December 16, 2024 • 33 mins
Unlock the potential of your home's value and discover innovative ways to use home equity for real estate investments. On this episode of the Buying Tampa Bay podcast, we're joined by Connor Kincaid to explore the often-overlooked resource of home equity, which has reached a staggering $35 trillion in the U.S. We guarantee you'll gain insights into effectively leveraging this asset, whether you're funding retirement plans, starting a business, or considering additional property purchases. Through the lens of the home equity line of credit (HELOC), we'll unpack the critical considerations such as credit requirements and loan-to-value ratios, giving you the tools to make informed decisions.
Managing risk is crucial when venturing into using home equity for investment purposes. Connor joins us to navigate the delicate balance between risk and return, emphasizing the importance of maintaining liquidity and ensuring your investments are cash-flow positive. In today's unpredictable economic environment, we underscore the need for strategic financial planning, particularly when interest rates are high. Learn why accessing home equity for speculative real estate ventures might jeopardize your financial future and how to mitigate those risks by focusing on strategic investments that align with your financial goals.
Looking ahead, we also discuss how evolving economic conditions may present new opportunities for those holding home equity. As interest rates fluctuate, rising home values could offer fresh avenues for expanding real estate portfolios. We delve into the role home equity can play in aiding younger generations with home purchases and share personal stories of how leveraging equity has expanded rental property holdings. With Connor's insights and our experienced hosts' guidance, this episode equips you with practical advice to maximize your home equity returns while keeping a keen eye on market trends and economic shifts.
For all your Real Estate Investment and Property Management needs check out HomeProp!
https://www.homeprop.com
https://www.HomepropPM.com
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:04):
Hello and welcome to the Buying Tampa Bay podcast.
We're your hosts, peter Murphyand Chase Clark.
Experts calculate that homeequity in the United States is
approximately $35 trillion as ofearly 2024.
That means the average Americanhomeowner has just look at this
number $315,000 of home equityin their primary residence.
(00:27):
This is a vast amount of lockedup capital just waiting to fund
retirement plans or businessventures or hey, how about an
investment in real estate?
So today we're exploring thepros and cons of accessing home
equity for investment realestate purchases.
For some, home equity is thelargest reserve of capital they
have, and activating it forinvestments can be an alluring
(00:49):
strategy.
So let's dig in and see if it'sthe right strategy, if it's a
smart strategy to initiate aninvestment in real estate for
you.
Speaker 2 (00:58):
Hey guys, conor Kincaid here, and thank you guys
for having me back again tothis podcast.
My goal today is to ask somequestions that I have about this
topic, as well as somequestions that any homeowner
would be asking or should beasking these same questions.
I've had several friends thathave used this investing tool
(01:20):
effectively, but so many peopledo not use this to their
advantage.
So I hope to take somepractical advice from you guys
today, and I think using yourhome equity to maximize this
potential can be very useful foranyone that owns some property.
So let's get into thesequestions, and I'll start with.
(01:43):
Give me an example of somethingthat you've experienced or some
story that you've heard fromsomeone else talking about home
equity investing.
Speaker 3 (01:55):
Yeah, hey, connor, thanks for that question.
Peter and podcasters, Welcome.
Today Interesting topic is, asConnor just said, you know, a
lot of people are looking athome equity and trying to take
advantage of that resource, anddoing so in the real estate
investment.
Realm and home equity is aninteresting thing to think about
(02:16):
.
A lot of people know it's there.
How many people do you knowthat are on Zillow at least once
a week looking up to see whatthe Zestimate on their house is?
It's that warm fuzzy thing forus in the Tampa Bay market where
, if you've owned a house nowfor 10 or 15 years, your home
equity is pretty significant.
That average of 315 per primaryresidence is definitely alive
(02:39):
and well here in the Tampa Bayarea, and so if you're inclined
to invest in real estate, youmay ask, okay, what can I do
with this home equity?
How can it go to work for me?
And we've done some things withhome equity, or property equity
in general, over the past 20years.
That's been advantageous to usand we've used that equity to
(03:01):
help fund down payments and evenoutright cash purchases of
other properties, which you cando.
And if you're starting out asan investor, maybe you've just
got that primary residence thatyou bought as your first piece
of real estate, as your firstinvestment really in the real
estate world.
And now you're sitting therewith that $300,000 of home
equity.
(03:22):
The best way to tap into that isusually with a home equity line
of credit, and that's availableat most any bank.
It is subject to credit andincome requirements to be able
to qualify for that, even thoughyou may have a substantial
amount of equity in your home.
But typically banks will loanyou up to 80% loan to value of
(03:44):
your current appraised homevalue, and so whatever your home
appraises for, take 80% of that, then subtract what you owe on
your first mortgage and that'sapproximately what a bank would
be willing to lend you in termsof a home equity line of credit,
and that equity then becomesavailable to you to either fund
(04:05):
an outright cash purchase ofanother property as a second
home or as an investment, or itcan fund a down payment if you
can then qualify for anadditional purchase loan on that
property.
And so there's a couple of waysthere to take advantage of that
equity that's pent up in yourhome.
(04:25):
And if you consider your homean investment property your very
first investment you need toconsider using your equity,
because while it's sitting there, it's really not doing a whole
lot for you other than makingyou feel warm and fuzzy when you
check the Zestimate once a weekwarm and fuzzy when you check
(04:47):
the Zestimate once a week.
So consider how you can deploythat equity in terms of capital
and put it to work in the marketfor you.
Speaker 2 (04:53):
Yeah, so say that someone has used their home
equity to invest in anotherproperty or to use in other
areas.
What does that look likepractically?
How does that affect theireveryday life?
How does it affect theirfinancial health, both
positively and negatively?
Speaker 1 (05:12):
Yeah, okay, so I'll give a stab at this.
Home equity is going to come ata higher cost than other types
of financing that a buyer cantake advantage of or an investor
can take advantage of.
Purchase money financing, forexample, will routinely come at
a rate in the mid to high sixesright now.
But if you're tapping into homeequity and you're getting that
(05:34):
from most lenders these days,you're paying upwards of 9% on
that money, so your home equitywill come at a definite higher
cost.
I guess that's because lendersare viewing that as higher risk
lending.
It's still securitized by yourhome, so you've got the
confidence, if you're a lender,that you could foreclose on that
(05:54):
primary asset and be someplacewithin line to receive a payback
on your money if the homeownerdefaults.
But a home equity line ofcredit is definitely secondary
to that primary mortgage in thehierarchy of liens, so they
might view that as higher riskand then the cost of that money
is higher.
So that's going to hurt, right?
If you're trying to buy aninvestment property and your
(06:17):
home equity line of credit isyour only source of capital and
that interest rate is nine or sopercent, well, that's
considerably higher than itwould be if it was purchased
money, and so that will affectyour cashflow on your real
estate somewhat substantially.
You know there's also thereality right now that you know
Chase talked about it a littlebit earlier but you have that
warm and fuzzy, you know,feeling that you have made a,
(06:40):
that you have equity in yourhome and when you tap into that
now that equity is gone and it'saccounted for and so your
equity-based liquidity is goingto become just less, you have
less potential, less room forrainy day emergencies that arise
if you've taken that equity outof your home and invested it in
a fixed asset, and thechallenge with fixed assets is
(07:03):
that they're hard to liquidate.
