Today we’re going to give you some examples of leveraging equity.
Bob Nelson, Eugene real estate investment broker
Marcia Edwards, Eugene residential real estate broker
Marcia Edwards: We’ve been talking about equity position and when it is time to leverage. We talked about, let’s say you have a duplex that’s worth, say, 400,000 right now and you’ve got 50% equity, 200-
Bob Nelson: And it used to be worth about 250,000.
Marcia Edwards: So you’ve gained some equity position both by paying down your mortgage we hope, as well as appreciation in the marketplace. Now, you’ve got that, and let’s say you’re 30 years old and this is your first investment besides your personal residence. What could you do, and should you do, at that point?
Bob Nelson: Okay. Number one, you could sell it, do a tax-deferred exchange into other property, because you’ve got this monster equity position, $200,000, and if you leveraged that to the hilt, you could buy an 800,000 to the hilt, to the maximum a lender would allow. You could buy an $800,000 property with that. Now, rather than owning a $400,000 property, you own an $800,000 property.
Marcia Edwards: Which we hope brings more income.
Bob Nelson: Exactly. Proportionately more income, and if it’s well located, less risk potentially.
Marcia Edwards: And with the interest rates, the mortgages that there are right now, you may have even a better cashflow than that.
Bob Nelson: Oh, you could have a huge cashflow. Interest rates as they are, particularly if you bought a house, duplex, threeplex, fourplex, as a rental, those are residential mortgage loans that have fixed interest rates over a 30 year term. So 29 years from now, your interest rate is still potentially 3% when maybe the market is six or nine or 12%. Huge.
Marcia Edwards: Right. So you went from two units to four units, and you’ve doubled your efforts, and you’ve basically accelerated your gain, your benefit, too.
Bob Nelson: Exactly. You put yourself in a position for greater equity growth, and that’s what you’re really ultimately after. That’s net worth.
Marcia Edwards: Now you could peel a portion of that off and do an independent purchase and keep that duplex as well.
Bob Nelson: Yes, absolutely. Pull back a portion of the cash, use that cash as a down payment into an income producing property. Now notice the term. If you use that cash from the refinance into an income producing property, not into a new shiny car, which will depreciate, what, at least 12% as you drive it off the lot, yeah, you may have a nice shiny car, but you don’t have anything that’s going up in value to generate you more equity and cashflow. Be careful.
Marcia Edwards: I just have to point out where you started was you took a tiny risk with maybe an owner-occupied small unit, or a duplex unit that you occupied, and now you’re looking at $800,000 purchases.
Bob Nelson: Yeah.
Marcia Edwards: It’s good stuff.
Join Eugene, Oregon, real estate experts: Bob Nelson, Real Estate Investment Broker with Pacwest Real Estate Investments, and Marcia Edwards, Residential Real Estate Broker with Windermere Real Estate, daily at 5:30pm on KPNW for the “Real Estate Today” radio show.