Should I Sell My 4% Interest Rate Rental Property? ($300K in Equity!)

Summary

BiggerPockets Real Estate Podcast Episode: Should I Sell My 4% Interest Rate Rental Property? ($300K in Equity!)
Release Date: December 11, 2024
Host: Dave Meyer, Head of Real Estate at BiggerPockets
Guest: Henry Washington

---

Episode Overview

In this insightful episode of the BiggerPockets Real Estate Podcast, host Dave Meyer delves into a prevalent dilemma faced by many real estate investors: whether to sell, refinance, or retain a successful rental property. To navigate this complex decision, Dave invites seasoned investor Henry Washington to provide expert analysis and real-time problem-solving. Together, they explore various strategies to optimize portfolio performance and effectively utilize equity, offering listeners a comprehensive framework for making informed investment decisions.

---

Background: Dave's Rental Property Situation

Dave Meyer introduces the central question of the episode: Should he sell his rental property with a favorable 4% interest rate and $300K in equity?

• Property Details:
  • Location: Denver, Colorado
  • Purchase Price (2016): $460,000
  • Current Estimated Value: $750,000
  • Re-financed Rate (2020): 3.875%
  • Current Rent: $350/month
  • Annual Cash Flow: Approximately $6,000 after expenses

Timestamp Reference:
[00:05] Dave Meyer: "How do you know when to sell a successful property? Or should you hold on to successful properties or refinance them?"

---

Discussion of Options

1. Option One: Keep and Increase Cash Flow

Strategy: Retain the property while exploring ways to enhance rental income.

• Potential Enhancements:
  • Renting out the two-car garage currently unused, potentially increasing monthly rent by $100-$150.

Notable Quote:
[07:00] Henry Washington: "You're at the max. Unless you get a little creative and run out of garage space to an existing tenant or something like that."

• Dave's Perspective:
  While modest rent increases could improve cash flow slightly, it wouldn't significantly alter the overall financial picture. Additionally, Denver's current market shows flat growth in rent and housing prices, limiting future appreciation potential.

---

2. Option Two: Refinance the Property

Strategy: Refinance to access equity for further investments.

• Pros:

  • Access to approximately $200,000 in equity.
  • Opportunity to purchase additional properties, particularly in higher-yield markets like the Midwest.

• Cons:

  • Refinancing at a higher rate could result in negative cash flow.
  • Current cash-on-cash return post-refinance estimated at 2%, significantly lower than potential Midwest investments yielding around 8%.

Notable Quote:
[09:37] Henry Washington: "I don't see how it wouldn't go negative if you were to refinance. That's why I don't really love option two for you either."

• Conclusion:
  Refinancing may not be the most financially viable option given the potential decrease in cash flow and the effort required to manage additional properties simultaneously.

---

3. Option Three: Sell the Property

Strategy: Sell the rental property to capitalize on equity.

• Financial Breakdown:

  • Estimated Net Proceeds: Approximately $700,000 after selling costs.
  • Outstanding Loan: $392,000
  • Net Cash: $308,000 before taxes.

• Tax Considerations:

  • Capital Gains Tax: Approximately 20% due to not meeting the two-out-of-five-year primary residence requirement.
  • 1031 Exchange: Potential to defer capital gains taxes by reinvesting proceeds into like-kind properties, though it's often stressful and time-bound.

Notable Quote:
[13:00] Dave Meyer: "And there's some more plays that can happen there. But Denver's pretty flat these days. Like rent growth is flat, housing prices pretty flat."

1031 Exchange Insights:
Henry expresses skepticism about 1031 exchanges due to their stringent deadlines (45 days to identify and 180 days to close on replacement properties) and the potential to compromise on investment quality under time pressure.

---

4. Option Four: Change Rental Strategy

Strategy: Convert the property to a different rental model, such as short-term or midterm rentals.

• Potential Benefits:

  • Increased Rental Income: Transitioning to midterm rentals could raise monthly income from $350 to approximately $3,800.

• Challenges:

  • Regulatory Restrictions: Denver imposes bans on short-term rentals unless the property is the owner's primary residence.
  • Operational Complexity: Managing multiple rental strategies would require additional property managers, increasing operational workload and costs.

Notable Quote:
[20:15] Henry Washington: "So we're taking that duplex, we're going to furnish the units and then we're going to put them up as midterm rentals and take the rent from $1,200 a month up to around $3,500 to $4,000 a month."

• Dave's Considerations:
  Despite the potential for higher income, logistical challenges and regulatory barriers in Denver make this option less attractive.

---

5. Option Five: Utilize a Home Equity Line of Credit (HELOC)

Strategy: Access equity through a HELOC instead of refinancing to fund new investments.

