Getting equity out of rental property

[grossklw]

My issue is the Helocs are second position. Out of the maybe 25 banks and credit unions ive talked to, only one said they can do a second on an investment duplex. I've still got a list of places to call, so I'm not done yet.

And I am not too concerned with what interest rate I get, because I don't plan on having it long enough for it to matter. Maybe 2 year's.

Owner financing is unfortunately not an option in this case

If you’re only planning on having the loan for less than 2 years I wouldn’t worry at all about doing the HELOC then. Even better is when you pay it back down to zero you’ll have access to that cash again should a deal pop up where you would want to close quick.

Even if local lenders balk at being in 2nd, don’t hesitate to get with a national mortgage broker. Explain your situation and they’ll essentially shop you to hundreds of different lenders. You don’t need a ton of yes’s, you need one.

You may sleep better with the equity sitting there, but equity that isn’t being put to use isn’t doing anything other than helping you sleep at night. This situation sounds like a great use of that equity thats sitting doing nothing right now.

 

[sasquatch]

No doubt, I have chosen that no stress slow wealth path. I live a good life, but often wonder about the debt way to get wealthy. My sister is in real estate and does 7x what I do. She's all about using smart debt

Sometimes we have to be careful not to confused outcomes with strategies.


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[svivian]

Any Zions Bancorp affiliated banks will do helocs at 75% LTV on duplex’s in a 2nd lien position.

Not sure where you are located

 

[shader112]

Real estate lawyer here. I have no idea of the location or condition of the properties but you could sell the one you live in and then move into one of the others. That would avoid any capital gains and keep the current interest rate. However there may be a disparity in conditions of the properties and locations that would make that prohibitive. Just thinking out loud for you.

I'm in illinois. I didn't realize you didn't have to pay capital gains on your primary residence. It looks like I could be exempt from 250k. Thanks for the heads up

 

[shader112]

If you’re only planning on having the loan for less than 2 years I wouldn’t worry at all about doing the HELOC then. Even better is when you pay it back down to zero you’ll have access to that cash again should a deal pop up where you would want to close quick.

Even if local lenders balk at being in 2nd, don’t hesitate to get with a national mortgage broker. Explain your situation and they’ll essentially shop you to hundreds of different lenders. You don’t need a ton of yes’s, you need one.

You may sleep better with the equity sitting there, but equity that isn’t being put to use isn’t doing anything other than helping you sleep at night. This situation sounds like a great use of that equity thats sitting doing nothing right now.

I agree completely. I've still got a list to call, and a couple suggestions from this thread to chase down. I'm optimistic I'll get something figured out this week.

 

[shader112]

Any Zions Bancorp affiliated banks will do helocs at 75% LTV on duplex’s in a 2nd lien position.

Not sure where you are located

They were not on my list, thanks for the heads up. I'll give them a call today.

I'm in Illinois

 

[fwafwow]

I'm in illinois. I didn't realize you didn't have to pay capital gains on your primary residence. It looks like I could be exempt from 250k. Thanks for the heads up

If you are single, you could be exempt from $250k (double that if you are married) if you meet the test for ownership (2 out of the last 5 years) and aren't otherwise disqualified (such as by acquiring the residence in a 1031 like-kind exchange). Note that the exclusion only applies to your residence, not the other part of a duplex (as an example). Also, if you sell a rental unit (or even your residence, if previously used as a rental), the gain may not be fully excluded, or only capital gain. If you deducted/depreciated against ordinary income, you will recapture that amount as ordinary income.

Publication 523 (2023), Selling Your Home | Internal Revenue Service

www.irs.gov

 

[MattB]

I would definitely talk to a tax guy to see how the split of residence and rental property impacts the $250K LT cap gains exemption.

But like my dad was fond of saying “a tax return is just a first offer.”

 

[fwafwow]

I would definitely talk to a tax guy to see how the split of residence and rental property impacts the $250K LT cap gains exemption.

But like my dad was fond of saying “a tax return is just a first offer.”

