Hello and welcome to another episode of Ask Marco on the Passive Real Estate Investing Show. I’m your host, Marco Santarelli. Thank you for joining me here today. Another great question, someone wrote in and asked me about investing using cash versus using a HELOC, which is a home equity line of credit or just simply a line of credit against your home or property. And the question came in from, well, it’s actually two people by the looks of it, Jay and Julie working together here. I’ll just read their email real quick and then address it.
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So, they write and say, hi Marco, I love your podcast. And actually bought my first property with Norada. Well thank you. Thank you for all of your information. Informative episodes. I can’t get enough. I recently lost my dear mom who was a very smart and savvy investor, and my condolences go out to you.
I will soon be receiving a large inheritance of $650,000. Additionally, my two siblings and I will be inheriting a Bay Area home that is fully paid for worth at least a million dollars million. I’ve considered buying out my siblings for the home with the inheritance money, which would leave me with a debt-free home to live in and at least $1 million in equity. If so, I would plan to take the heloc, the home and equity line of credit and invest that equity into rental properties in better markets. Alternatively, we could sell the house, which would leave me with at least $1 million cash between the inheritance and home sale. I could then rent or buy elsewhere and use that $1 million to invest in rental property and better markets. I am tempted to buy my siblings out so I can have a Bay Area home to live in or rent out.
Since acquiring a home in the Bay Area is so expensive and competitive, would you suggest this, is it feasible to take a HELOC and invest that 1 million of equity or is it wiser to sell the house and invest the cash? I also have to consider where I would live if I did sell the house, whether to rent, buy, or house hack. Ideally, I would stay near the Bay Area since my work is here. I know this is a long question and I thank you in advance for your time and expertise. Well, thank you for the question and it’s a great problem to have, if you will. Anything I say here, of course is not financial advice. I did respond to you as you know, with some clarifying questions. Basically, I wanted to know if you were living in that same house or living elsewhere and you know, I assume that you had a place in the area, so turns out that you just moved into that home from elsewhere, probably renting elsewhere, but now you’re living there.
But of course you could move back out and rent someplace. The idea I had for you originally, and I still think is probably the, the best option is, you know, my comment to you is, you know, is if you’re living elsewhere or can live elsewhere and you’re happy where you live now you may want to consider buying out your two siblings with your cash, the cash inheritance, and then selling the property after you’ve completed the transaction. You have full ownership and you’re entitled to the property complete sale using a 1031 exchange, which is a tax deferred exchange. It’s essentially selling the property, taking all your equity, you don’t touch it, but you don’t get taxed on it. And then rolling that equity into multiple properties in other markets basically a portfolio of properties elsewhere. And this will allow you to invest 100% of the net equity from that property tax free to maximize your investment dollars and then help you build the largest portfolio you can without having to pay taxes as part of that original sale.
o this is one option. You have multiple options available to you, but from what I know and what I think I know based on your situation, this is probably the best scenario. Now we’re making some assumptions here of course, that you know, more expensive markets like San Francisco, LA, New York are gonna flatten out there. There may be some pullback. We’ve already seen this happening in different areas around these larger metropolitan areas, these more expensive markets. So you can’t always count on or bank on appreciation each and every year, especially like we’ve seen in the last four years or so or or more where you’ve seen very strong in many cases, double digit appreciation rates. That’s not sustainable long term.
We are due for a breather and we are due for a pullback in some or many markets. So a lot of the markets used to be strong and very strong in terms of growth and price growth. Now we’re seeing a lot of more normal market conditions in a normalized market in probably close to 70% of the markets that we track. They’ve, they’ve normalized and now they’re somewhat neutral. They’re not strong, they’re not weak, they’re just kind of coasting along and that was expected. Just call it a market breather after a strong runup in terms of price appreciation. So that is what I see, you know, in your response, you had emailed me back, you had said thank you so much for your email. I know you’re really busy and truly appreciate your time in responding and in making your podcast. So you answered my question that you are currently living in your mom’s home rent free.
You move out of your apartment and into this home a few weeks ago. That’s great. It just means that you can move anywhere you want. Find the place that makes sense at the price that you want. You had made a comment, I’ll just read your email here. Doing a 10 31 exchange into a portfolio of other properties is very interesting and I hadn’t thought of that. I didn’t realize I could do a 10 31 exchange into multiple properties. I thought it was a one for one exchange. Thank you for that. So yes, you can do a 10 31 into multiple properties. You just have to work with someone who can hold your hand in coordinating that with you because when you get into a 10 31, there are time limits that you have to stick to. You’ve got certain milestones you have to meet and the IRS is not forgiving with that.
