Rehabbing Houses: 5 Ways To Leverage Pent Up Equity

How can real estate investors leverage pent up equity while rehabbing houses?

Whether enduring longer turn times when flipping houses or rehabbing homes and building a rental property portfolio, many investors can find themselves held back by lack of liquidity. How can you avoid this, and maximize growth and returns by leveraging the equity they have?

Cash Purchases, Real Returns & Home Equity

The American housing market has been fueled by mountains of cash over the last few years. According to NAR the percentage of cash purchases of residential homes was just over 10% in 2009. That rose to highs of 35% in 2011 and 2014. In some markets cash buyers have accounted for as many as 60% or more of sales. As of January 2017, that number was down to just 23%. Investors account for most of those acquisitions.

While this has certainly strengthened the market, it also holds two issues for investors. One; many fail to regularly recalculate their current investment property returns. When equity rises, either through market increases or value add improvements, it actually drives down the true return investors are getting on their money. To constantly optimize this investors should be sensibly leveraging their equity. Secondly, in order to maximize growth and minimize risk investors should be utilizing equity to expand and accelerate. The question is; how do you tap into existing equity to accomplish this?

1. Refinance

The most obvious solution for recapitalizing is to refinance. Interest rates are still low, enabling investors to lock in attractive and sustainable cash flow levels, while maximizing their potential. Of course, this still demands finding the right lender and loan programs. Some purchases may need to be seasoned, or detailed proof of repairs must be provided. Be sure to shop around for the best loan deals that fit your strategy and holding timeline.

2. Lines of Credit

Those who are adverse to long term debt, or who don’t want to incur the high costs of taking out a fixed mortgage loan, or who may plan to sell, could find a flexible line of credit a more attractive option. The borrowing costs are typically far lower, you don’t pay anything if you don’t have a balance, and the cash can be used as desired for new acquisitions, repairs, and working capital. Just watch out for adjustable rates.

3. Bridge & Blanket Loans

These types of loans have made a big comeback as big funds have pledged millions in capital through commercial lending conduits. These loans allow investors to pledge equity in current properties to obtain the cash to expand and buy more. This is especially beneficial for those will multiple properties, who may have lower priced properties they cannot get loans on individually, and who have free and clear properties. This equips investors with substantial capital to make new acquisitions and to improve properties with cash. The efficiency that can come with having a single loan, versus many can make daily bookkeeping far easier, lower risk, frees up time, and may offer lower borrowing costs. Just be clear about individual releases for properties you may want to sell off in the future.

4. Partner Up

In some cases a loan may just be unappealing or impossible to get on good terms. In these cases those rehabbing houses can bring in partners for an equity position. That adds fresh capital, without debt. Depending on who you partner with this can come with many extra advantages. Perhaps your partner has great contacts, experience managing properties, or will be willing to joint venture on future acquisitions as well.

5. Private Money Lenders

Private lenders may come in either to finance new acquisitions to avoid the need for tying up to much capital in the first place, or can provide repair funds, and partnership opportunities. Some will balance aggressive lending terms, such as second mortgages and low rates, in return for a piece of the equity on resale.

Whichever strategies you decide to use for optimally leveraging your investments, just remember to keep an eye on your real returns, and retain as much flexibility as possible.