BiggerPockets Money Podcast - 385: How to Use Equity in Your Home to Reach Financial Freedom Faster

Episode Date: February 17, 2023

Your home equity could be the secret sauce to earlier retirement. With so many homeowners and rental property investors across the nation sitting on hundreds of thousands in home equity, one asks, “what if you used this trapped equity to build wealth?” And although most homeowners won’t want to sell their primary residences, refinance into higher mortgage rates, or risk taking out a high-priced HELOC, rental property owners are in the perfect position to use their massive equity positions to upgrade to bigger, better investments. We brought on Chris Lopez, Denver-based investor and agent, to explain. Chris has been able to build a sizable real estate portfolio quite quickly, but even he admits to starting a little later. After working most of his career as an internet marketer turned day trader, Chris gave it all up to go head-first into real estate as an investor-friendly agent and investor. And, as a Denver investor, he’s seen homes he bought just a few years ago EXPLODE in value, and many other investors feel the same. So, if you’re in Austin, Boise, Raleigh, Phoenix, or any other real estate boom markets, it can seem as if you’re sitting on a pile of wealth that can’t be touched. But you’d be wrong. In this episode, Chris walks through how homeowners and real estate investors can unlock the “trapped” equity in their homes. He goes through when to buy, sell, or refi and how to use the BiggerPockets Rental Property Calculatorto decide the best move. Chris knows that not every property is worth selling/upgrading, but if you trade a few lackluster properties for cash-flowing ones, you could reach your retirement goals YEARS faster, with more money coming in and less stress. So, want to unlock your home’s equity and speed up your path to early retirement? Stick around! In This Episode We Cover Home equity explained and how to use it to build wealth even faster  When to buy, sell, or refinance and how to calculate the best option for you Cap rates and using this simple metric to decide whether a rental property is worth keeping HELOCs (home equity lines of credit) and which banks will offer them on rental properties Chris’ five-step framework to reassess and upgrade your rental portfolio When to cash-out refinance and whether or not doing so makes sense with today’s high interest rates  And So Much More! Links from the Show BiggerPockets Money Facebook Group BiggerPockets Forums Finance Review Guest Onboarding Scott's Instagram Mindy's Twitter Listen to All Your Favorite BiggerPockets Podcasts in One Place Apply to Be a Guest on The Money Show Podcast Talent Search! Subscribe to The “On The Market” YouTube Channel Listen to The “On The Market” Podcast: Spotify, Apple Podcasts, BiggerPockets Check Out Mindy’s 2022 Live Spending Tracker and Budget Finance Friday: Living Paycheck-to-Paycheck with 9 Rental Properties Chris Lopez Profile Click here to check the full show notes: https://www.biggerpockets.com/blog/money-385 Interested in learning more about today's sponsors or becoming a BiggerPockets partner yourself? Check out our sponsor page! Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to the Bigger Pockets Money podcast where we interview Chris Lopez and talk about what to do with the equity that is stuck in your house. So I think it always comes down like, hey, what are your goals and be realistic about what your goals are because all real estate is is a vehicle to get you to your goal. And so I think it's very good as people reevaluate this new problem they have. And while they're revaluing the problem, the market also take stock as to what your goals are right now and how they've evolved because that gives us the North Star. where to go and helps us make the appropriate decisions. Hello, hello, hello. My name is Mindy Jensen. And with me, as always, is my mind on his money and his money on his mind.

Co-host, Scott Trench. Awesome. Always good. What a wonderful intro from my notorious co-host. That's Snoop. Scott and I are here to make financial independence less scary. Did you really think that was the notorious V-I-G? That's okay.

That was even better. Scott and I are here to make financial independence less scary, less just for some somebody else to introduce you to every money story because we truly believe financial freedom is attainable for everyone, no matter when or where you're starting. That's right. Whether you want to retire early and travel the world, going to make big time investments in assets like real estate, start your own business or reassess your already built real estate portfolio will help you reach your financial goals and get money out of the way so you can launch yourself towards your dreams. Scott, I am super excited to talk to Chris Lopez

today. He is a local Denver investor and agent. and we are going to talk to him about what to do with all of that equity that's stuck in your house. But before we do, we have a new segment on the Bigger Pockets Money Podcast called Money Moment, where we share a money hack, tip, or trick to help you on your financial journey. Today's money moment is, if you have trouble saving, use the savings ladder. This is where you pick a reward like AirPods or a spa day and multiply the cost of the item by two to three times its value. Once you hit that savings goal plus the cost of the item, reward yourself. Get that item.

After that, pick a more expensive item and start the process all over again. If you have a money tip for us, please share it by emailing Money Moment at biggerpockets.com. And as a reminder, we're always looking for guests to come on the show to share their money story or come on as a guest for our Finance Friday episodes. So if you're interested, please apply at biggerpockets.com slash guest or BiggerPockets. Before we bring in Chris, let's take a quick break. Tax season is one of the only times all year when most people actually look at their full financial picture, including income, spending, savings, investments, the whole thing. And if you're like most folks, it can be a little eye-opening.

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What I personally like is that Monarch keeps you focused on achieving, not just tracking. You can see your budgets, debt payoff, savings goals, and net worth all in one place. So every decision actually moves in Edle. Achieve your financial goals for good with Monarch, the all-in-one tool that makes money management simple. Use the code pockets at monarch.com for half off your first year. That's 50% off at monarch.com code pockets. I love Matt, said no one ever. Nobody starts a business thinking, you know what would make this more fun?

