What Should I Do with My Home Equity (Sell, HELOC, or Hold)?

Added: 2026-05-16

[00:00:00]What if the deal your mentor told you to buy is actually a trap? A cheap property in the wrong neighborhood that eats every dollar you thought you'd cash flow. Or maybe you're house hacking and your roommate just trashed the place, but you never had them sign a lease, so now you have zero legal protection. And what if you're sitting on three rentals with $700,000 in equity and sub 3% interest rates? Is it smarter to sell, borrow against them, or just let them ride?

[00:00:31]>> [music] >> Today we're breaking down all three of those questions. This is the Real Estate Rookie podcast and I'm Ashley Care.

[00:00:40]>> And I'm Tony J. Robinson and with that, let's get into our first question, which comes from the BiggerPockets forums.

[00:00:45]This question says, "I'm looking to acquire my first property in 2026. I've been eyeing a few markets in the Midwest and came across this deal. The purchase price is $70,000. Closing costs are just over $1,000. My down payment is 30%, which is $21,000 at seven at a 7.1% interest rate. Property taxes are $612 annually. Insurance is $276 annually. That is a crazy low uh insurance cost.

[00:01:15]Um the rental income, it's currently occupied at $750 per month. It's about a 7% cash on cash return. Home is turnkey with the option to to do a slow bur.

[00:01:26]Uh looks like it could use some basic com- cosmetic updates. Um it's located in a C class neighborhood in Indianapolis.

[00:01:33]I have my vacancy rate higher than I would expect due to the C class neighborhood. Even at 15% occupancy, it still cash flows solidly at at 5%.

[00:01:43]Anything as a beginner that I'm missing?

[00:01:46]As an FYI, I would be an out-of-state investor as I live in California. I feel like I always get the California investors looking to invest elsewhere with the with the questions, but um I think a few things jump out to me on this deal.

[00:01:59]Um, number one is first insurance at $276 a year. That seems super cheap.

[00:02:07]Ash, have you ever had a property where insurance for the entire year is only $276?

[00:02:13]No, and that was going to be my first thought or question too as to where did this number come from? Is it an actual quote? Is it from the seller or you know, where did that come from? Because in my experience, I've you know, when I was looking at buying a campground, I asked, you know, what was your insurance you pay each month and he told me whatever and he sent me the policy.

[00:02:37]And every single cabin was a wood burning stove. And this policy did not cover wood burning stoves. And if any of those wood burning burning stoves caused a fire, they wouldn't have covered a thing. So, I think one important thing is like if you are getting that information from the seller, ask to look at the policy and see what is actually covered on the policy. Like maybe it's just a liability policy. Maybe they don't have a mortgage on the property so they don't have any like property coverage. Which I've bought in houses like that where people advisor just says, "Yeah, I self insure. It's a $30,000 duplex. If it burns down, it burns down."

[00:03:15]Yeah, that's that's a great point. Yeah, but I yeah, I just And again, I've never invested in Indianapolis so I maybe I could be wrong. But that feels incredibly incredibly low for any piece of real estate to be be insured for entire year.

[00:03:30]I think the other thing too is that when we talk about like class of neighborhoods, right? And there you know, A class, B class, C class, D class. Um, we're talking about a few things.

[00:03:39]Sometimes it's you know, you can look at things like the average income of folks in that area, the school ratings in that area and just the general what of demographic makeup, uh, socioeconomic makeup maybe of the folks who who would be coming into those units. And in a A-class neighborhood, we're talking premium rents, typically higher income earning individuals, um, and in a D-class neighborhood, it's it's the inverse of that, right? It's typically lower income individuals, um, lower end of the the rent spectrum, and, uh, the kind of wear and tear on the property is is is kind of higher on the low end if you're in a D-class neighborhood, and it's, you know, maybe a little bit easier in an A-class neighborhood. So, I I just, you know, I I I guess I just want to make sure that we're accounting for the fact that if this is a C-class neighborhood, um, A, can you validate that it actually is given that you're in California and that you're not actually walking into like some kind of war zone in Indianapolis?

