Need advice...want to unlock 1M equity in my home.

[kevlarswift]

Hello, I'm a longtime reader of MMM looking for advice from the community regarding my specific situation. I thank everyone in advance for any advice they may give. I have a thick skin!

I have a net worth of approximately $1.25M. I have an location-independent income of 200k per year as a managing member of an S Corp.

I estimate my home in desirable area of central Austin TX is worth $1.35M. I owe approximately $150k on the property and have low taxes ($9k/yr) for the area due to a historic tax credit. The house has nearly doubled in value since I bought it in 2013. My family loves it, so I don't have any plans to move. Additionally, it is almost certainly going to be upzoned to allow an additional 6 units as it is near transit corridor and the University of Texas. So, in the back of my mind, I can see it becoming an investment property in the future.

I also have around $200k in other liquid assets, mostly index funds in the stock market, in both IRAs and regular brokerage accounts.

Before I owned a house, I had all my money in stock and when I started a family, I decided to buy this house with 450k downpayment and a 15 year 300k mortgage at 3.5%. I had a lot of anxiety about the stock market once I had children and had an intense desire for security in the form of bricks and mortar shelter for my family.

Now, I'm thinking that I have too much money locked up in equity in the house and am considering ways to increase my leverage in a sensible, moderate way.

One thing I've been considering is a cash-out refinance to make another real estate purchase. In one scenario, I do a cash out refi pulling out $500k. Recently, although before the recent pandemic, my current mortgage holder, Chase, said they could give me a 30 year at 3.875% for 3181/month. This is approximately 1k more than what I pay now for my mortgage so would not be a strain. One plan would be take out the new loan, then with that, buy either a rental property in an up-and-coming area (like Asheville, NC). Once house is rented, I could refinance home. Another plan, which I think my family would get behind, is to buy a vacation home for cash. Plan would be to use home for 1 month in summer, and then as a vacation rental the rest of the time.

Thoughts? What am I missing? How do I put the equity in my house to work for me?

[LightStache]

One plan would be take out the new loan, then with that, buy either a rental property in an up-and-coming area (like Asheville, NC). Once house is rented, I could refinance home. Another plan, which I think my family would get behind, is to buy a vacation home for cash. Plan would be to use home for 1 month in summer, and then as a vacation rental the rest of the time.

If you buy a rental property, even if it's not occupied, you can still get it for 20%-25% down so no need to put a tenant in and then refi.

I would pull out the cash and diversify, slowly getting into RE investments. Pull out $500K, buy a SFR to 4-plex rental with $50K-$100K down, wait a year or more. If you don't have a terrible experience, buy another and repeat. In the meantime, stick the refi proceeds in brokerage.

Buying a vacation home is usually a worse decision then renting a vacation home. But I'm curious with your S-Corp can you get your MAGI down to $100K? Do you already have a DB plan?

[six-car-habit]

One plan would be take out the new loan, then with that, buy either a rental property in an up-and-coming area (like Asheville, NC). Once house is rented, I could refinance home. Another plan, which I think my family would get behind, is to buy a vacation home for cash. Plan would be to use home for 1 month in summer, and then as a vacation rental the rest of the time.

If you buy a rental property, even if it's not occupied, you can still get it for 20%-25% down so no need to put a tenant in and then refi.

I would pull out the cash and diversify, slowly getting into RE investments. Pull out $500K, buy a SFR to 4-plex rental with $50K-$100K down, wait a year or more. If you don't have a terrible experience, buy another and repeat. In the meantime, stick the refi proceeds in brokerage.

Buying a vacation home is usually a worse decision then renting a vacation home. But I'm curious with your S-Corp can you get your MAGI down to $100K? Do you already have a DB plan?

 These plans seem to put him / her in a situation where they would be paying Approx $3200 on the new $500,000 / 30 year Chase mortgage , plus whatever the mortgage would be on the remaining 75% owed on the remaining balance on the vacation / rental house ?

 Possibly another $2000 monthly if they buy something in the $400K range ?   Now they've got $5200 in mortgage payments and $390K in the bank [ i'm pulling out 10K for closing costs ].  Offset by whatever they can get for air-b-n-b  type rents / income.

[rothwem]

I think the idea of a cash out refi is sound, but you need to do more research on the properties you want to buy.  The fact that your cited Asheville as up and coming shows me you haven’t looked into it enough.

Have you ever been a landlord? You might want to start local before trying to do the remote thing.

[frugalfoothills]

Agree with the poster above, Asheville is not "up and coming." There are a bajillion people already packed into a small city and real estate prices there are nuts.

[TomTX]

I don't think this is really the time to be thinking about leveraging your home in order to finance a far-off property intended as a vacation rental.

[former player]

I don't think this is really the time to be thinking about leveraging your home in order to finance a far-off property intended as a vacation rental.

Quite.  Hunker down, financially speaking.  Adding a big ongoing obligation in uncertain times is a bet that could go very badly wrong

[the_fixer]

I think I would just start putting away some of that fabulous income instead of trying get fancy.



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[kevlarswift]

Thanks to everyone for their advice. I think the reality of this COVID-19 situation is starting to sink in. Not time to get fancy, especially with a family. I will be keeping my eye on the refinance rate and my documentation is in order, but now my plan is to simply make it through this pandemic the best I can, supporting my family and staying healthy (fingers crossed). I will also be looking into a DB plan, as the someone suggested. Good luck to everyone! I greatly appreciate your thoughts.