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Beyond audiobooks, you also get Audible Originals, podcasts, and a massive back catalog across business, health, parenting, and more. All accessible in one app. If you're looking to turn everyday moments into real progress, Audible has been indispensable for me over over 10 years. Kickstart your well-being journey with your first audiobook free when you sign up for a free 30-day trial at Audible. com slash BP money. And we're back. Chris Lopez is a Denver real estate agent and investor. He can be seen on the Bigger Pockets YouTube channel and he is also the founder of

Envision advisors. Chris, welcome to the Bigger Pockets Money podcast. Hey, Mindy. I'm excited to be here and ready to talk some money and some shop. Well, we are going to talk real estate today. Chris, tell us a little bit about yourself and what specifically you specialize in. So like a lot of people, realist, being a real estate. real estate agent and being a real estate investor was not my first career. I turned 40 recently,

and about eight years ago, I was ready for my second act in life, which was moving on for my first businesses, which was a lot of internet marketing and a lot of day trading on the stock market and the foreign currency market. So a short answer is I learned a lot on internet marketing and had a lot of success there, and I did horrible like most people do in day trading and foreign currency trading. And so all that made me go back to realize, you know what, real estate is where I wanted to go to when I was 20, but I didn't have the resources or money to, but now I'm in my early 30s. I got experience, got some money, got a lot more experience. I can go out there and start doing it. So at that time, I decided to pivot my career towards real estate because I needed a new

source of income for my business. And I also want to get into real estate investing. So I'm a big believer in, the more I can merge, like my interest and my career with my long-term, you know, retirement goals, investing goals, the better it is. So I did a fix and flip, made money, but hated it. Tried wholesaling. That was not for me. But it's going out there and talking to real estate agents and go out there and starting to do real estate deals. I realized, wow, there's a huge opportunity out there in the real estate agent world to go out there and be an agent to help people go out there and do what I want to do, which is not fix and flip or make a short-term money wholesaling, but how to go out there and invest so over next 20 years,

I can hit my retirement goals. So I took my internet marketing skills, leveraged that to become a real estate agent to start building my business, getting my name out there, and generating leads. And I did the niche on helping people invest in real estate here local in Denver. And so I very much have focused on the Denver locality and that longer-term real estate investing mindset and trends. So that brings us to present.

Yeah. So one of the challenges that Denver real estate investors, myself included, probably you included Chris and Mindy as well, is we've done really well over the last 10 years investing in property here. Property values have gone up a tremendous amount. You bought a property five, six, seven, eight years ago. It may have doubled in value or close to it. We may have cash out refinanced a few of properties.

I'm sitting on personally a pile of equity and I feel stuck. I'm very happy to have this problem. I'm not complaining about this problem, but I am stuck, right? Because if I sell the property, I've got to do something. I've got to pay taxes on the gain. I've got to pay off my mortgage. And then I've got to redeploy this cash into something else. That's going to make sense.

If I bought another property, for example, without a 1031 exchange, I'd be swapping my 3% mortgage. for a five or six percent mortgage. If I 1031 exchange, I'm doing the same thing. Got to exchange the mortgages. If I cash out refinance to pull cash out, same deal. I'm swapping my low interest rate. So this problem of rising interest rates, I think, has really created an interesting problem for those of us who have been investing. And I was wondering what your thoughts are in accessing that equity. And how do investors deal with this good problem? Yeah. And that's the way to start off of it is a great problem to have. Like it is the first world successful problem. And places like

Denver, Austin, Salt Lake City, a lot of the markets that have seen appreciation the last decade, they're having this problem. And essentially what it is, is, you know, someone bought a property a couple, you know, a few years ago at a seven, eight, nine percent cap rate, a very good rental. Fast forward, you know, rents have gone up 40, 50 percent. The values have doubled or tripled. So now cap rates have compressed. So now cap rates are four percent. 5%. And the lower the cap rates, usually the worst the rental is a rule of thumb. And so it brings up this interesting challenge for people to say, hey, I'm making pretty good cash flow down my property, $800 to $1,200 to $1,200 a month off a single family rental here in Denver. I've got $200,000

left with my mortgage balance at 3.5% that my property is worth $800,000. And it's all the points you laid out, Scott, as to what do you do? So I think it's really important for people to like, first take a step back and do like the the global overview of like what their goals are. Because like I'll use myself an example. I started buying real estate when I was single. Well now I'm married. I have a new business. I have two little kids.

My life has dramatically changed. So my goals have changed and also how much time I want to put into my real estate investments have changed as well. I want to spend time with my kids not going out there and painting walls. So I think it always comes down like, hey, what are your goals and have be realistic about what your goals are. because all real estate is is a vehicle to get you to your goal. And so I think it's very good as people reevaluate this new problem they have. And while they're revaluing the problem, the market also take stock as to what your goals are right now and how they've evolved. Because that gives us the north star where to go and helps us make the appropriate decisions.

And I mean, a lot of times there's no right or wrong answer for people that comes with equity. And I think it's very important to first look at, hey, if I sell this, what are you? are my tax consequences. I mean, I've House Act, Scott, you've HouseTack, a lot of the bigger pockets listeners of House Act, if you're an opportunity where you can sell a property and you're in that two out of a five year capital gains exclusion, well, then it might be a really good time to buy and just take $200,000, $300,000 of equity off the table. Take that gift from Uncle Sam and run with it. Now, the vast majority of people cannot, you know, access that capital gains exclusion. And then people get fixated on. And then people get fixated on

oh, well, I don't want to get rid of my 3% interest rate. Well, yes, but I would not just look at that one metric because there's a lot of scenarios where by holding that 3%, while you are saving money in interest, you're saving a dollar over here, but you're actually missing out on $10 in wealth creation over here by not redeploying it with leverage and a better cap rate property. So it comes down to actually running multiple scenarios a lot of times. Hey, figure out what your goals are. And then what can I do with that property? And let me actually just run scenarios. Should I pay it off?

And for a lot of people, that's not the right answer. Because you need to accumulate more properties for your retirement goals. Well, paying off for property is not going to get you there. Can I ask a quick question here? You said redeploying the equity from my property into a higher cap rate property could be a good idea. But like, I'm an investor here in Denver, and I'm arrogant as all heck. and I think that I bought some of the best rental properties, cash-flying rental properties here, and I'm not convinced that the cap rate on another property here in Denver is going to be higher

than the ones that I own. I think I constructed a reasonably good portfolio with this. So are you suggesting, in this case, that I go out of state, for example, and go into another property? or I wonder if many investors feel like their portfolio is reasonably, has reasonable cap rates there and is, you know, at least for the condition of their property among the better types of cash-willing investments in their area. What's the, what's the cap rate of one of your properties, ballpark? Sure.