[00:04:37]Um, and then B, if you have valid validated that it is a true C-class neighborhood, just making sure that you're actually accounting for some of those things. The you know, he did say 15% uh, vacancy rate, which, you know, maybe that's enough, maybe it's not enough, but just making sure that we're accounting for the fact that different class neighborhoods operate in different ways. This is one mistake that I made when I first started investing was I was only looking at cash flow, and I realized 10 years later that the real wealth is from appreciation and that mortgage paid down and the equity you're building up in the the property, and you can get a lot farther over time by also focusing on appreciation. I bought at first, really, you know, small duplexes for 20, 30, 50 thousand dollars in these class C neighborhoods.

[00:05:23]And they cash flowed pretty good, but they were headaches. There was the, you know, the tenant pool wasn't as great.

[00:05:30]Um, a lot of people in these areas struggled to have a great credit score, so it really made it hard to screen someone that, you know, had a great credit already. Uh, lots of turnover.

[00:05:40]Then these properties, you know, they had cosmetic updates, but just like this property, you know, over time it's going to need repairs and maintenance because it was just never done correctly. A lot of DIY behind the scenes on these properties. So, in that scenario, like it sounded great. I'm getting these cheap properties. I'm getting into real estate investing. And yes, they were the foundation for a long time of my real estate portfolio and got me to where I am today, but they saw very low appreciation. So, for example, I one of the $20,000 duplexes I bought, I was able to sell it for 4 years later for 20 for $40,000. So, I doubled my money on it. Like, wow, amazing.

[00:06:19]But, that's only $20,000 I made on that.

[00:06:21]Another property, the same time period, got over $100,000 in equity because it was in a better area, um a better class of tenant, and just a better property overall. And looking back now, what I would have done different is I would have not as bought as many properties, but bought better quality properties and not have had as many, but I was too focused on cash flow and not thinking about appreciation at all. And I I missed an opportunity there. And the only reason that my last seen properties sold for double is because the market was perfect. And that was no timing on my part. That just happened to be I got to buy more properties from 2013 to 2018, and then I was able to offload a lot of those dumpy duplexes, I call them, in 2020, 2021, 2022 when the market was super hot. And that was the only reason I I probably ended up making money on them. Um great great point, Ash, about like quality of the portfolio versus quantity. Um I I I also just want to quickly cover the math, right? Because if we look at the numbers that this person gave, on the rent amount, uh what did they say? 750 bucks uh per month, principal, interest, taxes, and insurance, again using the numbers that you gave us, is about 400 bucks per month. Uh vacancy uh at 15% is just over 100 bucks, repairs 10% another 75, CapEx even if we're being like conservative at 5% which I feel like you might need more, uh, is 30 is about 40 bucks a month. And then a property manager at at maybe 10% is 75 bucks. So the actual cash flow on this thing is when you account for all of those expenses is like 50 bucks a month.

[00:08:04]So you you have to ask yourself if 50 bucks per month on a $21,000 investment is that worthwhile to you? Um, often times rookie investors they just think about principal interest taxes and insurance is all of their expenses, but you you've got to account for everything as well.

[00:08:20]Maintenance, CapEx, property management fees as well. Vacancy isn't just lost rent. It's a silent profit killer. Every empty day compounds the damage. Mortgage strain, rising insurance, wasted marketing spend. Most landlords wait way too long to respond, but savvy investors they use Avail. Avail's rent analysis report helps you price your unit competitively. With real-time local comps, market trends, and predictive pricing insights. And once you've priced it right, Avail also offers promoted listings. So your rental gets priority placement on realtor.com and Zumper. So you'll fill your unit faster and stop the cash from bleeding. Plus, get access to full tools for tenant screening, automated rent collection, lease management, and maintenance tracking all in one place. Take the guesswork out, cut your vacancy gap, and start landlording like a pro. Go to avail.co/biggerpockets to sign up for free today. Our second question today comes from a SoCal investor in the Bigger Pockets forums. I have four rentals, all single family homes, bought starting in 2013. Three are in Southern California and have appreciated quite a bit. In the three SoCal houses total, I'm now looking at $703,000 equity split among the houses, 162k, 204k, and 336k.