If you've got to go sell thisinvestment property you've
purchased and it takes some timeand there's market risk in
selling that well, you can'taccess that capital quickly.
And if you have a home equityline of credit just sitting
there waiting for your rainy dayreality, whatever it might be,
that's accessible very fast,unless you spent it on a hard to
(07:24):
turn over piece of real estate.
So a couple of things to thinkabout there.
Speaker 2 (07:30):
Yeah, so let's talk about some strategic
considerations as you're tryingto access the home equity.
Are there any guidelines orcriteria you guys look at when
you're looking to perform thistask?
Speaker 3 (07:45):
Yeah.
So when you're looking at thecost of capital Peter alluded to
this earlier home equity linesof credit are a little bit more
expensive than purchase moneywhen you're getting them from
banks, and so you've got toconsider that right now.
Let's say the rate on a homeequity line of credit is around
9%.
Maybe you can get it down aslow as 8%, but you're going to
be in that 8% to 9% range.
(08:06):
Be in that 8% to 9% range.
Does your investment cash flowwith that kind of cost of
capital deployed is really thequestion you've got to ask with
any investment property, butespecially because home equity
is sitting there at a cost ofcapital that's just below hard
money in some cases, and so thatrate on a home equity line of
(08:28):
credit is going to fluctuatewith the market.
Now we are probably at the highend of the market right now as
far as interest rates go, andit's likely that we're going to
see them drop somewhat, maybeslowly, over the next six to 12
months.
So if you can underwrite yourinvestment now using the 9% cost
of capital and it cash flows,it's possibly going to get
(08:51):
better over the next six to 12months from a cash flow
perspective, and so that'sdefinitely one of the big
strategic considerations youwant to look at when you're
thinking about using that homeequity.
Speaker 2 (09:05):
Yeah, when using home equity, there's definitely a
potential just like with anyinvestment for there to be high
returns.
But if there are high returns,that also means there's a high
risk.
So how would you balance thetwo?
Speaker 1 (09:20):
Yeah, I think it's a liquidity risk once again that
you're facing.
People who have home equitywithin 30 days or so could tap
into that home equity and accessthat for whatever emergencies
might arise in their life.
It doesn't take long to getaccess to your home equity, and
so it's a very smart financialplan for people who might be at
(09:40):
significant junctures in theirlife where capital is going to
be required.
Maybe that's for health care orcaring for a dependent or
college expenses or some otherjust rainy day reserve that you
need Accessing and putting anaccess mechanism in place for
that equity is smart business.
But if you've tied that up andwe've already alluded to this to
some extent if you tie that upin real estate and now that
(10:01):
option is no longer available toyou, that puts your household
in a really tough place and Ithink many people would not be
comfortable with that.
Many people not only want tohave a little bit of equity they
can access, but they'reactually looking at that as a
big part of their eventualretirement money.
And let's say they do put thatinto an investment and that
(10:21):
investment doesn't profit orappreciate the way that they
thought it would.
Well, then there goes theirnest egg.
That $315,000 that we've talkedabout at home equity represents
last time I researched thisroughly 80% of the average
homeowner's total nest egg forretirement.
So there's not a lot left thereif all of that money now is
(10:45):
accounted for investment, andthat investment is a little
upside down.
So there's two veryconsiderable risks to watch out
for.
If you're thinking about usingyour hard-earned home equity I
mean hard-earned right the assetearned it for you but still
it's yours and because you havebeen in the market you had
access to that.
But if you use that and you putthat at risk in some other kind
(11:06):
of investment, then yourretirement could be somewhat at
risk and that's not anattractive proposition for many.
Speaker 2 (11:13):
Yeah, so kind of going along that.
Can you quickly just give a fewexamples of red flags that you
can see as you're trying tomitigate risk in this situation?
Speaker 3 (11:27):
Yeah, I think you know.
Just like with any real estateinvestment, you want to make
sure that it's going to cashflow.
I would not recommend to anyonetaking out home equity on your
primary residence to speculateon what the market might do from
an appreciation standpoint witha property.
You got to remember every timeyou borrow money there's going
(11:47):
to be a monthly cash outlay,whether it's interest only or
whether that loan is amortizing.
And you may be in a positionwhere you can afford to put out
$500,000, $1,500 a month no bigdeal and do that on a
speculative investment in thereal estate market.
But most people can't, and, asPeter alluded to, home equity is
a precious resource that isreally funding a lot of people's
(12:10):
retirement or is the backboneof their nest egg, and so
putting that money at risk on aninvestment that would not cash
flow or at least cover the costof your capital, is very risky,
and so I would always cautionany investor out there.
Be weary of investing basedsolely on market appreciation.
You need to consider cash flow,it needs to be the number one
(12:33):
consideration, and you need toonly buy cash flowing properties
.
Speaker 2 (12:40):
So, as Peter mentioned in the intro, there's
a lot of people, even in theTemple Terrace area here, that
have had these homes.
They bought them for somewherelike $200,000.
Now they have all this equityin their home and, with interest
rates the way that they areright now, so high, it may look
(13:03):
like a really good idea to usehome equity.
But is that really a good ideain this market, given the high
interest rates?
Speaker 1 (13:13):
So I think that's an important question and in this
market, is really the salientqualifier.
There have been markets whereusing home equity is, I think, a
really solid idea.
I'm thinking about highappreciation markets and the
challenge of course are you in ahigh appreciation market or not
?
Well, you know that five yearslater when you can look back and
(13:37):
say, wow, those prior fiveyears were high appreciation.
It's very hard to see thatyou're in a high appreciation
market when you're in one.
But let's assume that you havethat ability to be circumspect
and see that, yes, you're in oneright.
But let's assume that you havethat ability to be circumspect
and see that, yes, you're in amarket where appreciation rates
on your home are going to be inexcess of what the median
appreciation rates have beenover time, so more than four or
(13:58):
5%.
Then accessing your home equitycan be a very safe thing
because that home equity pot isgoing to grow for you and maybe
you've accessed a portion orclose to all of that home equity
.
But in three or four yearsthere's more home equity for you
and you have your nest eggstill there.
You have some more leveragethat you can tap into if you
(14:20):
need to.
And so high appreciationmarkets.
Home equity is a good idea.
Low appreciation markets or noappreciation markets I think
that's very risky, because whatyou're going to find is, not
only is your home notappreciating, but it's actually
depreciating right.
You've got costs and you've gotmaintenance and expenses
related to maintaining your home, and I promise you that tax
(14:40):
rates are not going to go downand insurance costs are not
going to increase, so your costof ownership of that asset is
going to go up and your equityis not, and that's going to put
you in a more and morevulnerable spot.
You don't want to tap into yourhome equity if you feel
reasonably certain that you'rein a low appreciation market.
I also think that interest rateshas a lot to do with this here.
(15:02):
If you're tapping into yourhome equity and your interest
rate environment is high like itis today, you've got to ask
yourself well, why am I doingthat?
If it's to buy another primaryresidence, well, you could buy
purchase money financing at farlower rate than you can buy home
equity financing, so thatcertainly wouldn't be smart.