Good suggestion. Publication 523 does cover it though, specifically including a reference to a duplex in which one unit is rented and one is a residence.

 

[MattB]

Good suggestion. Publication 523 does cover it though, specifically including a reference to a duplex in which one unit is rented and one is a residence.

It does, but in order for the OP to determine how much he would net in a sale he would have to complete the work sheets which most laypeople wouldn’t have the wherewithal to do on their own (determining the appropriate split between residential and rental property, calculating the depreciation recapture, etc.). Hence the recommendation to get guidance from a tax professional.

 

[ben h]

We have a few rental properties and were able to get HELOC loans on them in case we need to use the equity for something. Your scenerio reminds me of something my banker told me a while back "loans are easy to get when you don't need them". I advise everyone that has significant amounts of real estate equity to get these types of loans in place so that if there is a change in circumstances you can use equity just as if it's cash. I haven't found anything worth investing the equity in that satisfies my risk/reward criteria, but it's available if that changes.

We also looked at DSCR (debt service coverage ratio) loans which similarly will loan against equity, but the terms we looked at you had to borrow money with a 5 year minimum repayment term. In our case we didn't have anything in particular to use the money for, so we opted for the HELOC which gives the ability to use it "IF" you need it.

 

[subtlevibe]

Ignore the Dave ramsay guys. I'd buy another rental rather than into your company though

 

[schmalzy]

Ignore the Dave ramsay guys. I'd buy another rental rather than into your company though

Curious as to why buy another rental vs equity in a firm?


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[WRO]

I think that is good advice, and I will go that route if necessary. It just hurts to think about giving up low interest money and a cash flowing property. But in the long run I'm certain the return would be better in the company

Shits about to get rough in construction engineering work, so keep that in mind. The valuation could be significantly less in years to come for your buy in.


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[schmalzy]

@shader112 what kind of engineer are you / what kind of firm would you be buying into?


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[subtlevibe]

Curious as to why buy another rental vs equity in a firm?


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Idk your firm but the idea of buying into a firm never sits well with me. You're basically giving money to your bosses. They're cashing out at your expense. And they might be leaving you holding the bag

 

[schmalzy]

Idk your firm but the idea of buying into a firm never sits well with me. You're basically giving money to your bosses. They're cashing out at your expense. And they might be leaving you holding the bag

Thanks for clarifying. To me, this would fall under the due diligence part of your attorney and CPA vetting operating agreement, distribution schedules, profit sharing, capital calls, etc.


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[HoneyDew]

But personally I'd borrow as much as they'd give me for income producing property.

Just a heads up but that’s literally how he went bankrupt. After that he had to go all cash because he couldn’t get a loan. He’s now worth $250-500 million…

 

[Reburn]

Thanks for clarifying. To me, this would fall under the due diligence part of your attorney and CPA vetting operating agreement, distribution schedules, profit sharing, capital calls, etc.


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@WRO had it though.

I would bet that 2 years from now the valuation / profitability of the firm is down 25-45%. In the construction industry this feels alot like 2007. Alot of stalling and wait and see in the economy. I dont think we will go full 2008 though. Not to mention most valuations are made of 2 to 4 years of previous business and its pretty safe to say that the next 2 to 4 years wont be as good as the last. I would op to start my own firm rather then buy in.

 

[schmalzy]

@WRO had it though.

I would bet that 2 years from now the valuation / profitability of the firm is down 25-45%. In the construction industry this feels alot like 2007. Alot of stalling and wait and see in the economy. I dont think we will go full 2008 though. Not to mention most valuations are made of 2 to 4 years of previous business and its pretty safe to say that the next 2 to 4 years wont be as good as the last. I would op to start my own firm rather then buy in.

What segment/region of industry are you in? From my subjective viewpoint I think there’s still a ton of opportunity out there, but concurrently some floundering as well. Not disputing your notion, just saying I don’t think it’s something that can be painted with a broad brush. Interest rates going down in near future probably won’t hurt.

Side note, we still don’t know for sure if OPs engineering firm is even in construction.


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