So for example, you have to close within 180 days, but you have to identify your properties within a relatively short period of time. So you’ve got three milestones, a 45 day and 90 day and 180 day hurdle to get through. So once you start the sale, you’ll want to be working with a 10 31 accommodator or maybe even just do that first. That way you are ready with the team around you. And that may be one of our investment counselors here that are lining up properties ready for you to put under contract once your property is sold, whether you sell it yourself or whether you have it listed. So you have to be very conscious of the time and the timing of the sale. ’cause Once that property is, is under contract, you gotta be mindful and ready to put some properties under contract once the sale happens.
The clock has really started going back to your email here after re-listening to some of your episodes. I think it’s probably best that I rent instead of purchase in the Bay Area if we sell the home. Then you said, my last question is, if I decide to keep the home, which is already paid off, is it possible and why to do a HELOC and invest the equity elsewhere? And you conclude that email by saying Thank you so much, Marco. You’re really changing people’s lives with the information you are putting out there. I really feel that I can build wealth and be financially free with this inheritance as long as I invest it wisely. That is very true, and that is because I feel empowered with everything I’ve learned from your podcast and some great investing books. Regards Jay and Julie. Well, you’re very, very welcome.
So yes to your last question, you know, HELOC versus, you know, investing the equity elsewhere. Well, if you’re using a heloc, you know, the rates today on a home equity line of credit are gonna be pretty expensive. You know, they’re eight and a half to about 10 point half percent depending on, you know, where you go, what lending institution you go with. So it’s not cheap money. And often those HELOCs are available to you for a 10 year term. So at that point you need to repay it in full or redo your HELOC or find a HELOC elsewhere or whatever the case may be. So keep in mind that it is a fixed term, but of course you can always work something out with bank or lender or convert it into a loan, whatever the case is. But with a heloc, you have a monthly debt service payment that will have to be paid for, ideally from the properties that you buy using that HELOC as the down payment or towards the purchase.
Generally speaking, it makes far more sense to just take the cash, if you will, from the sale of the property, the heloc, ideally doing it through a 10 31 exchange so you’re not taxed on it and using that as your down payment capital or purchase capital towards one or more properties, multiple properties in other markets, markets that will provide better rates of return, better cash flow, and probably I’ll say maybe, but probably better upside potential or appreciation potential because of the growth going on in other markets. While some markets like San Francisco and maybe LA and New York and other major metro areas that had strong price run-ups, while they may be flattening or maybe pulling back a little bit, there are other markets that are still experiencing very strong growth. And even if that appreciation is single digit like nominal or more like the historic norms of let’s say six or 7%, four to 7% price appreciation per year over a long-term average, you’ll do better in those markets short and probably medium term than you will in a market that is gonna sit flat for a few years or even pull back where you’re losing equity.
So there might be, you know, a decision point here of to sell sooner than later if your decision is to sell the property. But again, you know, going back to what I was saying before, not necessarily financial advice, of course, you may be wise to take full ownership of the property, use your inheritance to pay off your two siblings so you have full ownership and all the equity in the property, and then do the 10 31 exchange with all the equity you have in that property and use that as your investment capital to build a portfolio of multiple properties in one or two markets, maybe even three markets, depending on what you’re investing in. So I think that would be a good, good conversation to have with one of our investment counselors. And so there’s no cost or obligation to to that ever. So just feel free to reach out to my team because it’s worth the conversation.
But me personally, again, not financial advice. I would consider using the equity and not using HELOC just so I can maximize and leverage that equity without having another loan of sorts, which is your HELOC to service each and every month with the properties. I think you’ll make out better if you run the math. If you actually pencil this out and you run the math, I think you’ll do better without the HELOC and just reinvesting the equity in other properties. And you can pencil this out. You have to make a few assumptions, but you can create the scenarios of investing in a small portfolio elsewhere, two, three homes and maybe Memphis or Indianapolis or Kansas City. Just look at the market list that we have. We have inventory and a pipeline of properties. If you do this on your own, it’s the exact same thing.
Just look at the properties, run the numbers, and just see how you’ll make out with having just a single loan on those properties, a first mortgage versus having financing and a HELOC to service back in California here. So I hope that helps. Great question. I think this comes up for a lot of people making a decision as to whether to use liquid cash or a line of credit of some kind, whether a home equity line of credit or just a line of credit. And again, it’s just the math. You have to run the numbers and just see what makes the most sense. So again, I appreciate the question. Thank you so much.
For everybody listening, I appreciate you taking the time. If you haven’t subscribed to the show, remember to do so. It takes all of your three seconds of your time. If you have questions about real estate investing, don’t forget to submit them to me. I’m happy to answer them on the show. And sometimes I just email you back with the answer to whatever question you have. Get your free strategy session with my team. There’s no cost or obligation ever. Just reach out to us at noradarealestate.com, download our free guide, The Ultimate Guide to Passive Real Estate Investing available on our website. And that is it for today. Thank you for listening. I will see you all on our next episode.
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