And if you're buying at a 7% to9% interest rate, well, you've
(15:24):
got to really consider carefullywhether your investment can
cash flow at those kinds ofinterest rates?
In our evaluation they do not.
And so, unless you haveastronomical rent rates for one
reason or another, a 7% to 9%interest rate on your home
equity line of credit which youuse to buy an investment
property, that's going to be aloss leader for sure.
So I think caution in usinghome equity lines of credit in
(15:47):
this current market is the rightidea.
Yeah.
Speaker 2 (15:51):
All right.
So have you learned anythingfrom watching others as they use
their home equity to invest?
What are some common mistakesthat you've seen?
Speaker 3 (16:03):
Well, you know.
Again I want to go back to thisidea that you know investments
should be evaluated on a case bycase basis.
It's hard to say in this marketevery investment is this way or
that way, or every strategy isgoing to be good or bad.
When it comes down to the useof home equity or any other
(16:23):
source of financing, again itall goes back to the cost of
capital.
So in this environment, if thecost of capital on a home equity
line is 8% or 9% and the costof purchase money for an
investor is probably somewherecloser to the low sevens, you've
got to evaluate that for everydifferent investment property to
determine can you make sense ofthat investment, achieve the
(16:48):
kind of ROI that you want, toachieve the kind of cash flow
you're looking for with thosecosts of capital?
And so that's really what thecrux is, I think, of this whole
conversation is just know, hey,number one, home equity is
available to you and you can useit.
And one of the best ways to dothat because home equity
functions like cash, which iscritical for investors, because
(17:12):
cash investors are usually theinvestors that get the best
deals.
So going down to your bank andseeing how much of a home equity
line of credit you can qualifyfor is a great idea, because a
line of credit doesn't requireyou to borrow a single dollar at
all, and usually the banks willdo them for little to no money
(17:32):
in terms of costs to no money interms of costs.
So if you can secure, if youhave $300,000 in equity and you
can secure a $200,000 or$225,000 line of credit on your
home that just sits there andwaits for you to identify a
great investment to hopefully beable to take down with that
cash, that's a great thing foryou.
(17:55):
But understanding that once youdeploy that capital, once you
draw on that line, that's whenthe till starts right.
So the 9% interest kicks inright away, and now you've got
to make sure the investment willcash flow at that cost of
capital.
Now a couple of good things, Ithink, in our favor.
Like I mentioned before, I thinkwe're at the height of the
interest rate market right now,at least for a little while, and
(18:16):
rates will slowly tick downover the next six to 12 months.
The 30-year fixed rate,hopefully, will do that, so will
the rate on the home equitylines of credit, and so one
strategy that a lot of peopleoften employ is go ahead and buy
the home run investment or thereally good cash flowing
investment now with your cashfrom your home equity line and
(18:39):
then in six to 12 months,evaluate your cost of capital
again and determine okay, nowthat I've got this property,
it's cash flowing, maybe I'vegot some equity in it.
Should I refinance thatproperty with a traditional
30-year fixed loan at that pointat a lower cost of capital and
let it ride for the 30 years?
And that's definitely an optionto reduce your cost of capital
(19:02):
from whatever the HELOC line isthe home equity line of credit,
also called HELOC back to atraditional conforming investor
fixed rate mortgage.
So that's definitely anopportunity there for investors
of any type to have this equitysitting in their home.
Speaker 2 (19:22):
All right, to this point, we've kind of talked
about the current marketconditions and some past
experiences.
But let's look into the future.
How do you see this form ofinvesting and funding investing?
How do you see that changing orevolving?
Speaker 1 (19:41):
I love future prediction questions because you
don't know how wrong you areuntil 10 years from now.
So maybe this is completely offthe wall, but I love the idea
of the fact that we are insomewhat of a flat and a
languishing real estate marketright now, and many people have
lots of home equity in theirhomes, and we're looking at
(20:01):
probably a 1% to 2% real estateappreciation rate over the last
12 months.
So it's not great.
And so, looking forward, whatwill that look like?
Will it be 1% to 2% again for awhile?
Will it tick up a little bit asthe economy improves?
As interest rates come down?
Will the value of homesincrease because now cash is
more accessible?
(20:22):
And I assume that it probablywill, and so what you're going
to find for a time, I think, isthat people's equity will start
increasing again at a reasonablygood rate, but we're not going
to have a ton of greatinvestment opportunities.
People are not going to beforecl of great investment
opportunities.
People are not going to beforeclosing out of their
mortgages and, as much as I hearthe doomsayers prognosticate,
we're not going to see a delugeof storm, damaged homes come on
(20:44):
the market in our area, and thatmeans the opportunities to buy
good investment propertiesaren't going to be there for a
while.
So let's say it takes three orfour or five more years for
there to be good options toinvest in.
Well, your home equity if yourvalues of the home has been
increasing at four or so percentis going to be substantially
higher in five years from now.
(21:04):
And well, in some cases, formany people they've got a huge
number of options available tothem at that point, when that
$315,000 becomes $500,000 ofhome equity.
Now you can tap that reasonably, you can tap a portion of that
and you can make your goodinvestment and you don't have to
put your family or yourretirement at financial risk.
My sense is hold off and letthat equity build up, and then
(21:25):
we're going to see just one ofthose awesome periods of time
where huge amounts of money aregoing to be able to enter the
market, both for investments andsecond homes, vacation homes,
and much of that will take theplace in home equity investing.
That's my prognostication Chase.
What about yours?
Speaker 3 (21:41):
Yeah, who knows what rates are going to do and how
fast or how slow they're goingto move?
We've got a lot of positivemomentum right now.
People's crystal balls arelighting up in a very positive
way with the election, theresults there, president-elect
Trump's at the stock exchangetoday lighting a fire under
everyone and talking about allthe positive, good things coming
(22:03):
down the pipe.
So there's a lot of reason tohave optimism about what's going
to happen.
Yet then you look at whateconomists are saying about the
next 12 months and thepredictions for the market in
2025 are flat to negative five.
So you know we're not quitesure where things are actually
going to go over the next.
You know 12, 13 months or evenbeyond that, but fundamentals
(22:29):
never change.
And so, again, you know, inreal estate investing, you make
your money when you buy it anddon't overpay.
Don't think I've got all thishome equity sitting here and
I've got to do something with it, like money burning a hole in
your pocket, right?
You've got to count the costs.
You've got to consider the 9%rate, the 8% rate, whatever it
(22:49):
is now, is what's important, notwhat you think it's going to go
to in the future, because itmay not get there, so don't just
buy something to buy it right.
One thing interesting to me isthat you know, you hear people
talking about Florida becomingthe new California and we're
already bumping up against theceiling of affordability here in
the state.
For what wages are.
(23:10):
You've also got people that youknow now a little bit older
than us, not too much older,have got kids, you know, in
college, graduating college, whowon't be able to afford to buy
a home.
And what has happened inCalifornia over the last 20
years is that parents with tonsof equity in their homes have
(23:31):
used that equity to provide downpayments on homes for their
children and that was the onlyway that they could afford to
buy a payments on homes fortheir children, and that was the
only way that they could affordto buy a home and live in that
state.