I'd say, and I use rent to price ratios as more of a rule of thumb, but I'd say it's like in the 0.65 range, rents to value. So what, a five to six percent cap rate? Sure. If we're, if we're being nice. Yeah. Well, I mean, okay. So I mean, so.

And that's high for Denver. Yeah. Yeah. So a lot of times like, you know, a lot of people have bought, especially here in Denver, I'm using, I'm using an extreme scenario because it does depend on what you're the, the current valuation of the property is. A lot of people make the mistake. Oh, I bought this property seven years ago.

Great. That doesn't matter anymore. You bought a 9% cap rate property. We got to use today's numbers. So from all the analysis I've done, the rule of thumb has been if it's below a 4% cap rate property, 4% cap rate with a PM fee, it often makes sense to sell and redeploy. Or 1031. If it's above a 4% cap rate property, a lot of times that means, hey, refi and redeploy. Now, with higher interest rates, things have changed.

You know, the spreads are harder. But I found that 4% cap rate to be the threshold. And a lot of times it's like, hey, people have a three and a half percent. cap rate property because they bought a property in like, you know, Sloan's Lake, which is a area that's gone through massive appreciation in Denver, we'll sell a 3.5% cap rate property. And I'd say you need about a 1.5 to 2% cap rate increase along with increased leverage. So a higher cap rate, higher leverage is the key to making it worthwhile in that transaction. Okay. I hang out in the Bigger Pockets forums all the time. And you can find those at biggerpockets.com slash forums. And I

find that the concept of cap rate is confusing to even some very experienced investors. Can you explain what you're talking about so that people who are listening who are probably very confused can understand? Absolutely. And thanks for bringing it up. So cap rate is essentially your net operating income divide by the current value of your house. And so what that means is you take your rent, you subtract all your operating data. So basically everything other than your mortgage payment, PM, repairs of maintenance, taxes, insurance, HOA fees, landscaping, whatever it is. That gives your net operating income. And it's just another way to evaluate how that property is performing. And I personally, I do cap rates. That's worked well for me. And it's also good

because if you have debt or no debt, it's a way to understand from a high level how properties can perform. I know a lot of people use like GRM or gross rent multiplier cap rate, very similar concept, just a little bit more advanced and nuance. But I find it's a very good way to help for, like, you know, high-level talking, sniff test, hey, this looks good or hey, you got a 4% cap rate property. Here's some high-level stuff you can do. And so I was using kind of a concept of GRM, right? Rent-to-price ratio is an inversion of GRM to think about my property's cash flow. You're saying cap rates, cap rates are better. I should have been using. Should be using cap rates, but I'm really looking at it as rent-to-price ratio at the highest level, although I can easily spend

that way. Anyways, so you're saying that a low cap rate property, something in the four or lower range right now, which many investors may find they have in Denver specifically, could be retrated for a property that can earn a six or seven percent cap rate in the market. And this could multiply your returns depending on how you leverage in the assumptions you make, right? So tons of caveats in there, but you could be suboptimally deployed, is what you're saying, with one of these properties. How do I justify, how do I, like, I have to make so many assumptions and I have to believe so many things to get to where you just kind of came from, get to arrive at the destination that you're at, right? I have to believe that my

appreciation is going to be this level. I've got to understand the difference between the interest rates on the debt I have currently versus that I'm going to get on a new property. How do I wrap my head around all of those puts and takes to feel confident that if I've, at the conclusion, oh, if I'm, if I own property at a 4% cap rate, I should, it's time to sell it and redeploy it into a higher cap rate property. You turn to your calculators and spreadsheets. So, I mean, a real simple thing is, I mean, you know, hey, go use the BP calculators and go plug in the rental spread.

Go take the rental spreadsheet calculator and plug in the rental you have today. But don't use the numbers you use five years when you bought it. Use today's numbers. Hey, what is today's value? What is today's rent? What is today's operating data? And underwrite it as if you're buying the. property today because every time you sign a new tenant or sign a new lease or you refinance it,

you're essentially kind of repurchasing the property for a while. So let's, hey, go through scenario and say, hey, does this property make sense? So you can do that with, you know, the BP calculator and then figure out how it performs. So I looked at a client's property last week, and this is a very common example. They bought the property for $300,000 in Denver. Now it's worth like $6.50. They got $200,000 mortgage. a 3% interest rate loan and 400K in equity. But it's a 3.5, 3.6% cap rate property. Great.

Go plug in the calculator and see how performs. And then figure out how much equity you have. In this case, let's say, $400,000. And, you know, just round up or round down for some, you know, selling cost, fees, assume a 1031 and place some scenarios like that. And say, great, if I got $500,000 to put down, I'm going to go buy this other cap rate property. It might be in Denver,

might be in your local market, or it might be out of state. You know, just, hey, whatever properties you're looking at, go plug in. Hey, if I sold this, took the equity

and bought this higher cap rate property, how's that perform? Now, what we're often seeing, and again, take this from a Denver perspective, that person sells that property for $650,000. They pay their realtor fees

and closing fees, 1031 it. They're going to buy a place you know, like $1.1.1 million or so. But to make a cash flow, we're like a 35, 40% down payment, you know, at a 7% interest rate. And so what happens a lot of times is in that scenario, they sold it, 35% down, and they go from a 3.5 to like a 5.5 cap rate property. So pretty conservative and pretty realistic. Their cash flow will stay about the same. However, their total evaluation goes up and their net operating income oftentimes more than doubles. And so I often look at