• Advantages:
  • Maintain Current Mortgage Terms: Keep the existing 3.875% interest rate while accessing funds.
  • Flexibility: Use only the necessary amount from the line of credit, paying interest only on utilized funds.
  • Potential for Increased Returns: Invest the accessed equity into higher-yield properties without disrupting the existing property's cash flow.

Notable Quote:
[28:26] Henry Washington: "You can also tap into the equity of a property by getting a line of credit against the equity."

• Current Rates:
  HELOC rates are approximately 8%, which, while higher than the current mortgage rate, may still be advantageous given the potential returns from new investments.

• Dave's Analysis:
  Combining minor rent increases with a HELOC could elevate total cash flow to around $7,000 annually, betting on Denver's long-term appreciation prospects.

Additional Insight:
Henry emphasizes aligning decisions with personal investment goals, suggesting that leveraging a HELOC aligns well with Dave's strategy of growing his portfolio without immediate liquidation.

---

Conclusion and Recommendations

After thorough analysis, Henry Washington concludes that utilizing a HELOC emerges as the most viable strategy for Dave Meyer. This approach allows Dave to:

• Maintain favorable mortgage terms on his current property.
• Access capital for new investments without significantly disrupting existing cash flow.
• Continue benefiting from potential long-term appreciation in Denver's evolving market.

Final Quote:
[32:42] Henry Washington: "So if it were me, that's the option I pick."

---

Key Takeaways for Real Estate Investors

1. Comprehensive Analysis: Always assess multiple strategies—selling, refinancing, adjusting rental strategies, or leveraging equity—to determine which aligns best with your financial goals and market conditions.

2. Understand Tax Implications: Tools like 1031 exchanges can defer taxes but come with stringent requirements and potential downsides. Always consult with tax professionals before proceeding.

3. Leverage, Don’t Liquidate: Utilizing financial instruments like HELOCs can provide flexibility and capital for growth without necessitating the sale of profitable assets.

4. Align with Long-Term Goals: Ensure that any decision supports both short-term cash flow needs and long-term financial objectives.

5. Stay Informed on Market Trends: Understanding local market dynamics, such as Denver's current flat growth in rent and housing prices, is crucial in making informed investment decisions.

6. Operational Considerations: Diversifying rental strategies may increase income but also introduces complexity. Assess whether you have the resources to manage multiple strategies effectively.

---

This episode serves as a valuable resource for real estate investors grappling with similar decisions, offering a balanced perspective on leveraging equity versus liquidating assets to optimize investment portfolios.

Transcript

[Dave Meyer]

How do you know when to sell a successful property? Or should you hold on to successful properties or refinance them? This is one of the most common questions that I get these days. And as I was thinking about how to talk about this on the podcast, it actually occurred to me that I have a property that I am about to go through this process of thinking through. And I've invited On Henry Washington to join me to actually just talk through this property and this problem, this challenge, this question that I'm facing in real time. And although we were going to talk about one of my portfolio properties, I think this conversation is going to be super helpful to everyone because it helps provide a framework for thinking through the best way to use your money and to optimize your portfolio over the long run. So, Henry, welcome and thanks for helping me out on this portfolio management question today.

[Henry Washington]

First and foremost, this is really cool because a lot of investors either have faced this problem or will face this problem in the future. And I believe people need to be analyzing their portfolios at least once a quarter. But selfishly, this is fun for me because I love spending other people's money. So let's talk about how I would spend yours.

[Dave Meyer]

I'm nervous now, but let's do it.

[Henry Washington]

All right, so first things first, Dave, tell us about this property.

[Dave Meyer]

Well, it's my former primary residence, as you might know, in 2019. About five years ago, my wife got transferred to Amsterdam for work, so we moved from Denver, decided to rent out our primary residence. We bought it back in 2016 for 460,000. It's in a great neighborhood, been very fortunate. It has appreciated. I think it's worth sort of conservatively like 750. I sold the property just down the street for 800, but that was in 2022, so it was a little bit hotter then. And right now I'm renting it out for 34, 50. I'm getting probably on average 500 bucks a month in cash flow after really, truly all the expenses because I have a really good interest rate on it, refinanced in 2020 to 3, 8, 7 5. And so it's a solid rental property, getting six grand a year in cash flow. But as I just mentioned, I'm sitting on a lot of equity, which is a good problem to have. But it sort of brings up the question if I'm using my money efficiently.

[Henry Washington]

Yeah, well, I mean, you're sitting on about $300,000 worth of equity, Right. One of the things that I typically ask people when I'm Faced with questions like this, or when they ask me questions like this is what are your real estate goals over the next one to three years? Because your goals should dictate what you do with your current portfolio or how you choose to grow.