Not sure that we're headedthere quite yet, but I already
(23:51):
see signs of that possibly beinga great use of your home equity
down the road.
Now, is that a great investment?
Opportunity for you Depends onhow you look at your bottom
lines.
Opportunity for you depends onhow you look at your bottom
lines If you like your kids tostay in the area, if you want to
help provide them with ajumpstart to their future.
Some people look at that as awonderful investment opportunity
.
So, you know, I think there's alot of different considerations
being made by people with homeequity right now, depending on
age, depending on, you know,what else they've got in their
(24:14):
nest egg and where theyindividually see the market
going in the future, and so allthose things play into what
their behavior might be withthis wonderful resource of home
equity that is sitting there,maybe doing nothing right now.
One thing I will say, becausePeter and I talk about this all
the time we have a rental realestate portfolio now with a lot
(24:38):
of equity in it.
And so, going back to yourquestion your previous question
about what have you seen peopledo or what have you done with
equity in some of yourinvestments?
A couple of things.
When the market's right and youcan identify good investments,
equity is the best place to gofind money right.
It's the fruits of your laborin terms of what you get for
(25:01):
taking the risk and entering themarket and riding the market up
from an appreciation standpoint.
We've used equity to buy moreproperties that now have more
equity, and it's been a hugeblessing in that over the past
20 years equity, and it's been ahuge blessing in that over the
past 20 years.
The one thing you've got toconsider, though, when doing
(25:22):
that, is that money is expensive, and money can be very
expensive when you're tappinginto equity.
Banks are profitable becausethey charge a lot of money for
loans the closing costs, theorigination fees, the yada yada
right Thousands of dollars totake out a loan to be able to
tap into your equity.
(25:43):
So not only is it the interestrate, but also be prepared to
count the cost of the frictionof getting your hands on those
funds from banks.
Find the cheapest possible waythat you can get your hands on
that money, and that will justhelp you achieve a higher ROI
down the road.
And when you do get your handson the money, I would say if
(26:05):
you're going to experience thecost of borrowing, borrow as
much as you possibly can.
That still makes sense inachieving your desired
investment outcome.
Don't shortchange the amount ofmoney you're going to borrow at
one time, because right thenyou don't need it if it's not
going to cost you anything toget a little bit more and be
(26:27):
able to deploy it in anadvantageous way.
So I think we've made thatmistake once or twice before,
not borrowing enough when we'vebeen charged like we should have
borrowed more, and so the costof that money becomes even
higher for the smaller loanamounts.
Just something to be aware ofand look into as you explore how
(26:50):
to tap into your home equity.
Speaker 2 (26:53):
Yeah, so let's just finish up talking about maybe
some advice you'd give tosomebody that wants to use this
strategy.
Maybe each of you could giveone or two of your top pieces of
advice and summarize that forus.
Speaker 1 (27:07):
Well, I tell you, I think my top piece of advice is
a cautionary note right.
So we have had properties thathave lots of equity and then
something turned in the marketand now that equity is gone, I
mean it's negative equity, right, and that can happen because
equity is on paper, right, it'snot in your bank.
And what we've, what we've doneto really double down on that
(27:30):
error, is that if in some ofthose cases we pulled out, had
second mortgages on them orpulled out lines of credit to
fund renovations on otherproperties or variety of other
things maybe not even a full,outright purchase we had just
taken some out of home equityand used it to improve the look
of our investment properties.
And then values plummet and nowyou owe way more between your
(27:52):
first mortgage and your homeequity line than what that home
is worth.
And if you have not heard aboutthe concept of short sale
because you're younger than 20years old, you should know that
the whole real estate market wasabsolutely roiled for a good 10
years because of this giganticproblem with the loss of equity.
(28:12):
And it wasn't just that peopletook a bunch of second mortgages
out and they lost value, it'sthat even their first mortgages
became more than what the equityin their properties were, and
so they were left with thisterrible dilemma where, like I,
owe way more than what myproperty is worth.
So I have no choice but to giveit back to the bank and to be
(28:33):
foreclosed on, or to short sellit, or to get you know deed in
lieu of foreclosure or any othernumber of adverse actions that
a borrower might have to takewhen they find themselves in
that spot.
Don't do that to yourself,right?
Your home, your home, isalready a little bit on a razor,
on like a tipping point wherethe market changes too much than
your mortgage might not coverits value.
(28:53):
Don't dig yourself even deeperby getting yourself a big line
of credit if you're in a marketor if you're fearful that a
market might turn.
So that would be my number onepiece of advice.
Speaker 3 (29:07):
Yeah, I'll offer one piece of advice as well.
One thing we've done over theyears is continually evaluate
our portfolio for what kind ofreturn we're achieving on it,
and one of the big gaps that'salways there is return on equity
.
That establishes a lot ofequity in it, sometimes more
(29:35):
than what you paid for theproperty.
Your return on equity is verylow compared to your return on
investment.
So you may only have $100,000invested in a property that's
worth $500,000 now.
So you have $400,000 of equity.
Your return on the $100,000looks great.
It's 12%, 14%, 15% sometimesbut your return on the $400,000
(29:56):
of equity maybe 2% or 3%.
And so a lot of people in thatsituation would look and say,
well, okay, we got to put theequity to work.
You've got two choices inputting the equity to work.
You sell the property or yourefire, or tap into that equity
with a HELOC.
That's a math problem.
(30:17):
It's not advice on which one'sbetter or which one's worse.
Do the math.
If you've got a betterinvestment alternative somewhere
outside of that property, youneed to determine whether or not
cashing out and disposing ofthe property to invest in
something else is going to beyour highest yield, or if taking
(30:37):
out a HELOC or refinancing yourprimary mortgage on that
property to a market rate willprovide you enough capital at
the right cost to be able toachieve the kind of yield you
want to achieve on anotherinvestment.
And so those are really the twoconsiderations when it comes to
equity is what are you going todo with the equity?
Are you going to dispose of theproperty, reliquify completely
(31:01):
and redeploy capital, or do youwant to hang on to that asset
and just further leverage it inorder to make new investments,
and most of the time, outside ofextremely high cost of capital?
The leveraging route pays offin the long run, but only if you
can find a cash flowinginvestment that meets your yield
(31:22):
requirements.
Speaker 2 (31:26):
All right, this has been a great discussion.
Thank you all for having me onthe show once again and I'll
turn it over to Peter.
Speaker 1 (31:33):
Yeah, it has been a great discussion, Connor.
Thank you, man.
Some great questions there andgreat to think through some of
that strategy.
And I love the concept ofreturn on equity, because it's
just not one of those things weevaluate very much as investors
to know that all of our equityis not working up to its fullest
potential.
So how do we maximize that?
And it's not an easy answer,for sure, but isn't it nice to
have equity?
That's, I guess, the nicestthing, Whether or not you're
(31:56):
getting the return on it.
You should be who knows.
But, man, it's a good problemto have right But-.
Speaker 3 (32:02):
Make your net worth look really good.
What was that Make your networth look really good?
Speaker 1 (32:12):
I know right.
So there you go.
That's something to be thankfulfor, but listen, it was a great
conversation.
I look forward to getting backwith you guys again to talk
about something interesting in acouple of weeks.
