Be brutally honest about my strategy!!!! New to real estate!!!

[Andrew A.]

I’m looking for some advice and feedback on my real estate investment strategy. Here’s the plan I’ve come up with, and I’d love to hear your thoughts on its feasibility, potential risks, and any improvements you might suggest.

The Plan

1. Pay Off Mortgage: I currently have $170K left on my mortgage, and my goal is to aggressively pay it off in the next 1.5 years.

2. Establish Emergency Fund: Before making any big moves, I’ll set aside 6-12 months’ worth of expenses as an emergency fund.

3. Extract Equity: Once the mortgage is paid off, I’ll pull out the equity from the property.

4. First Flip: Using the extracted equity, I’ll purchase another house, fix it up, and sell it for a profit.

5. Reinvest Flip Profits: Instead of buying another property immediately, I’ll use the profits from the flip to renovate the original property, aiming to increase its rental income and appraisal value.

6. Reappraise and Extract Equity Again: After renovating, I’ll get the original property reappraised and extract additional equity based on its increased value.

7. Purchase Rental Properties: With the additional equity, I’ll start purchasing rental properties that offer positive cash flow and have growth potential.

8. Leverage Equity Strategically: I'll use equity from the original property and any new properties while maintaining a healthy loan-to-value ratio (LTV), ideally around 70-75%.

9. Build Rental Portfolio: I’ll focus on acquiring a mix of property types (e.g., single-family homes, multi-family units) to diversify my investments.

10. Focus on Cash Flow: I’ll prioritize properties that generate consistent positive cash flow, ensuring that rental income covers all expenses, including mortgage payments, maintenance, and management fees.

11. Long-Term Hold: I’ll hold properties long-term to benefit from appreciation and tax advantages. I plan to regularly re-evaluate and refinance properties to pull out equity for further investments without over-leveraging.

12. Professional Management: I’ll consider hiring a property management company to handle day-to-day operations, freeing up my time for further investments and strategic planning.

Additional Consideration

I've considered using the BRRRR method instead of paying off the mortgage first. The BRRRR method could potentially allow for quicker expansion by leveraging equity to buy more properties. However, I feel that paying off the mortgage is a safer route for me. Here's why:

1. **Limited Ownership**: I don’t own a lot of properties yet, so paying off the mortgage on my current property provides a solid foundation.
2. **Realistic Timeline**: I can realistically pay off the house in a year, which gives me a debt-free asset to leverage later.
3. **Financial Security**: Being young and living in NJ, I want to build a strong financial foundation first to ensure stability before taking on more leveraged investments.

This approach might be slower than the BRRRR method, but it provides peace of mind and a secure starting point for future investments.

Pros and Cons

Pros:

• Initial capital boost from flipping the first house.

• Increased property value and rental income from renovating the original property.

• Consistent cash flow from rental properties.

• Long-term appreciation and tax benefits from holding properties.

• Diversification across different property types and markets reduces risk.

• Maintaining a healthy LTV and having an emergency fund reduces financial vulnerability.

Cons:

• Market risk: Property values and rental income are subject to market conditions.

• Management complexity: Owning multiple rental properties can be complex and time-consuming.

• Financing challenges: Extracting equity and taking on new mortgages require careful financial management to avoid over-leveraging.

My Questions

1. Do you think this plan is realistic and achievable?

2. Are there any potential risks or pitfalls I might be overlooking?

3. Any suggestions on how I could improve this strategy?

4. What are some best practices for managing multiple rental properties?

Thanks in advance for your insights and advice!

[James Mc Ree]

You have a very detailed plan. It doesn't have enough details to fully evaluate it here, but I don't see anything that is radically wrong or can't work. There appear to be a lot of assumptions that could affect your timing, so you may have some delayed gratification depending on how long each step takes. Good job.

Rather than respond point-by-point, I will give you thoughts on one topic and maybe later posters can take on different topics.

Step 1 is pay off your primary's mortgage. You create your emergency fund, then step 3 is pull out the equity which is creating a new mortgage on the same property. Since you plan to pay off the mortgage within a year, you might do best with skipping step 1 and just do your refinance in step 3 first or second. Such a short timeline doesn't give you any real margin of safety since you get out of debt, then right back into debt shortly thereafter.

This depends on your current interest rate though. It makes no sense to pay off a 3% mortgage, if you have something like that, then incur a 6% or so larger mortgage if your goal is to get out of debt. Consider banking your $170k that would pay off the mortgage and apply for a HELOC for the remainder of your equity to 75%. That will allow you to keep your low rate on $170k if you have a low rate, then have a line of credit that is only the size you need and easy to pay down.

This approach keeps your $170k liquid, sets up a $0 balance HELOC for the additional principal you can get and you don't pay for the additional principal loan in the HELOC until you use it, and only for what you use.