that, hey, that is a future dollar. That is a future value. And this is for like really, I'll say more hands-off investing for that I want to go out there and, you know, find a value add property. This is more like, hey, I just want to go out there, look at some properties, redeploy my capital. I'm a busy professional. I'm a busy person. For that type of speed, you're really more just looking at the redeploying your capital. And that's where it comes down to, for a lot of the clients I talk to myself included, I'm not living off my cash with my properties today. I have other income that does that and all my rental is for, it's my retirement, it's my investing pool. So I don't need massive cash flow. Now, I want my properties to cash flow, but it kind of comes down to, hey,

do you want more cash flow today or do you want to trade up to make more cash flow in the future? And so a lot of times, even with these very extreme examples of a low cap rate, high equity property, while it's not as good as it was a year ago, it still makes sense in the 10, 20, 30, your chess game of real estate investing. I don't know if I answer your question there or muddy the water. No, I think that's, I think that's right. And I think that, you know, you, I love your answer. And not just because it was a plug for our calculators at biggerpockts.com slash calc. But because it's like, hey, that's the answer is go plug this stuff into a spreadsheet and make some decisions, right? And make some assumptions. And one of the key assumptions that's going to be

in there is, look, if you're analyzing a new property, you're going to be able to get the down payment, all of the basic numbers around rents, cash flow, and all those kinds of things. Hopefully, if you're a real estate investor, you're pretty comfortable with making those types of assumptions. But the key ones in this analysis are going to be the interest rate on your debt that you're going to get on the new property. And the appreciation rates you have on rent growth and price growth over the next 30 years, and in particular in the next couple of years with that. Well, 30 years, if you're thinking long term or, you know, a shorter term, if you're thinking shorter term. And that really matters. And I think it'll be really interesting.

I think folks will find that if they don't believe that appreciation is going to be very high, the redeploying strategy is going to be pretty, could cost them. It could be pretty consequential. But if you do believe in appreciation over the next couple of years and you can put in a three, four, five percent appreciation number, then what you're saying will work out really, really well. Is that largely accurate, Chris, in your experience? Yes, but I have to push back on the appreciation assumption. So you're right. I mean, like, you know, I don't recommend underwriting, you know, 6%, 8%, 10% appreciation.

I didn't recommend that years ago. I kind of underwrite 3% to 5% for historical means. Now the next year or two, I'm saying, hey, we'll probably be flat, at least in Denver. We might give a point, it might make a point, but just kind of assume no appreciation. I think the more important thing there is because you're right, if you do crazy assumptions, you will get out of whack. but even if you buy like another property, let's say you sell in Denver and buy in Denver from a three and a half to five and a half cap rate property.

If you're actually doing a real underwriting on there, you're still better off from a pure wealth experience or wealth building experience because that is still a higher cap rate. Now, if it appreciates or the rents grow faster, that is a big fat cherry on the top, which will increase your returns. But even if appreciation and rent growth is relatively flat, which for most of the country, I think it's how it's going to be for a year or two or, or, you know, you know, it'll be negative three to plus three for a lot of the areas. So flat, it can still make a lot of sense and still be the right move in the long-term wealth building. So appreciation is not going to make

or break it. I would just underwrite very, very conservatively at like, you know, a zero, one percent for next year or two. And then it probably goes back to three or four percent in the long run. The other thing, too, as you look at like opportunities, this has been a few things. I recommend people go out there and just, I mean, play around with a ton of calculations. Like, In this case, hey, I'm a Denver investor, sell in Denver, buying Denver, and you do that in your market. Now, you also say, hey, sell in Denver and buy out of state at a better cap rate because Denver is, what, the most expensive non-coastal city now, I believe. So, you know, cash flow is very, very tough to find. So go underwrite, hey, if I bought this. And then I went on a crazy amount of underwriting deals. Like, hey, well, I don't give it my 1031 exchange.

What if I sold it and rolled into a DST, a Delaware Statuary Trust? yeah, you save your money on the taxes, but over the next five years, since you're making a 5% in return, you actually start losing money in the long run. I ran scenarios of, hey, if I actually just paid capital gains, I should walk with $4,000, but $100,000 goes elsewhere, but I think at $300,000 and make another investment in real estate, into a syndication into another business, by I get such a higher IRA, it can still make sense to say, you know what, it's worthwhile to eat those capital gains. So I'm not giving you. I'm not giving you. recommendations on here. My point is a lot of people do a lot of what-if stuff. Well, do the what-of-stuff

and run the calculations through a spreadsheet or the bigger pockets calculator. And you can take that one calculator and do it all for your property, a property in your market, an out-of-state place, a DST, you can put in the figure out a passive investing, things like that. Hey, what are those returns like and what are those tax consequences look like? Get the big picture of things. And then the next level is actually go through and make sure you talk to your CPA. What are the tax consequences? Because a lot of times I know from my own personal use, I estimate what I would own depreciation or capturing capital gains.

And my guesstimates are not very good. So I talk to my CPA. And also look at the stuff as like, yeah, you can go out of state and cap rates are higher more attractive. But now you have to have the added expense of traveling and developing a new network in the market, which is not good or bad. those hours and expenses, usually don't show up on the property underwriting. So I'm a big believe, run a bunch of scenarios and then look at the metrics and then also look at the tax

consequences and look at, hey, how much bandwidth and money does it take for me to actually go execute this new strategy and just have fun running scenarios. I like this advice a lot because it can be really easy to get caught up in FOMO or whatever the market is doing right now. You're a real estate agent. Remember spring of last year when everybody was buying and you couldn't even get a showing at sometimes on some of these hotter houses, or you would go in and it's just this revolving door of people, and you would lose your one of 37 offers. And so I can see people getting really, really excited about that. This spring is starting, from what I've seen so far, it's starting to look like that again,

not to the extent because we don't have the great interest rates, but it's still in the Denver area getting really, really hot. so it could be tempting to sell. Oh, I'm listening to Chris on the Bigger Pockets Money podcast, and he said that my cap rate isn't great so I should sell. No, he's not saying that. He's saying run scenarios. Run a lot of scenarios. Talk to your agent and see what they think you could get for your property. Run the numbers based on that amount, maybe a little bit less, maybe a little bit more, but see what all of these options are going to get you before you just. jump in with both feet, you sell it.