A lot of our questions overthis podcast season are coming
from people who have asked usjust general investment
questions.
A lot of them how do I get intoinvestments for the first time
and really start making a go atit in real estate?
So we're excited to share withyou some of the things we've
(32:32):
learned over the past few years.
So I think for until next weekit's been a lot of fun and Peter
out.
Speaker 3 (32:40):
Yeah, thanks, guys.
Connor, appreciate your worktoday and your help with guiding
us through some of thesequestions and look forward to
more questions in the future.
If you have questions, pleasereach out to us.
You can get us at chase at homepropcom, or Peter at home,
propcom.
We'd be glad to field yourquestions and even address some
topics that you may want to hearabout on this podcast.
(33:00):
Hope you all have a greatevening and we're bundled up for
winter here in Florida.
Hello and welcome to the Buying Tampa Bay podcast.
We're your hosts, peter Murphyand Chase Clark.
Experts calculate that homeequity in the United States is
approximately $35 trillion as ofearly 2024.
That means the average Americanhomeowner has just look at this
number $315,000 of home equityin their primary residence.
(00:27):
This is a vast amount of lockedup capital just waiting to fund
retirement plans or businessventures or hey, how about an
investment in real estate?
So today we're exploring thepros and cons of accessing home
equity for investment realestate purchases.
For some, home equity is thelargest reserve of capital they
have, and activating it forinvestments can be an alluring
(00:49):
strategy.
So let's dig in and see if it'sthe right strategy, if it's a
smart strategy to initiate aninvestment in real estate for
you.
Speaker 2 (00:58):
Hey guys, conor Kincaid here, and thank you guys
for having me back again tothis podcast.
My goal today is to ask somequestions that I have about this
topic, as well as somequestions that any homeowner
would be asking or should beasking these same questions.
I've had several friends thathave used this investing tool
(01:20):
effectively, but so many peopledo not use this to their
advantage.
So I hope to take somepractical advice from you guys
today, and I think using yourhome equity to maximize this
potential can be very useful foranyone that owns some property.
So let's get into thesequestions, and I'll start with.
(01:43):
Give me an example of somethingthat you've experienced or some
story that you've heard fromsomeone else talking about home
equity investing.
Speaker 3 (01:55):
Yeah, hey, connor, thanks for that question.
Peter and podcasters, Welcome.
Today Interesting topic is, asConnor just said, you know, a
lot of people are looking athome equity and trying to take
advantage of that resource, anddoing so in the real estate
investment.
Realm and home equity is aninteresting thing to think about
(02:16):
.
A lot of people know it's there.
How many people do you knowthat are on Zillow at least once
a week looking up to see whatthe Zestimate on their house is?
It's that warm fuzzy thing forus in the Tampa Bay market where
, if you've owned a house nowfor 10 or 15 years, your home
equity is pretty significant.
That average of 315 per primaryresidence is definitely alive
(02:39):
and well here in the Tampa Bayarea, and so if you're inclined
to invest in real estate, youmay ask, okay, what can I do
with this home equity?
How can it go to work for me?
And we've done some things withhome equity, or property equity
in general, over the past 20years.
That's been advantageous to usand we've used that equity to
(03:01):
help fund down payments and evenoutright cash purchases of
other properties, which you cando.
And if you're starting out asan investor, maybe you've just
got that primary residence thatyou bought as your first piece
of real estate, as your firstinvestment really in the real
estate world.
And now you're sitting therewith that $300,000 of home
equity.
(03:22):
The best way to tap into that isusually with a home equity line
of credit, and that's availableat most any bank.
It is subject to credit andincome requirements to be able
to qualify for that, even thoughyou may have a substantial
amount of equity in your home.
But typically banks will loanyou up to 80% loan to value of
(03:44):
your current appraised homevalue, and so whatever your home
appraises for, take 80% of that, then subtract what you owe on
your first mortgage and that'sapproximately what a bank would
be willing to lend you in termsof a home equity line of credit,
and that equity then becomesavailable to you to either fund
(04:05):
an outright cash purchase ofanother property as a second
home or as an investment, or itcan fund a down payment if you
can then qualify for anadditional purchase loan on that
property.
And so there's a couple of waysthere to take advantage of that
equity that's pent up in yourhome.
(04:25):
And if you consider your homean investment property your very
first investment you need toconsider using your equity,
because while it's sitting there, it's really not doing a whole
lot for you other than makingyou feel warm and fuzzy when you
check the Zestimate once a weekwarm and fuzzy when you check
(04:47):
the Zestimate once a week.
So consider how you can deploythat equity in terms of capital
and put it to work in the marketfor you.
Speaker 2 (04:53):
Yeah, so say that someone has used their home
equity to invest in anotherproperty or to use in other
areas.
What does that look likepractically?
How does that affect theireveryday life?
How does it affect theirfinancial health, both
positively and negatively?
Speaker 1 (05:12):
Yeah, okay, so I'll give a stab at this.
Home equity is going to come ata higher cost than other types
of financing that a buyer cantake advantage of or an investor
can take advantage of.
Purchase money financing, forexample, will routinely come at
a rate in the mid to high sixesright now.
But if you're tapping into homeequity and you're getting that
(05:34):
from most lenders these days,you're paying upwards of 9% on
that money, so your home equitywill come at a definite higher
cost.
I guess that's because lendersare viewing that as higher risk
lending.
It's still securitized by yourhome, so you've got the
confidence, if you're a lender,that you could foreclose on that
(05:54):
primary asset and be someplacewithin line to receive a payback
on your money if the homeownerdefaults.
But a home equity line ofcredit is definitely secondary
to that primary mortgage in thehierarchy of liens, so they
might view that as higher riskand then the cost of that money
is higher.
So that's going to hurt, right?
If you're trying to buy aninvestment property and your
(06:17):
home equity line of credit isyour only source of capital and
that interest rate is nine or sopercent, well, that's
considerably higher than itwould be if it was purchased
money, and so that will affectyour cashflow on your real
estate somewhat substantially.
You know there's also thereality right now that you know
Chase talked about it a littlebit earlier but you have that
warm and fuzzy, you know,feeling that you have made a,
(06:40):
that you have equity in yourhome and when you tap into that
now that equity is gone and it'saccounted for and so your
equity-based liquidity is goingto become just less, you have
less potential, less room forrainy day emergencies that arise
if you've taken that equity outof your home and invested it in
a fixed asset, and thechallenge with fixed assets is
(07:03):
that they're hard to liquidate.
If you've got to go sell thisinvestment property you've
purchased and it takes some timeand there's market risk in
selling that well, you can'taccess that capital quickly.
And if you have a home equityline of credit just sitting
there waiting for your rainy dayreality, whatever it might be,
that's accessible very fast,unless you spent it on a hard to
(07:24):
turn over piece of real estate.
So a couple of things to thinkabout there.
Speaker 2 (07:30):
Yeah, so let's talk about some strategic
considerations as you're tryingto access the home equity.
Are there any guidelines orcriteria you guys look at when
you're looking to perform thistask?
Speaker 3 (07:45):
Yeah.