[Dave Meyer]

That's a great question. So basically I split up my investing into sort of three different buckets recently. So I do long term rentals. I still buy long term rentals, mostly in the Midwest now. Then I invest sort of passively in larger value add types of projects either in syndications or passively into flips. And then I've started doing some private lending over the last couple of years. And so I like keeping it sort of a third, a third, a third roughly. And so if I did sell or refinance this, I would want to fill up my other that bucket of long term rentals. So like more low risk kind of cash flowing properties. But I don't need them to cash flow today. I buy rental properties because I want to 10, 15 years from now to have them mostly paid off and to have a solid income that I could replace my full time job from.

[Henry Washington]

Okay, so said differently, you would sell this or you would cash out of this and essentially take that money and buy more cash flowing assets. It's not like you take that money and use it to go lend more money.

[Dave Meyer]

Yeah, yeah, I think that's sort of what I would think about doing here.

[Henry Washington]

Okay, well that's good information. I obviously am going to have more questions, but as I see it right now you've probably got about four options. There's probably a couple of more, but typically they're going to fall in these four buckets, which would be one. You could keep the property but try to increase the cash flow or monthly return that you're getting. You could look to refinance that property, which would give you access to some cash that you could use to go and buy more cash flowing assets. Or you could sell the property, just straight sell it, cash out of it, and then use that money to go invest in more properties. And lastly, you could change the strategy. So maybe you could convert this property to a different rental strategy that might produce more cash flow for you.

[Dave Meyer]

Yeah.

[Henry Washington]

So let's talk about a few of these options. Sound good?

[Dave Meyer]

Yeah, let's do it, man.

[Henry Washington]

All right, so starting at the first one, keeping the property but trying to get a better return. How do you feel about that?

[Dave Meyer]

So I think there's two parts of this, like can I get a better return? Probably a little bit. I think I could get rents Up a bit higher because there's actually a two car garage at the property that I don't rent out because I have again, like I never knew how long I was going to stay in Europe, so I kept a car there. So I actually have a car sitting there and just some stuff. So I could clear that out and rent it out and I think that could raise rents 100 bucks, 150 bucks a month. So that would help, but it wouldn't really fundamentally change the math here. I think the biggest question to me is like, should I hold onto it for future appreciation? Because Denver has been great for appreciation. And I guess maybe I'll just explain to you a little bit about the neighborhood. The Denver a couple years ago built this light rail from downtown to the airport as this big project, super successful. And as part of that they announced that they were going to basically convert this entire street into this really cool park. And so the only time I've ever been not so lazy and called around to find off market deals was because I was like, I got to get a house on that park. And so my agent found out where they did eminent domain, he found out like exactly where the lines were. And I just called people on the line and got someone to sell me that house. That park is built now. It's awesome. It's obviously helped increase the value of the property and there are some more plays that can happen there. But Denver's pretty flat these days. Like rent growth is flat, housing prices pretty flat. Multifamily is overdeveloped there. And so I'm not feeling great that I'm going to get some huge appreciation boost unless not in the next year.

[Unknown]

Or two at least.

[Henry Washington]

Okay, so you're just assuming your average to national average increase in home value.

[Dave Meyer]

Yeah.

[Henry Washington]

Okay. Okay. And in terms of rent, you don't think there's much more you can do there? You're at the max. Unless you get a little creative and run out of garage space to an existing tenant or something like that.

[Dave Meyer]

Yeah, I don't see it going up that much more.

[Henry Washington]

Okay. The other question is considering that you are considering tapping into some of these funds in order to buy more cash flowing properties. If you got rid of this property, which would, and in my opinion refinancing it or selling it is technically getting rid of your cash flow because you're going to refinance it at a higher price point, which means you're going to kill your cash flow. What's the cash on cash return you'd be looking to get in comparison to what you're getting on this property.

[Unknown]

Yeah.

[Dave Meyer]

So let me figure out what the cash on cash return is, because you said it. So I owe 392. Let's just round down and say after all selling costs, I clear 700. Right. So that's 308. So I'm only making this is not good number. 600 grand divided by 308, that's 2% cash on cash return. So I can do better than that. I could do better than that. You know, some of the Midwest rentals I'm getting after rehab, stabilize them, you know, 8%, something like that right now. But I think those properties have as good of a chance of appreciating. And actually, at least one of them I bought is much better, a chance of appreciation.

[Henry Washington]

So obviously, if you go to refinance this or you go to sell it, you can take that capital and you can go buy more properties. How many properties would you be looking to buy based on the amount of money you could access on a refinance?

[Dave Meyer]

Yeah. So the way this math works, I'll just sort of do it out loud for people, is if I think this Property is worth 750, and that's what it would appraise for, I, as an investor now have to put 25% down. And so 25% down would be $187,000. And my equity was 392. So I could pull out, like, roughly 200 grand, let's call it. So I think, you know, given the four units I've bought in the Midwest this year, I could probably do that again. Four more units, roughly. I would basically be repeating two similar deals. And at that rate, I would be increasing my cash flow on that 200 grand to, let's call it 9,000 a year. But I would have to subtract the negative cash flow because raising my interest rate would probably. And pulling out the equity would probably make my cash flow on this property in Denver go negative.

