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This week\u2019s question comes from Tony\u2019s Instagram<\/strong><\/a> direct messages!<\/strong> This rookie real estate investor is asking: I have a good chunk of equity in my home, should I pull out cash to purchase a rental property?<\/strong> If not what should I do with the equity?<\/p>\n If you want to know how to use home equity<\/strong><\/a> to buy real estate<\/strong>, you need to know your options first. As many homeowners are sitting on massive equity gains, thanks to the past two years worth of price run-ups, they\u2019re asking how they can use this equity to their advantage<\/strong>. For most investors, you\u2019ll have two options in how you take this equity out of your home\u2019s value. But, both of them need to be intelligently evaluated before you make a decision<\/strong>.<\/p>\n If you want Ashley and Tony to answer a real estate question, you can post in the Real Estate Rookie Facebook Group<\/a>! Or, call us at the Rookie Request Line (1-888-5-ROOKIE).<\/p>\n Ashley: Tony: Ashley: Tony: Tony: Ashley: Tony: Ashley: Tony: Tony: Ashley: Tony: Ashley: Ashley: Tony: Ashley: Tony: Ashley: Ashley: Tony: Ashley: Ashley: Tony: Ashley: Tony: Ashley: \u00a0<\/p>\n<\/div>\n Interested in learning more about today\u2019s sponsors or becoming a BiggerPockets partner yourself? Check out our\u00a0<\/i>sponsor page<\/a><\/i>!<\/i><\/p>\n
This is Real Estate Rookie, episode 196. My name is Ashley Kehr, and I am here with my co-host Tony Robinson.<\/p>\n
Welcome to the Real Estate Rookie podcast, where every week, twice a week, we bring you the inspiration, information and motivation you need to kickstart your real estate investing career. I love Saturdays because we get to switch things up a little bit. Right? We get to dive into some of these questions. But before we do, Ashley, just tell us what\u2019s new with you. What\u2019s going on? What\u2019s new in your neck of the woods?<\/p>\n
Not much actually. The last couple of episodes we talked about my knee surgery. We talked about a new deal I\u2019m looking at. So yeah, really nothing else new that I can think of. What about you, Tony?<\/p>\n
Yeah. For me, we actually just lost out on a property. It was in a new market that we\u2019re looking at and we put up $20,000 as our EMD and with everything that was going on, it\u2019s new construction and the way they set it up was that you had to get a loan to purchase the land and then you had to get a secondary loan to cover the construction. So it was really weird how they had it set up, but with everything we had going on, we totally dropped the ball on remembering that we needs to get this financing for the land because we got this under contract, I don\u2019t know, maybe seven months ago and now it\u2019s like, \u201cHey, it\u2019s time to start.\u201d<\/p>\n
It was this mad ground to try and find a lender, but the lender that the builder recommended didn\u2019t want to lend to us because they said that we were overexposed for short-term rentals in our portfolio. They\u2019re like, \u201cThis is for someone that this is their first short term rental X, Y, Z,\u201d and it was really weird. We went to three different lenders in that same city and they all said the same thing, but I guess what\u2019s happened is that in that town, in that region, there\u2019s been just this boom of new construction of short term rentals. So I don\u2019t know why, but I guess they feel that there\u2019s less risk lending than someone that doesn\u2019t already have short term rentals. In my mind it would be the other way, because if you have short term rentals, you know what you\u2019re doing.<\/p>\n
You have experience, yeah.<\/p>\n
Anyway, we ended up having to back out of that deal because we couldn\u2019t get the financing in time for the construction start date. Now we\u2019re possibly going to lose our $20,000 EMD, so we\u2019re going back and forth with the builder to see if we can get it back from them.<\/p>\n
Okay. Well, first of all, that\u2019s awful. That\u2019s a lot of money to lose, but can you tell everyone what an EMD is? Your earnest money deposit. Explain that, how that process works and why you might not get it back.<\/p>\n