So when you're looking at thecost of capital Peter alluded to
this earlier home equity linesof credit are a little bit more
expensive than purchase moneywhen you're getting them from
banks, and so you've got toconsider that right now.
Let's say the rate on a homeequity line of credit is around
9%.
Maybe you can get it down aslow as 8%, but you're going to
be in that 8% to 9% range.
(08:06):
Be in that 8% to 9% range.
Does your investment cash flowwith that kind of cost of
capital deployed is really thequestion you've got to ask with
any investment property, butespecially because home equity
is sitting there at a cost ofcapital that's just below hard
money in some cases, and so thatrate on a home equity line of
(08:28):
credit is going to fluctuatewith the market.
Now we are probably at the highend of the market right now as
far as interest rates go, andit's likely that we're going to
see them drop somewhat, maybeslowly, over the next six to 12
months.
So if you can underwrite yourinvestment now using the 9% cost
of capital and it cash flows,it's possibly going to get
(08:51):
better over the next six to 12months from a cash flow
perspective, and so that'sdefinitely one of the big
strategic considerations youwant to look at when you're
thinking about using that homeequity.
Speaker 2 (09:05):
Yeah, when using home equity, there's definitely a
potential just like with anyinvestment for there to be high
returns.
But if there are high returns,that also means there's a high
risk.
So how would you balance thetwo?
Speaker 1 (09:20):
Yeah, I think it's a liquidity risk once again that
you're facing.
People who have home equitywithin 30 days or so could tap
into that home equity and accessthat for whatever emergencies
might arise in their life.
It doesn't take long to getaccess to your home equity, and
so it's a very smart financialplan for people who might be at
(09:40):
significant junctures in theirlife where capital is going to
be required.
Maybe that's for health care orcaring for a dependent or
college expenses or some otherjust rainy day reserve that you
need Accessing and putting anaccess mechanism in place for
that equity is smart business.
But if you've tied that up andwe've already alluded to this to
some extent if you tie that upin real estate and now that
(10:01):
option is no longer available toyou, that puts your household
in a really tough place and Ithink many people would not be
comfortable with that.
Many people not only want tohave a little bit of equity they
can access, but they'reactually looking at that as a
big part of their eventualretirement money.
And let's say they do put thatinto an investment and that
(10:21):
investment doesn't profit orappreciate the way that they
thought it would.
Well, then there goes theirnest egg.
That $315,000 that we've talkedabout at home equity represents
last time I researched thisroughly 80% of the average
homeowner's total nest egg forretirement.
So there's not a lot left thereif all of that money now is
(10:45):
accounted for investment, andthat investment is a little
upside down.
So there's two veryconsiderable risks to watch out
for.
If you're thinking about usingyour hard-earned home equity I
mean hard-earned right the assetearned it for you but still
it's yours and because you havebeen in the market you had
access to that.
But if you use that and you putthat at risk in some other kind
(11:06):
of investment, then yourretirement could be somewhat at
risk and that's not anattractive proposition for many.
Speaker 2 (11:13):
Yeah, so kind of going along that.
Can you quickly just give a fewexamples of red flags that you
can see as you're trying tomitigate risk in this situation?
Speaker 3 (11:27):
Yeah, I think you know.
Just like with any real estateinvestment, you want to make
sure that it's going to cashflow.
I would not recommend to anyonetaking out home equity on your
primary residence to speculateon what the market might do from
an appreciation standpoint witha property.
You got to remember every timeyou borrow money there's going
(11:47):
to be a monthly cash outlay,whether it's interest only or
whether that loan is amortizing.
And you may be in a positionwhere you can afford to put out
$500,000, $1,500 a month no bigdeal and do that on a
speculative investment in thereal estate market.
But most people can't, and, asPeter alluded to, home equity is
a precious resource that isreally funding a lot of people's
(12:10):
retirement or is the backboneof their nest egg, and so
putting that money at risk on aninvestment that would not cash
flow or at least cover the costof your capital, is very risky,
and so I would always cautionany investor out there.
Be weary of investing basedsolely on market appreciation.
You need to consider cash flow,it needs to be the number one
(12:33):
consideration, and you need toonly buy cash flowing properties
.
Speaker 2 (12:40):
So, as Peter mentioned in the intro, there's
a lot of people, even in theTemple Terrace area here, that
have had these homes.
They bought them for somewherelike $200,000.
Now they have all this equityin their home and, with interest
rates the way that they areright now, so high, it may look
(13:03):
like a really good idea to usehome equity.
But is that really a good ideain this market, given the high
interest rates?
Speaker 1 (13:13):
So I think that's an important question and in this
market, is really the salientqualifier.
There have been markets whereusing home equity is, I think, a
really solid idea.
I'm thinking about highappreciation markets and the
challenge of course are you in ahigh appreciation market or not
?
Well, you know that five yearslater when you can look back and
(13:37):
say, wow, those prior fiveyears were high appreciation.
It's very hard to see thatyou're in a high appreciation
market when you're in one.
But let's assume that you havethat ability to be circumspect
and see that, yes, you're in oneright.
But let's assume that you havethat ability to be circumspect
and see that, yes, you're in amarket where appreciation rates
on your home are going to be inexcess of what the median
appreciation rates have beenover time, so more than four or
(13:58):
5%.
Then accessing your home equitycan be a very safe thing
because that home equity pot isgoing to grow for you and maybe
you've accessed a portion orclose to all of that home equity
.
But in three or four yearsthere's more home equity for you
and you have your nest eggstill there.
You have some more leveragethat you can tap into if you
(14:20):
need to.
And so high appreciationmarkets.
Home equity is a good idea.
Low appreciation markets or noappreciation markets I think
that's very risky, because whatyou're going to find is, not
only is your home notappreciating, but it's actually
depreciating right.
You've got costs and you've gotmaintenance and expenses
related to maintaining your home, and I promise you that tax
(14:40):
rates are not going to go downand insurance costs are not
going to increase, so your costof ownership of that asset is
going to go up and your equityis not, and that's going to put
you in a more and morevulnerable spot.
You don't want to tap into yourhome equity if you feel
reasonably certain that you'rein a low appreciation market.
I also think that interest rateshas a lot to do with this here.
(15:02):
If you're tapping into yourhome equity and your interest
rate environment is high like itis today, you've got to ask
yourself well, why am I doingthat?
If it's to buy another primaryresidence, well, you could buy
purchase money financing at farlower rate than you can buy home
equity financing, so thatcertainly wouldn't be smart.
And if you're buying at a 7% to9% interest rate, well, you've
(15:24):
got to really consider carefullywhether your investment can
cash flow at those kinds ofinterest rates?
In our evaluation they do not.
And so, unless you haveastronomical rent rates for one
reason or another, a 7% to 9%interest rate on your home
equity line of credit which youuse to buy an investment
property, that's going to be aloss leader for sure.
So I think caution in usinghome equity lines of credit in
(15:47):
this current market is the rightidea.
Yeah.
Speaker 2 (15:51):
All right.
So have you learned anythingfrom watching others as they use
their home equity to invest?
What are some common mistakesthat you've seen?
Speaker 3 (16:03):
Well, you know.
Again I want to go back to thisidea that you know investments
should be evaluated on a case bycase basis.