Then you're like, oh, I can't do a 1031 because my timeline run out. Like, I know enough about 1031's to be dangerous. There is a very specific set of time that you have to buy a new property, to identify three properties. And if you don't, your 1031 is out the door. If you don't get somebody in advance to take possession of the money for you and hold it, your 1031 is out the door. Like if you take possession of the money, then you now owe all those tax.

taxes. So there's a lot of planning involved, but if you're thinking about selling, run the numbers, make sure it makes sense, run all the numbers, talk to people. I love this so much. Tax season is one of the only times all year when most people actually look at their full financial picture, including income, spending, savings, investments, the whole thing. And if you're like most folks, it can be a little eye-opening. That's why I like Monarch. It helps you see exactly where your money is going, and more importantly, where your tax refund can make the biggest impact. Because the goal isn't just to look backward. It's to actually make progress. Simplify, your finances with Monarch. Monarch is the all-in-one personal finance tool designed to make your life

easier. It brings your entire financial life, including budgeting, accounts and investments, net worth, and future planning together in one dashboard on your phone or your laptop. Feel aware and in control of your finances this tax season and get 50% off your Monarch's subscription with the code pockets. What I personally like is that Monarch keeps you focused on achieving, not just tracking. You can see your budgets, debt payoff, savings goals, and net worth all in one place. So every decision actually moves the needle. Achieve your financial goals for good with Monarch, the all-in-one tool that makes money management simple. Use the code pockets at Monarch.com for half off your first year.

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customers. Visit northwest registered agent.com slash money-free and start building something amazing. Get more with Northwest Registered Agent at Northwest Registeredagent.com slash money-free. At MedCan, we know that life's greatest moments are built on a foundation of good health, from the big milestones to the quiet winds. That's why our annual health assessment offers a physician-led, full-body checkup that provides a clear picture of your health today and may uncover early signs of conditions like heart disease and cancer. The healthier you means more moments to cherish. Take control of your well-being and book an assessment today. Medcan, live well for life. Visit medcan.com slash moments to get started. Yeah, Chris, it sounds like there are a couple of

options here. I can sell the property, I can refinance the property, or I can do nothing and let my low-interest debt amortize. I have chosen let my low interest rate debt amortize, right? That's been my approach currently. I'm not sure if that's the right approach, and I need to question it. And in the case of selling the property, I have two options there, 1031 exchange or just harvesting. I have option A, you know, sell part A is 1031 and sell part B is harvest the gain. do you have any case studies or maybe scenarios you could walk us through of folks who have chosen each of those options and why they've done it or maybe examples from your personal portfolio? Yeah, absolutely.

And one thing I want to jump back around what many was saying, my favorite thing about what I would recommend I have to do all the scenarios and talk to people, and I do this all the time. My favorite feature of bigger pockets is the forum. I like reading other people's posts, but I also post my own. And don't post, hey guys, I think about selling the property, what should I do? Don't do like a lame post like that. Do a post like, hey, I ran a scenario.

Here are the numbers. And I ran three upsides for this, this and this. Here are my numbers. Here's my thoughts. BP community, give me your feedback. And you'll get a lot of great feedback. You also get people reaching out to bring other opportunities. So always do due diligence.

But like the community on there, I think that is the absolute best part of bigger pockets or my favorite part. So do all that and then share it with the forum and get the, get the, get the group think going on. Love it. Bigger Pockets calculators and bigger pockets forums. That's right. And post a smart question and you'll get smart answers. A smart response. And you'll get a lot of different responses. Hey, I like what this person's saying, but I don't think they took this factor into account. You'll get people who are very experienced telling you what they would do in that situation. And most likely they will expound on why. People in the forums love talking about real estate. And, you know, it's a little bit different for us, but because we're in real estate,

but when you love talking about real estate and you're a real estate investor, nobody else in your life cares. They don't want to hear it. They only want to tell you about the bad experience they had. But in the Bigger Pockets forums, you've got people who are doing it, people who've been doing it longer than you, who have scenarios that you may not have been through yet, where they can give you experienced advice. Yes. And I didn't mean that to sound like a, commercial, but no, but I mean, is a asset out there, guys, use it. I mean, that's been one of the best assets I've used in my real estate career as an agent, as an investor. All right, so going back to some examples here. So to take one step back, like my degrees in financial planning,

and I've always had that longer term planning desire, I don't like doing in stocks and bonds. I'm like, hey, put an index fund, and that's boring and set and forget it. Real estate's a lot more complex. So what I do for myself and when I do for my clients, I've kind of put together a five-step framework and I'll frame it with this and this will walk through a couple common scenarios we see out there in the marketplace. So step one is what is your goals. Like I talk about revisit what your goals are, real estate's a vehicle to go there. Step two, look at your total portfolio. Like a lot of people look at their rentals, you know, isolated, but hey, across your five or seven or ten rentals, how does it perform as a whole? Just like you would.

look at your IRA, your 401k, this, hey, how is you all performing as a whole? The third step is to go out there and start looking at your individual properties, your individual assets. Hey, what are the opportunities? What are the numbers? Do a SWAT analysis on there. Step four, run those snores like we talked about. And then step five is write your action plan. And so this is very good for investors. And also, if you're an agent out there, I have found this to be a very good, an amazing client value-ad tool to my clients. So me and my team do about 30 to 40 these portfolio sessions a year, or I'm sorry, a month. And these are kind of like your annual financial planning sessions with our clients and for our selfless investors. So we get to a lot of good data and see some

trends on there. And to kind of bucket some common examples out there is it comes down to a lot of people are like nearing retirement. Well, for them, they usually have like they're less growth focused and they're more income focused. So it might be in their 50s or 60s starting to retire or want to take a step back. Kids are going to college or out of the house. You know, they don't need a ton of future income or a ton of future growth. They need more income next couple years. So that's a very different case than someone that's, you know, like, you know, me where I still need to accumulate more real estate to retire at the level I want to over next 10 or 20 years. I'm still in my accumulation phase. So for people that are often in their, you know, near retirement