[Henry Washington]

Absolutely. Yeah. I don't see how it wouldn't go negative if you were to refinance. That's why I don't really love option two for you either. So keeping it as a rental, not bad, but not great. Refinancing, this is. Is my least favorite option so far is refinancing.

[Dave Meyer]

The only thing I like about this deal right now is that interest rate. If you refinance it. I hate it. I don't hate it. But there's nothing very attractive about it anymore. So so far, Henry and I have talked about Option one which is keeping the property. Option two is refinancing and do a cash out refi for the property. We are going to take a quick break but after that Henry is going to walk me through the third and fourth scenarios he talked about, which was selling the property or converting it into a different strategy. Strategy. We'll be right back.

[Unknown]

Tired of the headaches that come with hunting down sufficient rental property insurance? Well, say goodbye to the endless calls and all the stress with National Real Estate Insurance Group or as they call it, nreg. With nreg, you can customize your coverage easily, manage it online and keep every property you own, regardless of occupancy status, protected on one monthly schedule and bill. There's no fuss, just flexible, reliable coverage that adapts to your portfolio. Visit biggerpockets.com insurance to learn how effective insurance can be with National Real Estate insurance group. That's biggerpockets.com insurance. Go visit it to request a proposal today.

This show is sponsored by Airbnb. Back when I lost my job in 2020, Airbnb is what gave me the extra income to work for myself. Look, I wasn't a big real estate investor then. I was just trying to take care of my family and thanks to Airbnb, I've done so much more. Next time you're out traveling for work or on vacation or you aren't using your place, it can actually make money for you that adu extra bedroom or additional property. It's an opportunity waiting to happen. With Airbnb, your home might be wor more than you think. Find out how [e-mail] host are you.

Looking to diversify your portfolio with real estate but don't have the funds to purchase rental properties? Well, Connect Invest has a solution for you. With short notes, you can invest in real estate without the stress. You can choose from a 6, 12 or 24 month term earning between 7.5 and 9% annualized interest. Your investment funds are spread across a portfolio of first position collateral backed real estate loans which help support residential and commercial projects in over 50 cities in the U.S. it's real estate investing made easy. There's no need to deal with the headache of owning rental properties. Just choose your investment term, fund it and enjoy monthly passive income. Visit biggerpockets.com connectinvest and start earning today.

[Henry Washington]

Hey Henry Washington here from the on the Market pod. You ever get frustrated while hunting for off market properties? Well, you're not alone. Just ask Alex, a fellow real estate investor who was in the same Boat struggling to find those hidden gems. Then he discovered Deal Machine. Now Alex effortlessly locates off market gems leveraging Deal Machine's free unlimited contact data, powered by the robust databases used by 911 call centers. And it automates mail campaigns seamlessly. So you ready to revolutionize your real estate game? Like Alex, visit biggerpockets.com dealmachine Sign up for free and start transforming your property. Hunting today.

[Dave Meyer]

Everyone, I'm back here with Henry Washington. He's helping me out with a portfolio management question. We are talking about my former primary residence. And Henry, I think you were about to ask me about the third option you proposed which was potentially selling this place.

[Henry Washington]

Yes, that's right, Dave. We're here to talk about option three and that is selling this property. So if you were to just say, you know what, I'm going to stick this thing on the market, what do you think it would sell for? But more importantly, what do you think you would net? And that's before taxes.

[Dave Meyer]

Yeah, so I think that I would net 700 is just kind of like a maybe a little bit, probably around 700 because I, I think the value is about 750. I sold a very similar house down the like two blocks away for 805, but that was in April of 2022. So time that one. Well, and I think this would pro, I think it's a little bit softer in Denver right now. So I would think you know, 750, 760, you know, commissions, spend 15, 20 grand cleaning it up. I'd say 700 and then my loans at 392. So what does that come out to? Three. Yeah, 308 was the number I was using before and I probably do a 1031. So like I, or I think I would, I mean maybe we need to talk about that. That's my assumption. If I'm going to put it into another rental property, I'd probably do a 1031.

[Henry Washington]

Yeah, so that was going to be the next question is obviously there's going to be capital gains taxes. Right. Because you haven't lived there two out of the last five years since you've been in Amsterdam.

[Dave Meyer]

Correct. Zero of the last five years.

[Henry Washington]

Zero of the last five years you've lived there. And for those of you who don't know you as an investor, if you sell a property that has gone up in value, if you have lived there two out of the last five years, you actually do not have to pay capital gains taxes. But since Dave has not lived in this property two out of the last five years, he would have to pay long term capital gains, which is at what percent right now?