[00:09:46]The cash on cash return is good compared to my original investment. But, if I do an ROE cal, return on investment, it's really only around 3 and 1/2 to 4%. All of them were refinanced and have 30-year interest rates between 2 and 1/2 to 3 3 and 1/2%. This was a VA home loan. I've considered lots of options, selling and getting something local in SoCal, 1031 exchanging into out-of-state cash flow markets, or cash out refinancing. I feel like the big equity gains are already realized here. So, there isn't much point holding out for more. What would you do? I think before we even get into answering this question, we need to break down a little bit of the the metrics here, ROI, ROE, cash on cash return. So, let's start with return on investment. So, this measures the total return that is relative to your original investment put into it. So, he bought it in 2013, the property has doubled, and he's earning cash flow on top of it, or tripled for some of the the properties. And so, for return on his investment, this actually has been a a great decision on his part to buy these properties. And return on equity, or ROE as he said in the question, measures what your trapped equity in this property is actually earning you right now. With $703,000 in equity sitting in these uh properties generating 3 and 1/2 to 4%, the question is, is that the best use of the $700,000?

[00:11:22]And I think that's what we're trying to answer here, right? So, like the the key point here is that ROI looks backwards, was this a good deal? ROE looks forward saying, is this still the best use of the equity and the money that I've generated? Um both matter, but the return on equity helps you drive uh or helps drive your next decision. So, let's look into one of those scenarios here. What if he decided to sell one property and 1031 it into another property in the Midwest?

[00:11:51]So, let's for example take the 336k equity property. We're going to sell it for 500,000 and we're actually going to net 460,000 after cost, okay? So, we're going to do a 1031 exchange. A 1031 exchange is where you're selling a property and you're deferring your capital gains tax.

[00:12:12]So, not eliminating tax, you're just deferring it. So, you don't have to pay any tax on that gain when you sell the property, but you have to follow the 1031 exchange rule, okay? So, you have to identify another property that you're going to purchase with those funds, okay? So, we're going to say he does a 1031 exchange and he's going to go ahead and buy two $230,000 properties each in the Midwest with putting $115,000 down on each of them, which will give him 50% loan to value. And if we look at the Midwest rents, and I'm using just some examples here, obviously, right?

[00:12:47]But let's say that they were in between 1,800 to 2,000 bucks per month at 7% interest rates that we're probably seeing today, the cash flow per property after all expenses might be somewhere around between 300 to 400 bucks per month. Um that's 6 to 800 bucks per month in total versus maybe the you know, 200 bucks per month the SoCal property was generating. So, the return on equity jumps from 3 and 1/2% all the way up to maybe 7 to 9% on the on the deployed capital. Um so, that the the cash flow basically triples or quadruples uh from this decision. Now, the catch here [snorts] is that, you know, we're we're giving up a almost irreplaceable uh uh, and 1/2% you know, 3% interest rate. Um, you know, that that sucks, right? Cuz that debt is locked in for for 30 years, but you have to ask yourself what what makes more sense, right? Is it maybe losing some of that that interest uh, advantage on that deal over the long term, um, or is it getting the the additional cash flow and better return on the investment today? Okay, let's look at scenario two. And scenario two is where he's going to take a line of credit to actually tap into the equity of these properties without selling.

[00:13:54]Okay, so on the $336,000 equity property, uh, most lenders will go and lend you up to 80 to 85% of the loan to value minus the balance you already owe on the mortgage payment. So, you your property's worth 100,000, they'll lend you up to 80, but say you have a mortgage of 40, that 80 minus 40 leaves $40,000 of a line of credit that you'd be able to get on that property.