Yeah. So thank you, Ash, for asking that question. So your EMD stands for your earnest money deposit. So a lot of times when you look to purchase a property, the seller will ask for an EMD, or an earnest money deposit, to show that you have in \u2026 even though you\u2019re \u2026 let me take a step back. Plenty of people can submit an offer on a property, right? But some people are tire kickers. Some people just want to lock the property up to see what happens. So a lot of times sellers will ask for an earnest money deposit to show how serious you are as a buyer. The way that it works is the earnest money deposit is whatever amount you and the seller agree to. Could be as low as $100, it could be as much as $20,000 or maybe more, and That money gets deposited into escrow.<\/p>\n
So the seller doesn\u2019t have access to those funds. It\u2019s held in escrow. Then typically there\u2019s a certain point in your contract where your earnest money becomes non-refundable, which means that if you back out of the deal, for any reason, you don\u2019t get that money back to you. It actually goes to the seller. But if you cancel before that date, then you as the buyer get your earnest money back. So we are in a situation where our expiration date for the earnest money deposit passed. So it was considered hard, right? So your money goes hard, your EMD goes hard after that expiration date. So now it\u2019s really up to the sellers to decide if they want to be nice or not, or if they just want to keep our $20,000.<\/p>\n
Yeah. I recently did a $50,000 earnest money deposit on a property. They originally wanted $300,000 as the earnest money deposit.<\/p>\n
Isn\u2019t that crazy?<\/p>\n
So we settled on a 50 and what happened was it was a bank that was selling this property and they just wanted to push, \u201cWe want this a quick close,\u201d blah, blah, blah. So they\u2019re like, \u201cWe won\u2019t accept any more than 30 days due diligence. No more than that.\u201d This was a massive property with so many different avenues. So what my attorney did when he structured the contract is he said, \u201cOkay, the 30 days actually starts when you send us the title work.\u201d So that way it actually gave us so much more time. We ended up taking two months and we still had more time locked because the bank\u2019s attorneys just took so much time to get the title work done and sent it to us.<\/p>\n
Then ended up backing out that deal because of multiple issues, but we were able to get our deposit back pretty quickly. That was such a key thing that my attorney did was put in these little loopholes where it\u2019s on [inaudible 00:05:16], \u201cYeah, we\u2019ll take 30 days due diligence, but that time isn\u2019t going to start until we have all of the information we need to actually understand the property.\u201d<\/p>\n
Yeah. We did something similar for our Big Bear hotel where we set it up to where the due diligence period didn\u2019t start until we got all of the financials back from the summer. So that ended up giving us an extra, I don\u2019t know, I think 14 days or something like that. So there\u2019s some ways you can structure it. But same for us in that deal, we put up $50,000 in EMD as well and that went hard a little over a week ago. So now for whatever reason this Big Bear dude doesn\u2019t work out, we\u2019re out 50 grand. So we\u2019ll see.<\/p>\n
It will, though.<\/p>\n
Cool. Fingers crossed. We\u2019re making good progress. Awesome. But today\u2019s question actually comes from my DMs and if you guys ever want to get your question featured on the show, you can go to the Real Estate Rookie Facebook group, the Bigger Pockets forms, or you can slide in mine and Ashley\u2019s DMs. We pull questions from all those places. But today\u2019s question, I actually don\u2019t know who this came from. So I apologize in advance if you hear this question and it sounds familiar, because I just took a screenshot of the question, but I forgot to get the person\u2019s name. But it says, \u201cHi, Tony, I need your advice. I have a good chunk of equity on my home. Do you think it\u2019s why to pull some cash from my home to purchase an investment property? If not, what do you suggest I do with that equity?\u201d Ash, why don\u2019t you kick us off here? What are your thoughts on this equity piece?<\/p>\n