[Dave Meyer]

I think it's 20%.

[Henry Washington]

So not terrible. Right. But it's, it's, it's a chunk of change when you're talking about putting $300,000 in your pocket. So yeah, your options are sell it and 1031 or sell it and not do a 1031. Here's my unpopular opinion about 1031 exchanges is I don't love them.

[Dave Meyer]

They're so stressful. I've done them.

[Henry Washington]

They're so stressful in theory they're amazing. But in practical application, oftentimes they're not executed well. Because what happens is you get your into a time crunch. Do you want to, do you want to talk about the time windows that you have in a 1031 exchange real quick?

[Dave Meyer]

I think that the rules, and I will look this up as I'm talking, is that you need to identify the properties that you're, your replacement properties within 45 days, which is tight. And then you have to close on them within 180 days. So closing is actually not hard at all.

[Henry Washington]

Correct.

[Dave Meyer]

It's that you have 45 days to find, negotiate and put under. You don't actually have to put them under contract, but in practice you kind of do have to put them under contract to make it worthwhile. That can be stressful, especially in a really hot market now. It's a little bit cooler, but it still is stressful.

[Henry Washington]

And the other hang up with that strategy is not only do you have to stick to this time window, but you have to be buying something of like value or higher. So that property has to be a more expensive property or a more valuable property than the one that you are selling now. You can package properties so you can buy a couple of them in the Midwest. But what I find often is because of the time crunch and because people are so scared about the tax hit that they're going to take is they go and they buy something that's not necessarily the greatest of numbers because they'd rather avoid paying the capital gains taxes than to wait around and find a deal that financially makes the most sense.

[Dave Meyer]

Yeah.

[Henry Washington]

And so I would just say that if you choose the 1031 strategy, you're going to have to truly find something that works. Or else, you know, or else you could end up still paying that money. You're just now not paying it in taxes, you're just paying it in less cash flow because you bought a deal that doesn't make as much financial sense.

[Dave Meyer]

Yeah, I. That totally makes sense. Also add one other rule is that you have to take on as at least as much debt too. So you can't with a 1031. Just like I can't just buy a property for cash. Like that was something I would think about with a 1031. If I could just buy something for 300 grand cash, that would be great. And then I would refinance it like later that would work. But that's not allowed under a 1031. And the story I was going to tell is from 2018, like things were just going so crazy in Denver. I did a 1031 and I was like, you know what? Even if I have to do an okay deal, like the market is giving had such strong tailwinds and I was so confident in them. I was like, it's fine. Like even if it's not the best cash flow market, I was buying in a great neighborhood. That worked out great. I don't feel that confidence anymore.

[Henry Washington]

So still, given that tight time window, I still think this is the best of the options we've talked about so far for you.

[Dave Meyer]

Same.

[Henry Washington]

Another option to think about in terms of taxes. Now I am going to give the caveat that we are not tax professionals who do. Please consult a tax professional before you make any decision like this. But there's also the option of just selling it. Not doing a 1031, but then buying rental properties that are currently in service, meaning they're not properties that. That you have to do a big renovation on. They're actually ready for tenants and you can put them in service quickly. And by doing that, then you can do a cost segregation study on that property. And that cost segregation study can help you offset some of the capital gains taxes that you will have to pay when you sell.

[Dave Meyer]

Yeah, that's true. I would need to think a little bit more about what the 1031 versus not strategy. But I agree so far selling is the best option of the three. And I don't know, let me just ask you. Like so many people say that they buy properties and never sell. You don't believe that, right?

[Henry Washington]

I. You know what? No, I don't believe that. And it's. It's like I would love to. I would love to be that old guy in like 20 years that's like, yeah, I never sold anything I bought. And it's. You should never sell it. Like it sounds. All that sounds amazing until you need money and you have to sell something. Something like it's a. It's a business that needs funds and holding properties. As we are discussing here, it's not big bucks. We're talking about being a landlord. We're talking this, this 750, 000 property is making you 500amonth. Right? Like you need to be able to turn real estate to make money.

[Dave Meyer]

Yeah, absolutely. I bought this deal not for cash. I bought it to live in and I thought it was. Appreciate it appreciated. It's done its job very well. Thank you. Need to use that money for a new job.

[Henry Washington]

All right. We've covered three options so far, which is keeping the property, refinancing the property and selling the property. And the fourth option we have here is converting the property to a different strategy like a short term rental or a midterm rental. This can seem daunting, but from a portfolio perspective, what I like about an option like this is it forces you to look internally within your current portfolio to see if you can find returns similar to what you might get if you were to sell, but you could get them in your same portfolio. So what do I mean by that? I have a duplex right now that is a long term rental and it does fine as a long term rental. But we have recently had three short term rentals that we converted to midterm rentals and they are kicking butt.