phase, it can make sense to pay off the properties and say, hey, if you have these properties paid off, what's the cash flow? But at the same time, you run scenario, hey, at that same time, if you pay off these properties, hey, look at a triple net. Hey, look at a debt fund that might pay at 8 or 10 percent in yield. You know, you can do different things like that, but you have to make sure that aligns with that goal. And so for a lot of the people that are in that retirement phase, a lot opt to go out there and just continue to pay off their properties. You're like, hey, if you just pay off your properties, you're at your income goals. And so then a lot of times they'll take like the debt snowball approach and like start, you know, paying off one property or,

you know, the lowest balance or the highest interest rate. So, hey, start paying that off. And then pay off next one, pay off the next one. And a lot of times they'll sell like one property. That's their dog property or, you know, call to her like, hey, this property, it's the pain in the butt. I hate it. It doesn't perform well. Great. Well, get rid of that. You know, appreciation party, we move on. So for a lot of people, paying off the property can be a really good move. Now, however, if you say, hey, if I pay off the property and I don't have the income I want, we have a problem there. So, you know, we had a great discussion about a topic like this on Bigger Pockets Money, a show 3-2-2, why your rental property cash flow isn't what you think it is.

And we had a guest there who had nine rental properties and was living paycheck to paycheck because the cash flow was not there. So if you're wondering about this, if you're not sure, you could be in that situation if you have a couple of rentals where at least a few of them are break even at best and maybe negative cash flow. And I think in that situation, you've got a clear, like you will discover that by following the five steps that Chris outlined. And in that specific property by property analysis, you'll determine which ones probably

should consider sawing or exiting. So Chris, have you done this with your own portfolio in the last year or two? I have. So I did my own portfolio review. I did not make any moves this year. And now it was more because my portfolio is actually, it's pretty well optimized with the cap rates, the loan to value. But also going into the outside factors is my career, my business is a real estate agent all real estate related. Well, I'm very conservative. And since, you know, We're going through choppy times and most people's income in real estate has dropped this year. Right. And for 2022, 23, it's a lower for a lot of people. So I'm like, hey, I need to, I'm going to be very conservative of my investing because I got to make sure my day-to-day income is fine.

And so I don't want to go out there and start trading up or tightening on cash flow. While it makes some, it makes sense from the investing standpoint. It doesn't make sense from like the global standpoint of what I need to do as investor right now. So what I'm doing is I've got two properties here in Denver Metro that, I mean, they're good rentals. Like I said, they're not my favorite. Not my favorite ones. I would not be unhappy to move them. So I'm planning on, I've talked to my property manager.

Leases will come up to around December time, but we're shooting for because the best time to sell properties here in Denver or springtime, like right around like mid-February to like end to May sweet spot for a listing of property. So I'm going to make sure those leases are up and then I have time to get the tenants out so then go find a new place to live. And hopefully I have, you know, three to six weeks to go on there and do any type of updates I need to do. Because most rentals, you know, they need some love. They need some TLC. And a lot of times you're better off putting in, you know, five to $15,000 in some work and then sell it to an owner occupant. And you'll, if I spend three, you know, for every dollar I spend in making it prettier, I should get three to

four more dollars in return on that. So, hey, where's that sweet spot for me to make it very owner-occupant friendly to maximize my dollar? So I'm starting to plan on that. A lot of clients are doing that. One really interesting thing, this has been so fascinating. So going back to this high equity, low interest rate scenario, a lot of people like, hey, my rental is good. They're a four or five percent cap rate. They like the rental, good part of town. They don't want to touch it, but they want to redeploy the equity. We, We've been doing a lot of helix. Like there's one bank that I know in Colorado, they're usually very tough to find, like,

banks that will do investment helox on investment properties. So a helic is a home equity line of credit. And they typically don't, they're not like a 30-year mortgage, but it's more like that, you know, the check credit card on your property. We have a lot of people who are doing an investment helock on their investment property. And then they're drunk going like, you know, they have a 30% LTV. they're taking out 20 or 30% of their equity and then redeploying it, either into a rental or some type of like syndication strategy. And they're able to kind of like have their kicking it too because they have

that low 30 year fixed interest rate and they're able to handle some variable interest rate, but borrow at 6, 7%, but go get a 15% and 20% return. Who is doing this HELOC for investment properties? Because I have not been able to find anybody that does investment hellocks. Well, DM me on bigger pockets, and I'll tell you, maybe. No, so a lot of this comes from, and so, you know, with this, so these are, I'll happy to share that name with you and give my contact over them in the awesome guy, but you want to look for local banks. The big banks and national lenders and probably the person that gave you your 30-year fixed conventional loan, they're not going to be the right guy or girl to give you that loan. They're, they're fanny and friendly conventional lenders.

And so the big banks will not give this, but find a local. bank, like a state chartered bank or credit union a lot of times. And they're the ones that do helox. And that just comes down to like, I talk to 30 banks. Plus, I got my network out here. And I know one bank that will, I know a couple things that will do it, but very few will do it if they don't own the first position. And a lot of times they don't own the first position. So it gets very, very nuanced. But that is where like a lot of people get frustrated at real estate, especially like tech guys and stock guys. I'm like, well, real estate's not efficient. Yeah, call 30 lenders. It's not fun, but that's how you find the gold. So I love this as an approach

and as a tool. I do want to caution that I am not a fan of using an investment helok at 6, 7% interest to then redeploy into syndication type investments. I think that's really tough arbitrage. and the cash flows and timings from those syndications cannot be quite as good in some of those cases. It's a very aggressive play. So just remember that if you're going to do that kind of strategy. It's much more aggressive than redeploying the equity from a rental property into another property, in my opinion, using 30-year fixed rate debt. Yeah. And this is where, like I, you know, for a lot of people doing it, they own eight rentals and they're doing it on like one or two.