[Alecia Loveless]

@Andrew Acosta I see no reason to pay off the mortgage only to turn around and just refinance it. If your rate is higher simply refinance it if rates drop and just save all those “aggressive payments” to then invest with. $170,000ish should be plenty to help you buy your first rental maybe less and then you can get started faster than the timeline of spending 1.5 years paying off your mortgage first.

[Basit Siddiqi]

Agreed - I see no reason to pay off a mortgage if you plan to use the funds back right away.

[Nathan Gesner]

Quote from @Andrew A.:

I stopped reading your list after just a couple paragraphs, because you aren't thinking it through.

Paying off a mortgage may provide security, but it does not increase your return.

If you pay off the mortgage and then borrow against the equity, you will be worse off than you are today. First, you are paying interest on the existing mortgage, then you will cash out the equity and start paying interest on that money. You will pay interest twice for the same dollar.

[Corby Goade]

My feedback is that you are getting WAAAYYYY too deep in to the weeds. To be honest, I didn't even read the whole thing because it was just too much. 

The initial goal should be to build equity in an investment property. Once you do that, if it works for you as a rental, keep it. If it doesn't, sell it. 

Generally, I'd disagree with your desire to pay off your personal property first and save up an emergency fund. Lots of reasons that the Dave Ramsey method doesn't work for average people. 

[Tim J.]

I didn't read all of what you posted as I could not get past the multiple times you basically said you were going to "pay off" properties or renovate/put money into them, only to turn around and pull that money out with loans.  

Seems like very high friction.  Waste of time and resources IMO 

[Bruce Woodruff]

Quote from @Nathan Gesner:

I stopped reading your list after just a couple paragraphs, because you aren't thinking it through.

Not really disagreeing, but my first thought was that he is way overthinking this. Such a complicated approach to a relatively easy situation.

Definitely think that paying off the mortgage is pointless if he's just getting another. And mortgages/debt is not always bad anyway (tax write-offs, etc)

@Andrew A. you say how much you still owe, but not what your property is worth now. That would be nice to know.....

[Jonathan Greene]

This post gave me analysis paralysis so I shudder to think of the state you are actually in. What sources did you base this list off? AI? This is like when I was younger and I laid out all the steps to playing in the NBA, but the first step didn't make any sense because it was grow to 6'6". Above you see why you started wrong, but why is this plan that long? And why do you just cruise past flipping a house and making a profit as if it's no problem with low inventory, no experience, and no connections. This plan is like swiss cheese after 131 rabid mice were let into a box where the wheel was. You said be brutally honest so there you go.

[Bruce Woodruff]

@Jonathan Greene......ROTFLMAO

[Bob Stevens]

Quote from @Andrew A.:

I’m looking for some advice and feedback on my real estate investment strategy. Here’s the plan I’ve come up with, and I’d love to hear your thoughts on its feasibility, potential risks, and any improvements you might suggest.

The Plan

1. Pay Off Mortgage: I currently have $170K left on my mortgage, and my goal is to aggressively pay it off in the next 1.5 years.

2. Establish Emergency Fund: Before making any big moves, I’ll set aside 6-12 months’ worth of expenses as an emergency fund.

3. Extract Equity: Once the mortgage is paid off, I’ll pull out the equity from the property.

4. First Flip: Using the extracted equity, I’ll purchase another house, fix it up, and sell it for a profit.

5. Reinvest Flip Profits: Instead of buying another property immediately, I’ll use the profits from the flip to renovate the original property, aiming to increase its rental income and appraisal value.

6. Reappraise and Extract Equity Again: After renovating, I’ll get the original property reappraised and extract additional equity based on its increased value.

7. Purchase Rental Properties: With the additional equity, I’ll start purchasing rental properties that offer positive cash flow and have growth potential.

8. Leverage Equity Strategically: I'll use equity from the original property and any new properties while maintaining a healthy loan-to-value ratio (LTV), ideally around 70-75%.

9. Build Rental Portfolio: I’ll focus on acquiring a mix of property types (e.g., single-family homes, multi-family units) to diversify my investments.

10. Focus on Cash Flow: I’ll prioritize properties that generate consistent positive cash flow, ensuring that rental income covers all expenses, including mortgage payments, maintenance, and management fees.

11. Long-Term Hold: I’ll hold properties long-term to benefit from appreciation and tax advantages. I plan to regularly re-evaluate and refinance properties to pull out equity for further investments without over-leveraging.

12. Professional Management: I’ll consider hiring a property management company to handle day-to-day operations, freeing up my time for further investments and strategic planning.