Okay, well we know interest rates are going to raise two more times this year. So if you are going to pull any money out, now is the time to do it. So you basically have two options. The first option is you can actually go and remortgage. Get a whole new mortgage on your property. So I would look at what is the current interest rate on your mortgage now. Can you get a lower interest rate if you go and refinance right now, or is it going to be higher? So if it\u2019s going to be in higher interest rate, don\u2019t remortgage, keep the mortgage that you have on the property. Then look at a line of credit. So pulling out a home equity line of credit on your property. Since it\u2019s your primary residence, you\u2019ll usually get good terms, a good interest rate. Some banks will actually do a promotional period where maybe for the first six months, the first year you\u2019re only paying 1.99% or 2.99% on that money for those first six months and then it actually goes variable.<\/p>\n
So I would definitely look into a line of credit or to remortgage and refinance and pull that money out. I think it also depends what you\u2019re using the money for too. So if you are going to purchase property and you\u2019re maybe going to flip it, so you\u2019re going to make your money back right away, or you\u2019re going to bur it where you\u2019re going to go and refinance that money and pull it back, then you want that line of credit so you can just pay the line of credit back and then you got that money again to go do the next deal. But if you were looking for a down payment maybe, or maybe you\u2019re looking to just purchase a property in full and with no expectation of going and refinancing anytime soon, then I would go ahead and remortgage the property instead of pulling out that line of credit.<\/p>\n
Yeah. Ashley, I think you hit everything, just like the nail on the head with everything you said. I probably wouldn\u2019t refinance in today\u2019s environment, assuming that you have a better interest rate. I know for us, when we bought our primary residence, 3% was our interest rate. If we tried to refinance today it\u2019s two and a half points higher. So it wouldn\u2019t make sense for us to refinance our mortgage. So I think your point of if your plan for the capital is something that\u2019s short with a quick turnaround time, like flipping, then a line of credit probably makes the most sense. Honestly, that will probably be my approach right now anyway.<\/p>\n
You can get a better loan to value too, because a lot of times they\u2019ll lend you up to 90%, 95% of the loan value. So say your house is worth a 100,00 and you have a mortgage of 60,000 on the property already. They\u2019re going to give you a line of credit for that other \u2026 what is that? 35,000? The math right? 35,000, give you a line of credit up to that 95% loan to value. So that\u2019s definitely an advantage too, is that doing a line of credit you\u2019ll be able to pull more money off. You can also do a home equity loan where you\u2019re actually pulling the money out, they\u2019re going to amortize it for you over so many years, you\u2019re going to get a fixed interest rate and then you just make those monthly payments.<\/p>\n
So it\u2019s almost like a second mortgage on the property where the line of credit, the money can just sit there on the line, you can pull it off as needed and you\u2019re only paying interest when you use it. Then if you pay the money back, the money is still there for you to pull off at certain times. So you just have to watch when that line of credit expires, when the bank can say, \u201cYou know what? We\u2019re actually closing down your line of credit.\u201d I remember during COVID, a lot of people started pulling all their money off their lines of credit, afraid that the banks were going to shut them down and close them off. So they were trying to pull their money off before the bank said, \u201cYou no longer have access to this money.\u201d<\/p>\n
Yeah. Ashley, I think you literally said everything that I was going to say, so I don\u2019t, I don\u2019t think I have a whole heck of a lot more to add. Again, sorry that I didn\u2019t grab your name, but hopefully whoever asked this question, we gave you a good response and now you\u2019ve got some ideas or at least some flexibility in terms of what strategy you can use with that equity you have sitting in your home.<\/p>\n
Tony, usually if I pull someone from my DMs, after we record I\u2019ll send them a message saying, \u201cJust so you know, your question was answered on this episode.\u201d So you can send that to them so they can watch you forget their name.<\/p>\n
I apologize in advance.<\/p>\n
Thank you guys so much for listening to this week\u2019s Rookie Reply. I\u2019m Ashley @wealthfromrentals and he\u2019s Tony @tonyjrobinson and we\u2019ll see you guys on Wednesday.<\/p>\n