[Dave Meyer]

Nice.

[Henry Washington]

And so instead of us going and buying another duplex and using it as a long term rental, we looked internally within our own portfolio and said what do we have that we could convert to a different strategy and increase the cash flow. So we're taking that duplex, we're going to furnish the units and then we're going to put them up as midterm rentals and take the rent from $1,200 a month up to around 3,500 to $4,000 a month based on what we're doing in our other units. And so it's going to cost us some money, probably around $10,000 to furnish the property. But that $10,000 is going to net me a much better return in terms of monthly rent than if I were to go take that $10,000 and try to buy another property with it. And so I'm not saying is the best strategy, but I'm saying it's worth a look into your portfolio to see if I just spend a little money on this property. Can I increase the return from 2 to 3% up to 8, 10, 11, 12% cash on cash return without having to get rid of the property or tap into the Equity, right?

[Dave Meyer]

Yeah, yeah, that's a great question. So I actually, I looked into this a little bit. In Denver. There is a ban on short term rentals unless it's your primary residence. And although this is technically mine, I do plan to buy a new house as a primary residence soon. And so that is not like the spirit of the law and I'm not going to to mess around with that. So I can't do that. Midterm rental is kind of interesting and I do think I could probably get rents from 3450 to let's call it 3800 because it's in a really good location. It's really nice because it's right near the train and it's also walking distance to a lot of offices and stuff. So if people are there for corporate work or you just, you know, wanted to come work out of Denver, it could be appealing. The problem is just logistical and my not it's not laziness. Sometimes I joke that I'm lazy. It's just operational. Like my property manager doesn't do midterm rental management and so I don't know if I want to another one. I already have a short term rental manager in Colorado and a long term rental manager in Colorado. I don't want a midterm rental manager in Colorado. It's just like a lot of work. I guess I would consider it, but that is sort of the one reason I would second guess it.

[Henry Washington]

Yeah. Well, I don't know if that reason is financial reason enough for you not to consider this option, but I would say that if you're only going to go from 34 up to $3,800, then it's definitely not worth it. Right. I think if you're going to go from a long term to a short or midterm strategy, you need to be 2 to 3xing what you're making per month for it to make sense. Because your property management for a midterm is going to cost you a lot more than 8%.

[Dave Meyer]

Yeah. And you're going to have vacancies like you. You know, it's just. Yeah, it's going to get like if you spread out 3,800 over 12 months, I might lose money. So I don't know. It's also like I've thought about can I put a dad to an adu? But it's a pretty small lot.

[Henry Washington]

That's a lot of work.

[Dave Meyer]

Yeah. So out of all of these, I'm kind of like in selling the property, to be honest.

[Henry Washington]

Yeah. I mean after, after reviewing that again, I think the only getting about A$400 a month boost by turning it to a midterm definitely isn't enough. So I would say that takes this option off the T you. Now for somebody else in a different market, that may be a very wise thing to do. But in your market you're not going to get that return. So I don't like that option for you either. So that leaves us with the option to sell it. But what if there was a fifth option, a super secret ninja fifth option.

[Dave Meyer]

Oh, an Easter egg.

[Henry Washington]

Easter egg option.

[Dave Meyer]

Are you going to buy it for me?

[Henry Washington]

I am absolutely, absolutely not going to buy Dave's property. But after the break, I am going to give him some more advice on what he could do as a super secret option. Number five. We'll be right back.

[Unknown]

Worried about your investment properties? Weathering a storm? Experience peace of mind with coverage from National Real Estate Insurance Group, or NREC as they call it. They've built the largest investment insurance program in the country. They focus solely on residential, tenant occupied, vacant and renovation properties, all customizable to your specific needs with just a couple of clicks. So while the rain pours outside, rest assured your properties are covered with comprehensive insurance from NREC. Visit biggerpockets.com insurance to learn how effective insurance can actually be with National Real Estate insurance group. That's biggerpockets.com insurance. Go visit today to request a proposal. Are you wanting to earn passive income from real estate, but you don't want to deal with the headaches of being a landlord? Short notes are designed to help investors diversify their portfolio and reap the benefits of private real estate investing without the stress that's usually involved. You can invest as little as $500 for terms as short as six months and earn between 7 and a half and 9% annualized interest. Your investments help fund a diverse Portfolio of Active U.S. real estate projects across different phases like acquisition, development and construction. But the Fed starting to lower interest rates now is a prime opportunity to enter the market. So if you're ready to start making your money work for you while you sit back and relax, head to biggerpockets.com connectinvest and get started today.

