Ask Paula - Should I Sell My House and Invest the Equity?

#148: Welcome to a special episode of Ask Paula!

Today I’m answering questions about real estate investing, and I’ve brought a special guest on the show to join me.

His name is Lucas Hall, and he’s a landlord with 5 properties in three locations (D.C., Virginia and Colorado). He’s also the founder of Landlordology and head of investor relations with Cozy. We met about five or six years ago through blogging about rental properties, and I invited him on the show today to answer questions alongside me.

Anonymous asks:

If you have significant equity in a home due to market appreciation, what’s the best way to leverage the value of this equity? Should you sell? Refinance? Something else?

Here’s a quick snapshot of the answer:

You have three options: sell, cash-out refinance, or take out a HELOC.

If you’re unhappy with the property, sell it. There’s no reason to hang onto an undesirable or underperforming property. If you choose to sell, use a 1031 exchange to defer taxes on the capital gains and use the proceeds to purchase another property. Be aware, however, that the rules regarding a 1031 exchange are onerous, and there’s a chance that you might either miss the cutoff or you may be forced into trading one mediocre property for another.

That said, wanting to tap equity is not a sufficient reason to sell.

If you’re happy with the property, keep it and either use a cash-out refi or HELOC to tap the equity. On today’s episode, Lucas and I discuss the pro’s and con’s of both of these strategies, and explain which one is our favorite. (Lucas prefers the HELOC and I prefer the cash-out refi; on the episode you’ll hear each of us explain why.)

Richard from Massachusetts asks:

I’ve been listening to this podcast regularly, and thanks to this podcast I’ve opened a Roth IRA. I’ve saved $54,000 and I’m interested in investing in a Class B or Class C neighborhood in an out-of-state location. How can I find out if a neighborhood is Class B/C without visiting it?

Catherine asks:

I’m 27 and need investing advice. I make $75,000 per year and I have $60,000 in retirement savings. I max out an HSA. I have $12,000 in an emergency fund. I live in Los Angeles and I’d like to invest in real estate, but I don’t want to travel to another state. I’ve been thinking about Roofstock; what are your thoughts?

Anonymous in Atlanta asks:

My wife and I have $500,000 in savings, in addition to our 401k. We keep $130,000 of this in the market. We had an advisor that was charging a 1.6% fee, and we recently fired him. What should we do with the remainder of the cash in our savings accounts? Should we put this in Vanguard funds? I’d also like to get into real estate, but many homes in Atlanta don’t meet the one percent rule. Should we look at foreclosure auctions? Should we look further outside the city? We’re in our early 30’s and would like to retire in around 15 years.

We answer these questions in today’s episode. Enjoy!