It's hard to say in this marketevery investment is this way or
that way, or every strategy isgoing to be good or bad.
When it comes down to the useof home equity or any other
(16:23):
source of financing, again itall goes back to the cost of
capital.
So in this environment, if thecost of capital on a home equity
line is 8% or 9% and the costof purchase money for an
investor is probably somewherecloser to the low sevens, you've
got to evaluate that for everydifferent investment property to
determine can you make sense ofthat investment, achieve the
(16:48):
kind of ROI that you want, toachieve the kind of cash flow
you're looking for with thosecosts of capital?
And so that's really what thecrux is, I think, of this whole
conversation is just know, hey,number one, home equity is
available to you and you can useit.
And one of the best ways to dothat because home equity
functions like cash, which iscritical for investors, because
(17:12):
cash investors are usually theinvestors that get the best
deals.
So going down to your bank andseeing how much of a home equity
line of credit you can qualifyfor is a great idea, because a
line of credit doesn't requireyou to borrow a single dollar at
all, and usually the banks willdo them for little to no money
(17:32):
in terms of costs to no money interms of costs.
So if you can secure, if youhave $300,000 in equity and you
can secure a $200,000 or$225,000 line of credit on your
home that just sits there andwaits for you to identify a
great investment to hopefully beable to take down with that
cash, that's a great thing foryou.
(17:55):
But understanding that once youdeploy that capital, once you
draw on that line, that's whenthe till starts right.
So the 9% interest kicks inright away, and now you've got
to make sure the investment willcash flow at that cost of
capital.
Now a couple of good things, Ithink, in our favor.
Like I mentioned before, I thinkwe're at the height of the
interest rate market right now,at least for a little while, and
(18:16):
rates will slowly tick downover the next six to 12 months.
The 30-year fixed rate,hopefully, will do that, so will
the rate on the home equitylines of credit, and so one
strategy that a lot of peopleoften employ is go ahead and buy
the home run investment or thereally good cash flowing
investment now with your cashfrom your home equity line and
(18:39):
then in six to 12 months,evaluate your cost of capital
again and determine okay, nowthat I've got this property,
it's cash flowing, maybe I'vegot some equity in it.
Should I refinance thatproperty with a traditional
30-year fixed loan at that pointat a lower cost of capital and
let it ride for the 30 years?
And that's definitely an optionto reduce your cost of capital
(19:02):
from whatever the HELOC line isthe home equity line of credit,
also called HELOC back to atraditional conforming investor
fixed rate mortgage.
So that's definitely anopportunity there for investors
of any type to have this equitysitting in their home.
Speaker 2 (19:22):
All right, to this point, we've kind of talked
about the current marketconditions and some past
experiences.
But let's look into the future.
How do you see this form ofinvesting and funding investing?
How do you see that changing orevolving?
Speaker 1 (19:41):
I love future prediction questions because you
don't know how wrong you areuntil 10 years from now.
So maybe this is completely offthe wall, but I love the idea
of the fact that we are insomewhat of a flat and a
languishing real estate marketright now, and many people have
lots of home equity in theirhomes, and we're looking at
(20:01):
probably a 1% to 2% real estateappreciation rate over the last
12 months.
So it's not great.
And so, looking forward, whatwill that look like?
Will it be 1% to 2% again for awhile?
Will it tick up a little bit asthe economy improves?
As interest rates come down?
Will the value of homesincrease because now cash is
more accessible?
(20:22):
And I assume that it probablywill, and so what you're going
to find for a time, I think, isthat people's equity will start
increasing again at a reasonablygood rate, but we're not going
to have a ton of greatinvestment opportunities.
People are not going to beforecl of great investment
opportunities.
People are not going to beforeclosing out of their
mortgages and, as much as I hearthe doomsayers prognosticate,
we're not going to see a delugeof storm, damaged homes come on
(20:44):
the market in our area, and thatmeans the opportunities to buy
good investment propertiesaren't going to be there for a
while.
So let's say it takes three orfour or five more years for
there to be good options toinvest in.
Well, your home equity if yourvalues of the home has been
increasing at four or so percentis going to be substantially
higher in five years from now.
(21:04):
And well, in some cases, formany people they've got a huge
number of options available tothem at that point, when that
$315,000 becomes $500,000 ofhome equity.
Now you can tap that reasonably, you can tap a portion of that
and you can make your goodinvestment and you don't have to
put your family or yourretirement at financial risk.
My sense is hold off and letthat equity build up, and then
(21:25):
we're going to see just one ofthose awesome periods of time
where huge amounts of money aregoing to be able to enter the
market, both for investments andsecond homes, vacation homes,
and much of that will take theplace in home equity investing.
That's my prognostication Chase.
What about yours?
Speaker 3 (21:41):
Yeah, who knows what rates are going to do and how
fast or how slow they're goingto move?
We've got a lot of positivemomentum right now.
People's crystal balls arelighting up in a very positive
way with the election, theresults there, president-elect
Trump's at the stock exchangetoday lighting a fire under
everyone and talking about allthe positive, good things coming
(22:03):
down the pipe.
So there's a lot of reason tohave optimism about what's going
to happen.
Yet then you look at whateconomists are saying about the
next 12 months and thepredictions for the market in
2025 are flat to negative five.
So you know we're not quitesure where things are actually
going to go over the next.
You know 12, 13 months or evenbeyond that, but fundamentals
(22:29):
never change.
And so, again, you know, inreal estate investing, you make
your money when you buy it anddon't overpay.
Don't think I've got all thishome equity sitting here and
I've got to do something with it, like money burning a hole in
your pocket, right?
You've got to count the costs.
You've got to consider the 9%rate, the 8% rate, whatever it
(22:49):
is now, is what's important, notwhat you think it's going to go
to in the future, because itmay not get there, so don't just
buy something to buy it right.
One thing interesting to me isthat you know, you hear people
talking about Florida becomingthe new California and we're
already bumping up against theceiling of affordability here in
the state.
For what wages are.
(23:10):
You've also got people that youknow now a little bit older
than us, not too much older,have got kids, you know, in
college, graduating college, whowon't be able to afford to buy
a home.
And what has happened inCalifornia over the last 20
years is that parents with tonsof equity in their homes have
(23:31):
used that equity to provide downpayments on homes for their
children and that was the onlyway that they could afford to
buy a payments on homes fortheir children, and that was the
only way that they could affordto buy a home and live in that
state.
Not sure that we're headedthere quite yet, but I already
(23:51):
see signs of that possibly beinga great use of your home equity
down the road.
Now, is that a great investment?
Opportunity for you Depends onhow you look at your bottom
lines.
Opportunity for you depends onhow you look at your bottom
lines If you like your kids tostay in the area, if you want to
help provide them with ajumpstart to their future.
Some people look at that as awonderful investment opportunity
.
So, you know, I think there's alot of different considerations
being made by people with homeequity right now, depending on
age, depending on, you know,what else they've got in their
(24:14):
nest egg and where theyindividually see the market
going in the future, and so allthose things play into what
their behavior might be withthis wonderful resource of home
equity that is sitting there,maybe doing nothing right now.
One thing I will say, becausePeter and I talk about this all
the time we have a rental realestate portfolio now with a lot
(24:38):
of equity in it.