[Henry Washington]

Hey, Henry Washington here from the on the Market pod. Ever feel stuck while searching for off market deals? Well, let me introduce you to Sarah, a savvy real estate investor who turned her fortunes around with Deal Machine. Sarah now taps into free unlimited contact data powered by the same databases used by 90% of US caller ID systems. She easily sends automated mail campaigns, and thanks to Deal Machine's new private investigator tool, Sarah can even track down those elusive corporate leads. This powerhouse combo keeps her steps ahead of the market. Want to invest like Sarah? Head to biggerpockets.com dealmachine and sign up for free. Start turning hidden opportunities into your investment success with just a few clicks.

[Unknown]

Listen up business owners, because I've got some quick little math for you. Fewer costs equal more profit. The problem? You're spending more than ever on operations, materials, deliveries, software and more. So why not reduce your costs and headaches with NetSuite by Oracle NetSuite is the number one cloud financial system, bringing accounting, financial management, inventory and HR into one platform and one source of truth. Oh, also, NetSuite lives in the cloud, which means you can reduce IT costs with no hardware required. Cut the cost of maintaining multiple systems because now you've got one unified business management suite. You can improve efficiency by bringing all your major business processes into one platform, slashing manual tasks and errors. It makes sense that over 37,000 companies have already made the move to NetSuite. So don't let rising costs sink your business growth. And by popular demand, netsuite has extended its one of a kind flexible financing program for a few more weeks. Head to netsuite.com BiggerPockets netsuite.com Biggerpockets netsuite.com.

BigGERPOCKETS Black Friday is coming, which means people lining up outside of glass doors waiting to burst in and get their hands on some great deals. But there are some doors you don't want anyone smashing through and snatching stuff. And those are the doors to your home. You need the best home security system available. That's why I'm personally recommending SimpliSafe. It's the system I use to keep my home and family safe. Their active guard Outdoor protection changes the game by preventing crime before it even happens. If someone's lurking around, Simplisafe's agents see them in real time and can even talk to them. Set off your spotlights and call the police before they've had a chance to break in. Plus, there are no long term contracts, no cancellation fees, and it's around a dollar a day for all of this protection. And right now, SimpliSafe is giving exclusive early access to its Black Friday sale to our listeners this week only. You can take 60% off any system with a select professional monitoring plan. This is their best offer the year, so don't wait at to simplisafe.com pockets to claim your discount. Don't wait. This offer won't last long. Keep your home, your family, and your peace of mind protected with Simplisafe. There's no safe like SimpliSafe.

[Henry Washington]

And we're back with Dave, and we're about to dive into a less likely option that people should be thinking about as they're analyzing their portfolio.

[Dave Meyer]

I'm on the edge of my seat. You made me wait through the whole ad break.

[Henry Washington]

One of the things people don't think about when they think about tapping into their equity of a property, a lot of the times is they think refinance. But that's not your only option. You can also tap into the equity of a property by getting a line of credit against the equity. And what I like about this strategy, the old HELOC strategy, is it does not require you to get a new loan at a higher amount. You keep your current mortgage payment, but you can access the equity. And so they would. The bank would essentially take a look at the property, do an appraisal, and then if they say, hey, the property is worth 700 and you owe 400, you've got $300,000 of equity. We'll loan you between 70 and 75% of that equity on a line of credit. And so you could then access that line of credit, but you don't have to use it all. You could literally only use what you need. Now, you will be paying interest only payments on the money that you use, but if you factor that into your underwriting of the property that you're buying, you can technically have that property work to pay back your line of credit through the return that you're getting over the first couple of years. And then once that line of credit's paid off, then your cash flow increases substantially.

[Dave Meyer]

I kind of like that idea. What are HELOC rates right now, just so we can talk about?

[Henry Washington]

I bet they're about a point above prime.

[Dave Meyer]

So eight, eight and change. Right now, probably we're recording this towards the end of November. Honestly, for, for a rental property, that's not that bad. Especially like when I'm thinking about this is like, if you remember, the original scenario here was I could probably get the rent up a little bit if I cleaned out that garage and did something with it. So if I got a little bit more rent and then did a heloc, then I'm getting, you know, I'm going up to seven grand a month. And then if I can earn money above and beyond what I'm paying in interest on that heloc. Then this becomes interesting and give myself potentially some upside here in Denver there. So there's basically this just like a long shot appreciation play that I'm kind of holding on to.

[Henry Washington]

Yes, that's what you'd be betting on.

[Dave Meyer]

So right across the park there's this old like industrial site which like every developer now is just like salivates at these old industrial sites. And it's incredible. It's this amazing, beautiful old property but the financing always falls through and I kind of just like I know if it gets built it would be one of these like mixed use developments with retail and restaurants and it would be super cool. But I'm losing my patience on it. But this might be a good hedge where if I'm earning seven grand a year in cash flow and I could wait and see if in like the next cycle this is realistically going to happen, maybe I'd take that bet, but I don't know, maybe I think I'll have to do the math on selling versus a heloc. Those, those feel like the two right options here.

