More Properties or Increase Cash Flow?

Question

Hey BP. I’m looking for some insight on what folks would do in my situation.

I currently have (2) rental properties that cash flow positive every month after all expenses and savings (#1 $215 / mo , #2 $293 / mo) and am looking to possibly get another property at the end of the year or improve my cash flow on one of the above properties. Property #1 mortgage pay off is $132k, property #2 mortgage pay off is $117k

I have enough cash to put down 25% on up to a $285k property or I can use that cash to help pay down one of the above mortgages and refinance into a lower payment which would yield more cash flow.

What would you do and why? Thanks!!

Bob Okenwa · Answer

@Eric Perez

I'd find another property to purchase and continue to build your portfolio. Rental property investments are a long-term game and rents rise over time, especially if your properties are in Laredo as the incoming population has increased 11.7% from 2010 to 2020.

If you're using your own money to pay down the mortgage and then use more of your own money to refinance into a lower payment, you're essentially buying cash flow. Let your tenants pay down the mortgage and refinance into a lower rate if that opportunity presents itself in the future, although there is no guarantee that rates will ever go back to sub 4 any time soon or ever.

Even if you're hellbent on paying down the mortgage, run the numbers on how much it'll cost you. Just an example, but if you spend 40k to pay down and refi one of the existing mortgages, what will your new cash flow be? If you go from $215/mo to $415/mo, then you spent 40k to buy an additional $200/mo. At that rate, it would take 16.6 years to break even on that additional $200 you're earning. If you put that money into a down payment on another property, now you may have another $200/mo in cash flow, plus a chance at additional equity and future appreciation and future rental rate increases.

Only you will know what is best for you and your future plans. Just hoping to shine some light on something you may have not considered yet. Best of luck.

Robin Carriger · Answer

Minimize the outlay of your own cash.  Instead, leverage the equity in the properties you already have, and, if necessary, combine that with short-term private or hard-money loans to buy more good deals.  BRRRR out of those buys ASAP, and keep on buying until you can see the financial independence light at the end of the tunnel.At that point, start making extra principal payments on one property loan until you pay it off.  When it's paid off, your cash flow will go up, so you can similarly pay off the second property even faster.  Continue that payoff snowball until you can get a substantial commercial Line of Credit (LOC) using the equity in all your "paid off" properties.  That, combined with cultivating private lender relationships, will give you the buying power you need to perpetually grow your portfolio while you simultaneously pay off one loan after another.That's the high-level version of how we've achieved financial independence, and I'm convinced that virtually anybody can do likewise.  :-)

Jeff Schemmel · Answer

Hey Eric, very interesting post.  I think instead of mortgage payoff, you may calculate your return on equity (ROE).  right now you're earning $6,096 per year in cash flow after expenses and debt service.  What are each of these properties worth compared to their payoff amounts?  If you have 100k in equity across the two, you have a 6% return on equity.  you just have to ask yourself if you're getting the return you like on that equity.  If you're not, I would spend some time/effort and maybe a little money trying to improve the return where it makes sense.  I'm speaking generally here because I don't have much info to go on, but I hope this gives you some direction.

It's usually pretty easy to justify adding properties, but I would take a hard look at your ROE and appreciation in the area you own in and decide whether holding those or rolling equity into a better purchase makes sense.

-Jeff

Eric Perez · Answer

A lot of great advice and I definitely have plenty of homework to see what would be ideal. I appreciate everyone taking the time to chime in and help a guy out!

Brian G. · Answer

@Eric Perez I would buy another property. Your COC would be higher than your return on paying down principal and you would increase the total value of your portfolio. Leverage up if you can find a good deal as long as you are in growth mode.

Andrew Garcia · Answer

Hi @Eric Perez, I would compare the principal and interest payments of the mortgage vs the cash flow generated by the new property.

If the mortgage savings are less than the cash flow from the new property, it is a no-brainer. Put the money in the new property.

However, if the principal and interest savings are more than the cash flow, it gets a little more complicated.

You have to factor in appreciation, rental appreciation, and principal buydown when considering buying a new property.

Therefore, if the numbers are fairly similar, buying a new property seems to be the better option.

You can also refinance one of the mortgages into a 15-year to get a better rate but that would hurt your cash flow position. On the flip side, you do not have to spend any money to get the better rate.

Hope this helps! Let me know if I can be of any assistance.

More Properties or Increase Cash Flow?

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