[00:14:20]Okay, so for this one he might be able to access between 120 to 150,000.

[00:14:26]Now, he's going to use that as a down payment on a new property in the Midwest, and he can keep his 3% mortgage on that other property and add a new cash flowing asset by using the line of credit. So, interest rates on lines of credit between 8 to 9%. Actually, I just got a notice in the mail that my one line of credit went down to 7.75%.

[00:14:49]I was so excited. I was like, "Oh my god, is it that low forever?" Like when I first got that line of credit, it was like 6.5 my line of credit. [laughter] So, it it's working its way back down again, hopefully. Um, okay, so 8 to 9% in this scenario, um, we're going to say 130,000 borrowed for that down payment, and that would be about $870, maybe a little more, 975 per month in interest-only payments, okay? So, your new rental has to cash flow enough to cover that payment and still leave you positive. Plus, you need to have a plan in place to actually pay off that line of credit.

[00:15:31]So, I would look into it to make sure that you're going to be able to make some principal payments on that line of credit, also. Yeah, I think the other thing, too, we didn't like model the math on this one, but as you're talking, that should came to mind. I think the other scenario that would work here as well, and this kind of ties into the first question, is well, maybe you use your your line of credit and the funds from that to not you know, not not to put it directly into a down payment, but to put it into a BRRR opportunity. And maybe you're taking that money, combining that with some hard money, and now you're going out there and you're BRRRing properties in in the Midwest.

[00:16:01]And now every time you close on that refinance for the BRRR property, you can pay back your line. So, now it becomes this almost reusable source of of of funding that you can use to continue to build your your portfolio. And I mean, and with 700k in equity right now, I mean, that's a lot that you can go deploy from these different lines to hopefully BRRR a lot of properties in a short period of time, as well. So, the upside there, right, is that you keep all the SoCal properties, but then you're leveraging that equity to BRRR additional properties in in these other markets. And every time you you close on a refinance, you're paying back that line of credit. So, it could be maybe the the best of both worlds. You get the the SoCal properties, equity continues to grow there, you keep the super low rate, you get the appreciation, and the portfolio grows without actually selling anything. Okay, so let's go to scenario three, where it's just you hold everything and let it ride. So, SoCal has averaged 5 to 7% annual appreciation if you're looking at the past 30 years. So, on 703,000 in equity, that's about 35 to 49k in annual wealth building just from appreciation alone, okay? And that's also tax deferred.

[00:17:09]So, now if you add in mortgage paydown across the three properties, that's, you know, every year you're going to increase more equity, maybe 5 to 8,000 per year in cash flow you're also getting and plus tax benefits of owning real estate. So, your total annual return of just looking at that maybe 55 to 75,000. Yeah, so so there is kind of an argument for doing nothing as well, right? You're you're sub 3% debt on strongly appreciating assets in California might be the best financial position, right? And trading that for 7% and with cash flow might look smart on a spreadsheet today, but you're trading an asset that builds long-term wealth for one that just pays you monthly. So, I I think a lot of it depends on what this person actually needs, right? Do they want monthly income right now?

[00:17:56]Um, you know, portfolio growth without necessarily messing up their their current equity or just continuing to build long-term wealth, right? I think each one of those kind of lends itself to a different situation. We're jumping in with our final question and this is one that almost every single house hacker should be hearing uh because if you get it wrong, it could cost you big time. So, this question says, "When house hacking, do you have the hackee?"

[00:18:17]I haven't heard that phrase yet. Uh the tenant who who would be staying with you uh sign a rental agreement? If so, does anyone have advice on where to get one drawn up or have an example of one that they have used?" Um now, Ash, I know you haven't uh house hacked uh with roommates in the sense.