[Henry Washington]

So here's my personal opinion based on this is based on what I know about you and your goals in your portfolio. In other words, this may not be what what anybody else in this situation should do or what I would recommend. Right. I don't think that you, Dave, are in a position where you need $300,000 in your bank account. Right. I feel like it would be nice but you're probably surviving just fine. Right. So yeah, I feel like you taking a very educated gamble, quote air quotes on appreciation while still being able to meet your goals of buying more ca. Cash flow seems like a good option for you versus just selling it. Now if somebody was in a position where the cash is much more needed for them then selling it's probably the best option in that situation. But it sounds like you can reach your goals, keep your property, keep your cash flow and hopefully get even more appreciation in the next one to five years.

[Dave Meyer]

Yeah.

[Henry Washington]

So if it were me, that's the option I pick.

[Dave Meyer]

I do like that. It's because I think it would change if all of a sudden in the Midwest or some opportunity came up where it was like a screaming deal and I wanted 300 grand. But like they're better cash flow deals but like I said earlier, I think depending on the deal in the Midwest they have an equal opportunity to appreciate in the next, in the next couple of years. So maybe you hedge a little bit and spread it between the two and Although Denver's been flat, I do think Denver is like one of these markets like Austin and Boise where it's like, it got oversupplied, it got too hot. It's still a popular city. It's a great place. You know, like, I still think that it's going to grow in the long term. It's very. There's a lot of job growth there. And so I do think it will pick back up, but it might take a couple years. Well, thanks again, man. I really appreciate it. This is really great information and hopefully for all of you who own properties, you can see some of the thought process and the math that goes into this equation. Because a lot of people ask me this question. I don't know if you get this too, Henry, but they haven't like done any of the math or really considered what they would do with the money if they sold. And that's really the whole game. Right. At least to me it's just opportunity costs. Like, yes, it is costing. I am making money on this property, but it could be costing me something because it's not the most efficient use of my money. But I only know that because I've run deals in other markets to see what else I could be doing. Doing with that money.

[Henry Washington]

Yep. And I think the cornerstone of being able to answer this question appropriately for yourself is having a good understanding of what your short term and long term goals are. I think a lot of time people make decisions and they don't necessarily have their goals mapped out or flushed out and that could cause you to make a decision that you end up, you know, regretting later on when you do finally flush out your goals. And so said differently, I don't know that you have a terrible option here with this property, which is a good position to be in, but you've got to have your goals mapped out and know where you're going so that you can make very educated decisions with your portfolio that are going to help you get to your goals faster. I mean, you've essentially got this property which is giving you a big stepping stone into getting to your goals faster. But you've got to, you've got to leverage it the right way.

[Dave Meyer]

Totally. Yeah. And it just goes to show, like, although people say, hey, you shouldn't buy primary residence, bad investment. It can be a good investment if you do.

[Henry Washington]

Pretty awesome, right?

[Dave Meyer]

Yeah, it actually could work really well. I don't know if you've done this. I know James, our friend James Dainard has done this too. Like if you, if you buy your primary residence. It can be a great stepping stone, especially given the tax benefits Henry was talking about before, too.

[Henry Washington]

I bought my property in 2020 right before the market popped off. I have a 2.2.3% interest rate. No. And are you serious? Yeah. And about $300,000 of equity myself, so. I love this.

[Dave Meyer]

Never get rid of that 2.3. That's like an heirloom you should pass down.

[Henry Washington]

That's the. That's the new family heirloom.

[Dave Meyer]

Yeah, don't. No watch, no jewelry, anything. Just pass down your 2020 interest rates to your daughters. All right, well, thanks again, man. And thank you all so much for listening. We'll see you again soon for another episode of the Biggerpockets Podcast. Thank you all for listening to the.

[Unknown]

Biggerpockets Real Estate Podcast. Make sure you get all our new episodes by subscribing on YouTube, Apple, Spotify, or any other podcast platform. Our new episodes come out Monday, Wednesday, and Friday. I'm the host and executive producer of the show, Dave Meyer. The show is produced by Ian Kay, copywriting is by Calico, content and editing is by Exodus Media. If you'd like to learn more about real estate investing or to sign up for our free newsletter, please visit www.biggerpockets. the content of this podcast is for informational purposes only. All host and participant opinions are their own. Investment in any asset, real estate included, involves risk, so use your best judgment and consult with qualified advisors before investing. You should only risk capital you can afford to lose. And remember, past performance is not indicative of future results. BiggerPockets LLC disclaims all liability for direct, indirect, consequential or other damages arising from a reliance on information presented in this podcast.