Additional Consideration

I've considered using the BRRRR method instead of paying off the mortgage first. The BRRRR method could potentially allow for quicker expansion by leveraging equity to buy more properties. However, I feel that paying off the mortgage is a safer route for me. Here's why:

1. **Limited Ownership**: I don’t own a lot of properties yet, so paying off the mortgage on my current property provides a solid foundation.
2. **Realistic Timeline**: I can realistically pay off the house in a year, which gives me a debt-free asset to leverage later.
3. **Financial Security**: Being young and living in NJ, I want to build a strong financial foundation first to ensure stability before taking on more leveraged investments.

This approach might be slower than the BRRRR method, but it provides peace of mind and a secure starting point for future investments.

Pros and Cons

Pros:

• Initial capital boost from flipping the first house.

• Increased property value and rental income from renovating the original property.

• Consistent cash flow from rental properties.

• Long-term appreciation and tax benefits from holding properties.

• Diversification across different property types and markets reduces risk.

• Maintaining a healthy LTV and having an emergency fund reduces financial vulnerability.

Cons:

• Market risk: Property values and rental income are subject to market conditions.

• Management complexity: Owning multiple rental properties can be complex and time-consuming.

• Financing challenges: Extracting equity and taking on new mortgages require careful financial management to avoid over-leveraging.

My Questions

1. Do you think this plan is realistic and achievable?

2. Are there any potential risks or pitfalls I might be overlooking?

3. Any suggestions on how I could improve this strategy?

4. What are some best practices for managing multiple rental properties?

Thanks in advance for your insights and advice!

 All I can say IS WOW!!!! Talk about WAAAAAAY Overthinking, I too stopped reading at #7

Good luck 

[Bruce Woodruff]

@Andrew A. The big guns are being rough on you, but you did ask for honesty and we can do that.... :-)

Don't take it personally and just use the advice to move forward. You are definitely making this way too complicated...just relax and start over. Keep it simple.

[Bob Stevens]

Quote from @Bruce Woodruff:

@Andrew A. The big guns are being rough on you, but you did ask for honesty and we can do that.... :-)

Don't take it personally and just use the advice to move forward. You are definitely making this way too complicated...just relax and start over. Keep it simple.

 WOW I'm a big gun?  I was unaware I was at your level LOL

Well said Bruce,,,,,,,,, as always 

YES Andew, KISS, RE is nothing but math, 

[Bruce Woodruff]

Quote from @Bob Stevens:

WOW I'm a big gun?  I was unaware I was at your level LOL

Well said Bruce,,,,,,,,, as always 

YES Andew, KISS, RE is nothing but math, 

Yep. And you're almost always right too....except when you disagree with me 🤣

[Bob Stevens]

Quote from @Bruce Woodruff:

Quote from @Bob Stevens:

WOW I'm a big gun?  I was unaware I was at your level LOL

Well said Bruce,,,,,,,,, as always 

YES Andew, KISS, RE is nothing but math, 

Yep. And you're almost always right too....except when you disagree with me 🤣

LOL 

[Andrew A.]

Thank you, everyone! The comments were hilarious. I’m new to all this and excited to keep learning from all of you. I see how my plan made no sense now 😂 

Additional information about me 

• My home is vale right now $750k I haven’t done any renovations. 
• My mortgage is $2,456.
• I manage my own property  right now I’m doing house hacking.
• I live in the basement and rent rooms, earning around $6,500 monthly.

[Jonathan Greene]

Quote from @Andrew A.:

Thank you, everyone! The comments were hilarious. I’m new to all this and excited to keep learning from all of you. I see how my plan made no sense now 😂 

Additional information about me 

• My home is vale right now $750k I haven’t done any renovations. 
• My mortgage is $2,456.
• I manage my own property  right now I’m doing house hacking.
• I live in the basement and rent rooms, earning around $6,500 monthly.

See this is good. Do this. You don't need a 27 step plan because you are already way ahead of most people. You are cash flowing in a house hack which is near impossible right now. Before you make any other moves, do all the repairs and cap ex on this property while you have the equity so when you get something else this one is cap ex free barring something crazy.

[Andrew A.]

Thank you for the valuable advice! Do you have any recommendations on how I can best educate myself in my current situation? I’m 26 and acquired this property by chance. I’ve been living in and managing it for only a couple months. 

[Kris Holt]

Andrew, like many others expressed the first step is off base which puts all of the others into question. If you have a low interest rate on your primary mortgage, that's cheap money and low cost of capital. The cost of capital is higher in today's environment. I would explore your options for other sources of capital such as a HELOC or private (hard) money. It may be easier to get than you think and not as expensive as you assume. You're obviously a planner which is great, but things won't always turn out as planned. Things change and evolve although exit strategies are a must. Focus more on the goal in the long term and break it down in the short term and start there.