[00:18:37]Um I haven't either, but I'm I'm assuming both of us would have a very strong answers to this, which is yes, even if you are house hacking, there is still a a a landlord-tenant relationship and because of that, you should 100% still get them to sign a lease.

[00:18:54]Um the the the lease is the backbone of that relationship between you and and the tenant. And you said hackee, but they're still your tenant, right? So, all of a lot of those laws still apply. So, um the short answer is yes. Uh go out, get a lease.

[00:19:10]Uh we we've got so many episodes in the archives. Like if you just search real estate rookie and house hacking, you'll see so many different folks who have come on, shared their story, shared their experience about how they put together their leases from from a house hacking perspective. I think that'll give you a lot of the insights you need about what to put into that. And then go sit down with an attorney, let them review it, and give you the once over and then the final approval on what that lease should look like. Tony, I'm honestly shocked and maybe a little disappointed in you. You're entrepreneur businessman and your son just turned 18 and you do not have a lease agreement with him yet to be renting a room in your house. [laughter] That is very true. I need to get him on a lease now. It's my my first house hack. Just so we have a content content for the the podcast, you need to now have experience house hacking by renting to your son. Now that he's 18.

[00:20:02]>> [laughter] >> Uh BiggerPockets, if you go to biggerpockets.com, there's a lease agreements that you can use that are state specific. Um if you're a pro member, you'll be able to access those for free or you can pay for whichever state that you need. But I think that's a really great starting point is looking at uh those lease agreements that were drafted by attorneys in your state that you're investing and then reading through every single thing. And I want you to think of like outside scenarios that may not be in there, especially with house hacking as to like what are the rules of the kitchen? What are the rules for parking, you know? Are do they have a parking spot? Do they Is it shared parking with you? Are they parking on the street? Like trying to think of different pain points and just draw it out as to, you know, put it into the lease agreement so it's just clear it's clarified. Um even how should rent be paid, you know?

[00:20:57]If they say, "Oh, I left it on the counter for you." And it's not on the counter and you know, like that's not the the best way to, you know, receive rent. So, um if you can think of every every little scenario and add them in, AI put the lease agreement into AI. They This is my situation. I have a roommate.

[00:21:17]We share a two-bedroom house.

[00:21:19]What are some things that I should be putting in this lease agreement to avoid conflict with each other and to protect myself. And just see what it says. Put it in there and see what feedback it it gives you. And there might be some things that you find useless and things some things you think like, yeah, actually that is a great idea. And go ahead and and plug it into the the lease agreement. And then final thing, I would send it to an attorney and ask the attorney to review it. So much cheaper than asking attorney to draw up something for you from scratch. They usually have a template anyways. But this way you're not paying for them to send you something and you revising it all so that it fits your property specifically, but actually drafting it up and then sending it to them to review will be a lot cheaper, too.

[00:22:04]>> As you made a really good statement about like reducing conflict.

[00:22:08]And I think that's a big value prop of a strong lease is that it does reduce conflict because you've already outlined how certain situations will be handled if they arise. And I think the better job you can do of of communicating the lease clearly, I think the easier it becomes. And um you know, we've had so many folks uh who we've interviewed on the podcast, Dia McNeely, um uh Grace Goodenough, uh Amelia Grace and Amelia. Like and they talk about how they have those conversations with their tenants when they first uh become their tenants to make sure that there's clarity in what the lease actually expects of them. And then what they can expect of, you know, for them as as a landlord as well. And that helps reduce a lot of that that conflict and friction. So, I just want to highlight that cuz it was really well said. But it's from my own experience.

[00:22:55]>> [laughter] >> Not wanting to have to deal with conflict in between tenants. Thank you guys so much for joining us for this episode of Real Estate's Rookie. I'm Ashley, he's Tony, and don't forget to check out becoming a BiggerPockets Pro Member. You can go to biggerpockets.com/pro and check out our pro perks. We'll see you guys next time.