And so, going back to yourquestion your previous question
about what have you seen peopledo or what have you done with
equity in some of yourinvestments?
A couple of things.
When the market's right and youcan identify good investments,
equity is the best place to gofind money right.
It's the fruits of your laborin terms of what you get for
(25:01):
taking the risk and entering themarket and riding the market up
from an appreciation standpoint.
We've used equity to buy moreproperties that now have more
equity, and it's been a hugeblessing in that over the past
20 years equity, and it's been ahuge blessing in that over the
past 20 years.
The one thing you've got toconsider, though, when doing
(25:22):
that, is that money is expensive, and money can be very
expensive when you're tappinginto equity.
Banks are profitable becausethey charge a lot of money for
loans the closing costs, theorigination fees, the yada yada
right Thousands of dollars totake out a loan to be able to
tap into your equity.
(25:43):
So not only is it the interestrate, but also be prepared to
count the cost of the frictionof getting your hands on those
funds from banks.
Find the cheapest possible waythat you can get your hands on
that money, and that will justhelp you achieve a higher ROI
down the road.
And when you do get your handson the money, I would say if
(26:05):
you're going to experience thecost of borrowing, borrow as
much as you possibly can.
That still makes sense inachieving your desired
investment outcome.
Don't shortchange the amount ofmoney you're going to borrow at
one time, because right thenyou don't need it if it's not
going to cost you anything toget a little bit more and be
(26:27):
able to deploy it in anadvantageous way.
So I think we've made thatmistake once or twice before,
not borrowing enough when we'vebeen charged like we should have
borrowed more, and so the costof that money becomes even
higher for the smaller loanamounts.
Just something to be aware ofand look into as you explore how
(26:50):
to tap into your home equity.
Speaker 2 (26:53):
Yeah, so let's just finish up talking about maybe
some advice you'd give tosomebody that wants to use this
strategy.
Maybe each of you could giveone or two of your top pieces of
advice and summarize that forus.
Speaker 1 (27:07):
Well, I tell you, I think my top piece of advice is
a cautionary note right.
So we have had properties thathave lots of equity and then
something turned in the marketand now that equity is gone, I
mean it's negative equity, right, and that can happen because
equity is on paper, right, it'snot in your bank.
And what we've, what we've doneto really double down on that
(27:30):
error, is that if in some ofthose cases we pulled out, had
second mortgages on them orpulled out lines of credit to
fund renovations on otherproperties or variety of other
things maybe not even a full,outright purchase we had just
taken some out of home equityand used it to improve the look
of our investment properties.
And then values plummet and nowyou owe way more between your
(27:52):
first mortgage and your homeequity line than what that home
is worth.
And if you have not heard aboutthe concept of short sale
because you're younger than 20years old, you should know that
the whole real estate market wasabsolutely roiled for a good 10
years because of this giganticproblem with the loss of equity.
(28:12):
And it wasn't just that peopletook a bunch of second mortgages
out and they lost value, it'sthat even their first mortgages
became more than what the equityin their properties were, and
so they were left with thisterrible dilemma where, like I,
owe way more than what myproperty is worth.
So I have no choice but to giveit back to the bank and to be
(28:33):
foreclosed on, or to short sellit, or to get you know deed in
lieu of foreclosure or any othernumber of adverse actions that
a borrower might have to takewhen they find themselves in
that spot.
Don't do that to yourself,right?
Your home, your home, isalready a little bit on a razor,
on like a tipping point wherethe market changes too much than
your mortgage might not coverits value.
(28:53):
Don't dig yourself even deeperby getting yourself a big line
of credit if you're in a marketor if you're fearful that a
market might turn.
So that would be my number onepiece of advice.
Speaker 3 (29:07):
Yeah, I'll offer one piece of advice as well.
One thing we've done over theyears is continually evaluate
our portfolio for what kind ofreturn we're achieving on it,
and one of the big gaps that'salways there is return on equity
.
That establishes a lot ofequity in it, sometimes more
(29:35):
than what you paid for theproperty.
Your return on equity is verylow compared to your return on
investment.
So you may only have $100,000invested in a property that's
worth $500,000 now.
So you have $400,000 of equity.
Your return on the $100,000looks great.
It's 12%, 14%, 15% sometimesbut your return on the $400,000
(29:56):
of equity maybe 2% or 3%.
And so a lot of people in thatsituation would look and say,
well, okay, we got to put theequity to work.
You've got two choices inputting the equity to work.
You sell the property or yourefire, or tap into that equity
with a HELOC.
That's a math problem.
(30:17):
It's not advice on which one'sbetter or which one's worse.
Do the math.
If you've got a betterinvestment alternative somewhere
outside of that property, youneed to determine whether or not
cashing out and disposing ofthe property to invest in
something else is going to beyour highest yield, or if taking
(30:37):
out a HELOC or refinancing yourprimary mortgage on that
property to a market rate willprovide you enough capital at
the right cost to be able toachieve the kind of yield you
want to achieve on anotherinvestment.
And so those are really the twoconsiderations when it comes to
equity is what are you going todo with the equity?
Are you going to dispose of theproperty, reliquify completely
(31:01):
and redeploy capital, or do youwant to hang on to that asset
and just further leverage it inorder to make new investments,
and most of the time, outside ofextremely high cost of capital?
The leveraging route pays offin the long run, but only if you
can find a cash flowinginvestment that meets your yield
(31:22):
requirements.
Speaker 2 (31:26):
All right, this has been a great discussion.
Thank you all for having me onthe show once again and I'll
turn it over to Peter.
Speaker 1 (31:33):
Yeah, it has been a great discussion, Connor.
Thank you, man.
Some great questions there andgreat to think through some of
that strategy.
And I love the concept ofreturn on equity, because it's
just not one of those things weevaluate very much as investors
to know that all of our equityis not working up to its fullest
potential.
So how do we maximize that?
And it's not an easy answer,for sure, but isn't it nice to
have equity?
That's, I guess, the nicestthing, Whether or not you're
(31:56):
getting the return on it.
You should be who knows.
But, man, it's a good problemto have right But-.
Speaker 3 (32:02):
Make your net worth look really good.
What was that Make your networth look really good?
Speaker 1 (32:12):
I know right.
So there you go.
That's something to be thankfulfor, but listen, it was a great
conversation.
I look forward to getting backwith you guys again to talk
about something interesting in acouple of weeks.
A lot of our questions overthis podcast season are coming
from people who have asked usjust general investment
questions.
A lot of them how do I get intoinvestments for the first time
and really start making a go atit in real estate?
So we're excited to share withyou some of the things we've
(32:32):
learned over the past few years.
So I think for until next weekit's been a lot of fun and Peter
out.
Speaker 3 (32:40):
Yeah, thanks, guys.
Connor, appreciate your worktoday and your help with guiding
us through some of thesequestions and look forward to
more questions in the future.
If you have questions, pleasereach out to us.
You can get us at chase at homepropcom, or Peter at home,
propcom.
We'd be glad to field yourquestions and even address some
topics that you may want to hearabout on this podcast.
(33:00):
Hope you all have a greatevening and we're bundled up for
winter here in Florida.
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