it long term, move it into an LLC after getting a HELOC and begin to build your LLC's credit.
 

M&T

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Oct 2, 2007
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Peerless,
I am one of the people that voted hold.Because of todays market.Also you did say it is brand spankin new and did not appreciate yet.You have plenty of time. Keeping up a property in a decent area will increase. I agree with some of the others, $70,000 does not leave you as much leverage as say$150,000...Also to sell does cost a lot more than you think.You would not be left with $70,000of course. In this market you would have to advertise more and beat the pavment to sell.Your time is worth more to you!That is a great rate! Just think longer term.
I know right now everybody is saying it's a great time to invest and rates are low.And it is. But make sure you don't kill yourself just trying to put properties under you belt.Knowing what I know now I would hold offfor awhile.Look around for some struggling property owners that NEED to sell. Work a deal with OPM-other people's money!!! Because hey that's the best kind to use and keep your own..
Just my thought.
M&T...
 

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hakrjak

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Sep 15, 2007
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I agree with Biophase. If it's good cashflow, keep it awhile longer until the market improves. If you come across an absolute smoking deal in the meantime that you need cash for -- Consider tapping your equity with a HELOC.

- Hakrjak
 
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PEERless

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Jan 23, 2008
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Thanks for the great feedback. Really great tips. My membership to this forum may have made me millions already (a few decades down the road).
 

Corrado79

New Contributor
Sep 24, 2007
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I'd recommend Option #3 (refi and use to get into other properties). You call pull some equity off to fund some other projects that will also (hopefully) appreciate and produce their own cash flow.
 

dbeck29

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Jan 4, 2008
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well if you are up to the challenge, i would sell and 1031 in to a piece of property you could tear down and redevelop.
 
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PEERless

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Jan 23, 2008
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well if you are up to the challenge, i would sell and 1031 in to a piece of property you could tear down and redevelop.
Would love more detail on how to make THAT profitable...
 

EasyMoney_in_NC

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Sep 9, 2007
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Would love more detail on how to make THAT profitable...
Can be easy, if you have the right pieces to work with. Buy a home on a large parcel of land that is zoned for more than what's on it now. Tear the home down and subdivide the parcel or go with whatever the highest and best use is. You'll need to either know about development or find someone who does that you could partner with. You'll need: acquisition money, carry costs cash, development funds (with more carry money in their) etc.....
Build something easily rent-able or valued to sell (if thats possible these days).

But in all honesty (and I don't know your market) you're not working with NEARLY enough $$, unless you find a majority partner and take a back seat investment position and a minor stake with your $$ for putting the deal together. Like I said, could be nice. If your market is on fire, try it, if not......sit on it (the property that is :D ) wait for better times (but learn now about how to implement )
 

Jito

New Contributor
Dec 2, 2007
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A tiny bit of insight here as far as development is concerned echoing EasyMoney...there are three basic components for RE development.

1. Money
2. Land
3. Knowledge/Experience

If you have money, you can invest with a developer, if you have land you can put it up as an equity component of a project, and if you have experience you can get money or land. Hope the over simplification helps a bit.
 

EasyMoney_in_NC

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Sep 9, 2007
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A) you won't get all the equity out, usually only 80% (most likely, unless one wishes to pay higher rates and PMI),
B) having said the above, it gets hard to trade "up" with little down and still cash flow.
 

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jimculler

New Contributor
Sep 14, 2007
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Tampa Bay, FL
Trade up if you find a great deal on multi-unit, I would hold on to this property that cash flows until a GREAT deal comes along.

Like a previous poster said, if you could cash flow a significant amount more in another investment, then make a move.

With the rate you have, a refinance of your current property would not make sense. If anything perhaps a HELOC would be good for you if a great deal that comes by and you need down payment money for that new investment.

Factor your new HELOC and new mortgage for the new property into your overall cash flow. You can rest assured your new lender for the new property will factor it into your debt ratios.

The key is to find a great deal then use your HELOC for down payment money. Then you have both properties, greater cash flow, and a larger tax deduction than one property would provide.
 

jimculler

New Contributor
Sep 14, 2007
63
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Tampa Bay, FL
Well I ran the scenario through my online rate generator, and I dont have a HELOC program available, because its a high CLTV (over 80% of value for a 35k line) on an investment property.

You would need to check with your local banker about getting a HELOC if it interests you.

Pricing it out as a primary residence, rates on a 15 year fixed range from 9.27 - 10%, and lender fees are from $549 to -151 ( -151 means the lender would be paying you to take a 10% rate)

Of course its not a primary residence, so my programs would be irrelevant. Your local bank will be the most competitive on HELOCS in this particular situation. But dont pay more than 500-1000 in costs, or 9-10% in interest rate.
 

Russ H

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jimculler-

What's your read on HELOCs in general right now?

We've got a bunch (both on primary residences and investment prop), and our mortgage broker is telling us that much of the HELOC supply is pretty dried up compared to a year ago (when we got about $600K in HELOCs). Most were 80-90% LTV (2 were big National City loans).

Can't be our FICOs (they're 720 and 743).

Could just be we're not getting any appreciation, so there's nothing there to loan against?

-Russ H.
 
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PEERless

Bronze Contributor
Jan 23, 2008
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Are those costs payable when the option to borrow is opened? Or only when I actually borrow?
 

jimculler

New Contributor
Sep 14, 2007
63
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Tampa Bay, FL
jimculler-

What's your read on HELOCs in general right now?

We've got a bunch (both on primary residences and investment prop), and our mortgage broker is telling us that much of the HELOC supply is pretty dried up compared to a year ago (when we got about $600K in HELOCs). Most were 80-90% LTV (2 were big National City loans).

Can't be our FICOs (they're 720 and 743).

Could just be we're not getting any appreciation, so there's nothing there to loan against?

-Russ H.

Banks are yanking HELOCS out from under anyone and everyone who has property in a declining market at higher LTV's. THey are lowering their CLTV requirements. My guess would be i your 80% HELOCS wouldnt be in as much danger as 90% LTV ones.

Depending on the line you have, it could be frozen, or just reduced.

There are 2 ways to handle this IMO, call customer service of the lenders you have the lines on and ask them if your line will be ok or not. Or you can max out your line (dont call for permission!) and look to leverage that money at a higher rate or return than would be charged to you in interest.

All of this aside, HELOCS are still being written every day. I just think banks are losing their shirts on the stated HELOCS they wrote at really high CLTV's and this is their only way to slow the bleeding.
 

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