So they're still staying very balanced in overall equity position, and their blended fixed interest rate is three and a half. And now they're adding on a very small amount of variables. So I totally agree with you, Scott, like it is more advanced. It is higher risk. And we have people doing that to rental, doing that to funds or syndications. But it's definitely a much more advanced technique and make sure you have the cash to ride any waves from there, right any punches from there. And I do think, I do want to say, I think it is. wise to go out and see what you can get for an investor helock. If that's available to you,

it's always good to have access to the credit, even if you aren't going to use it. Yes, that definitely saved my skin on our property. It wasn't an investor helock. It was a helock on my own house, but I did some financial monkey business and I needed access to quit cash. And I thought I might need access to quit cash. So I opened it up, but I didn't take anything out. It was just sitting there. but then when I needed it, it was there to pull. Is an investment helock at the same or similar rate to a personal property heluck? No. A lot of times, you know, it's more like prime plus like, you know, one to three percent,

where a lot of times owner rock can be like prime plus zero or prime plus like zero to one. So you see the spread there. The other thing is for a lot of primaries, like, I mean, there's a lot of credit unions and banks around town that'll go up to like a 95% or 100% combined LTE. They'll do very high LTVs. Again, go in there with caution. You know, you have to be smart with the big credit card. But investor helox kind of where they tap out a lot of times is like a total combined LTV of 70 to 80 percent.

And combined LTV means, hey, what's the percent of that, you know, 30 year fixed first position payment? We had the helock on top of there. What's those two combined? And so investment helix is the best I've seen. I say best the highest LTV is 80% combined LTV, which is still incredibly high for an investment HELOC. Can we go through a couple of examples from perhaps clients that you've worked with of folks maybe going through various of these options? Have you talked with somebody and they're like,

you know what, I'm just going to pay the thing off and say, forget it. Or I'm just going to let it, I'm just going to let it sit and do nothing. I'm not going to pay off the debt early. I'm just going let it amortize. And then if you had some folks that have gone through this, and what was their rationale in the recent past? Yeah, I mean, it's all the above. And a lot of it kind comes down to what their goals are and what their overall risk tolerances. I mean, I've got clients right now that are selling a property and they're going to do a 1031. Some are staying local, some are going out of state. Great. You know, various options on there. And, you know, their rationale in that case is, hey, the appreciation party is over.

You know, for Denver, like, you know, the crazy appreciation that's over. Now, you sell, now you might give a couple points back, but who cares? You made 40% give two points back the last two years. And they're still saying in the long run, I want to go out there. A lot of people are saying, hey, this property is a Class C property, headache property. I've, you know, it's no longer great rental. I want to move it into a better location or Class A property, lower headache.

So it should be lower maintenance, a similar, higher cap rate, but more hands off. And that's partly like investment. Also partly just makes their life easier as a as an investor. I got a lot of people as well, actually majority of people saying, you know what, I'm hanging tight for the year, which hanging tight for the year and just kind of letting cash stay in the bank bill and continue pay off of debt is never a bad move. You know, if you're not sure, pumping the brakes, it's not going to hurt you. Like, you know, there's no one deal that you'll miss out on that's going to make or break your career. But if you do a transaction, there is a deal that could break your career.

So don't worry about the big one that's going to make you rich. Worry about the one that's going to blow you up and set you back 10 years. And that's what can happen. So it's always being mindful of that. So a lot of people are sitting tight. Like I said, they're doing what I am. Hey, I'm in a good position. My prop is performed well.

I'm a good LTV. I'm sitting tight for a year. And then the people that are doing more the advanced strategies of putting a second on there, like a second fixed or second helock. These are not people with, like, one property they're doing it. These are people with like five to ten properties. And they have good cash flow and they're doing it on like one or two properties to like, you know, increase their global LTV from like 30% to 40%. So they're still a very low LTV. And their blood and interest rate goes up by a little bit. And they also have the cash in the bank and the rental income coming in to like be able to fund all the payments.

and also with standing, oh, I made that move, and I thought I was going to make 20% IRR, and I'm making the 7% IR on this property. They can handle that black eye. But, you know, the risk-reward ratio is correct for them, but they are properly capitalized, and they have good income coming in. Chris, in this market, is there ever a good case for a cash-out refi? We've had, I mean, I am old enough to remember 7%. My first mortgage was a 7% loan, and I thought I would.

was hot snot for getting that 8, 7% loan, and now we've had 2, 3, 4% loans for 20 years. People are freaking out about these current interest rates. And I can understand why a cash out refi seems like a bad idea on paper, but it can't be all bad. As with most things, it depends. But some high-level stuff. So going back to the example where I said if a property is at a 4% cap rate, that's often kind of like, that's my rule of thumb. That works well in Denver. I don't know how that translates to other markets.

I assume similarities, but again, that's my disclaimer. High level, if the property is above a 4% cap rate property, a cash out refinance can make sense. If it's below 4% cap rate property, it usually doesn't make sense. But now I say it's a probably a bit higher. I probably need to up my rules of thumb for cap, you know, cap rates in the new market. Because if you do a cash out refi, you are repurchasing the property. And I seriously doubt if you did the full cash out refi, the product would still cash flow. Most of the times it's not a negative cash flow.

So have all the reviews I've done, have all the clients I've worked with. I can't think of anyone that's done a cash out refi right now in the current market. There might be one or two, but I'd say it's as close to zero as I feel comfortable publicly saying it's zero. Most people are opting to like sit tight and do nothing, sell and move the money, or put a he lock on there. to access the equity. But if you already have a poor rental property, doing a cash rate refight 7% is usually not a good thing because now you have a negative cash flowing asset that's at a poor cap rate that you're now reinvesting. So like for the vast majority of people, I don't think it really makes sense to have negative cash flowing properties. Once in a while,

for the very small part of a small part of portfolio, yes, I can make the exception to that rule. but for most people, why do you want to have a asset that will not pay for itself? And so if you do a cash out refile a lot of times, that becomes negative. And that's where it becomes a liability for most people. So I haven't seen any cash out refis. I don't see my investors or clients doing it either. I get that question a lot. And I haven't seen any reason to do a cash out refi either.

If you have a property that you bought before the interest rate started going up last June, then you should, if you want to keep it, keep it. And Helock to access the equity short term. I do agree with Scott that Helock money should be short term money. But then, yeah, you either keep it or sell it. And if you're going to keep it, then keep the low interest rate. It just doesn't make sense. I don't know what you would do with that. But again, it depends.

Most likely it's not going to work out. Run your scenarios, just like you said before. If you can access that cash in such a way that it will, like you found a killer deal and this is the only cash you have, that could be a very, very specific way to use the cash out refy. But yeah, I agree with you. Yeah. Except for in the cases of those who are extreme bulls about the real estate market, and want to just buy a lot more and pull out their cash, refinancing from a low interest rate

mortgage to a much higher one does not make much sense. So I see the use case for this slowly coming back over the next couple of years as people buy with interest rates at current rates. So if you're buying a new property, it's 6, 7.5% with an investor loan. And then you burr it next year, if you want to refinance at a 7% rate and pull some cash out, that would make sense to me. And I think, so I think you're going to see a temporary lull in most refinancing activity. That's obviously already here. I think that's going to continue and come back slowly over the next couple of years. Yeah, and I haven't talked to, I mean, I talked to a lot of lenders.

And, I mean, the refy party ended about a year ago. And that's why we saw a lot of layoffs in the lending world as well, because the refy party ended. I agree. Like, it's just not big play right now. So it's a very small use of cases right now. But there's usually makes sense for someone, but that's 0.1%. out there. Chris, this has been fantastic. Thank you for coming on and showing and and talking about this, this good problem, how to how to deal with the equity that you've got, perhaps trapped in your

rental portfolio if you've been a long-term investor. Where can people find out more about you? Well, you can always Google me. I'm a marketer here in Denver. So if you Google Chris Lopez, Denver, you'll find me. But the absolute best place to do it is bigger pockets. I'm on the forms there and shoot me a DM. That's really the only social platform I actually use myself and respond to because it's actually useful information. So I would love to connect to people, people on Bigger Pockets because I truly love, like, jamming and talking about real estate and also like learning what other people are doing. So Bigger Pockets is the best place to go. Awesome. Yeah. If you're in Denver, Chris is always willing to meet up. I've met with you a couple

times recently. And yeah, feel free to also, if you go into Bigger Pockets forums, reach out to me as well, and I'll be happy to meet with you. So Denver's a fun place for investors. We love, we love to grow the network. Awesome. Well, thank you guys. This is a blast to come on here and get I love like talking more technical stuff like this. So this is my absolute cup of tea. So thank you guys. Thank you, Chris. This was super fun. And we'll talk to you soon. Bye, guys. All right, that was Chris Lopez. That was a lot of fun. Scott, we brought up a lot of things that I hadn't really considered before, but also the advice that sticks out over again, just with every show we do, is run your numbers, do your homework, run the different scenarios, don't just fly by the seat of your pants,

see what is the most financially advantageous path for you to take. Don't just, everybody else is selling so I should sell too. That might not be the best option. That might be the best option, but make a solid decision based on math, not emotion. Yep, love it. You know, Chris says start with your portfolio. Ask yourself the question, is that going to achieve what I want it to achieve? Right. Then boil that down inside of the real estate component of your portfolio on a deal-by-deal basis.

Are each one of these deals contributing to that larger goal? And if not, am I going to pay it off? Am I going to do nothing? and let my current note amortize, or am I going to sell an exchange or sell and capture the gains? Complex set of decisions that you have to make here. A lot of thought, energy, and a lot of know-how needs to go into that. Luckily, we've got a platform called Bigger Pockets to help you discover all the ins and outside of those types of things and make those kinds of analyses on the properties component of that. But I do want to also give one other kind of question. I want to pose one other question to this issue,

is what would you do with if you converted your entire portfolio to cash? If I just handed you that in cash, how would you deploy it? Would it be the same way that you've got to deploy today or would it be something different? And if it's something different, why don't you back into that and say, how do I begin making moves today with all the additional cash I accumulate or maybe even redeploying some of the assets in my current portfolio to get to that state that is my desired portfolio? I like that question a lot, Scott. How would you deploy the cash? Would you deploy it the exact same way or would you make changes? That's interesting. I think honestly, I would be pretty much the same way that I am right now. I like my portfolio. Yeah, I'm pretty happy with my portfolio, but I do think that a big one for folks to ponder is debt. I've been talking about this a lot lately, but I got a question the other day from a BP money listener and they're like, hey, I've got this big portfolio, but I don't generate any cash flow. Portfolio is like, two. and a half, $3 million. How are you not generating cash flow? Oh, it's because we're deployed like this. Well, if you just, if you bought a mortgage, if you literally, like, investment mortgages

are nine, seven, seven and a half percent right now for 30 year investor and mortgages on investment properties, you just put a couple hundred grand into one of those mortgages by a single mortgage and you've got just from the interest your $30,000, $40,000 a year in passive cash flow. So something to noodle on for folks out there that are wondering what to do with their portfolio, consider debt as one of those places where you might redeploy to a larger degree, especially if you want that passive income. That's an interesting scenario, Scott. I like it.

All right, should we get out of here? Let's do it. Okay, that wraps up this episode of the Bigger Pockets Money podcast. He is Scott Trench, and I am Mindy Jensen saying, talk to you soon, Baboon. If you enjoyed today's episode, please give us a five-star review on Spotify or Apple. And if you're looking for even more money content, feel free to visit. our YouTube channel at YouTube.com

slash BiggerPockets Money. Bigger Pockets Money was created by Mindy Jensen and Scott Trench. Produced by Kaelin Bennett. Editing by Exodus Media. Copywriting by Nate Weintraub. Lastly, a big thank you

to the Bigger Pockets team for making this show possible.