Need some advice on next move to make

[Ciarraghe G.]

Hi everyone!

I'm looking for advice on what to do as a next step in my investing journey. Sorry this is a long post but I want to give as much info as possible. 

My husband and I currently have 1 rental unit, a townhome which cashflows a bit over $500 a month in the Portland OR area, I have had this unit about 4 years now, so I got it for a great price at a good interest rate.

I also have my own home, and both of these properties have a lot of equity in them, I have about $260K worth of equity altogether that I could get on an HELOC if I wanted to (this is the 80% LTV less current mortgages, actual equity is more).

On top of the HELOC I could take out, I also have about $100K in stockpiled cash and another $100K I could take out as 401k loans. I'm currently paying above payment on these two existing properties an extra $900 a month to pay down the mortgages more quickly, which could quickly be freed up as well, as they both have low interest rates so this is not really the best use of my money.

I have great credit and day job income and qualify for a disgustingly huge mortgage level, even without rents included so mortgages are not an issue for me. I have a great lender as well, who I have a long term relationship with and is very investor friendly. I am a long term hold focused cash flow focused investor, equity is just icing for me. Small fix ups are ok (paint, carpet, counter replacement etc.), but larger ones are probably not something I want to really get into at the moment (full kitchen remodels, full plumbing or electrical replacements, etc.). I am most comfortable with SFR but am intrigued by a duplex to quad unit, but at the same time they worry me if I ever had to get out quickly and quality of tenant potential.

So my thoughts on my options are:

--Take out both HELOC's and 401k loans and sit on that cash in a money market or similar vehicle along with what I have already to wait for the crash (whenever it arrives), using my personal and rental cash flow and redirecting the extra I'm paying on those existing mortgages to pay off the HELOC and loans quickly

--Use my HELOC and stockpiled cash today to go into another, cheaper market somewhere else in the US, and buy up 3-8 more properties, either leveraged or outright. The Portland market prices are just ridiculous and the market is showing a very slight relative cooling, but as of May, inventory was still a 1.9 month of supply and prices are still rising, up another 1.9% from April to May, so I don't think there are deals to be had for someone like me doing this on the side, I just don't have the time. The other Oregon areas such as Salem, Eugene, Bend, etc. do have some great deals on paper but they are also longer term more unstable from a job market or tenant quality, so true deals are harder to find. Eugene and Bend have great AirBNB market potential but I worry about cleaning/turnover services being reliable and they are too far for me to drive to on a whim. I've lived in all of these areas at some point so I do know the areas pretty well and like them all.

--Take out the HELOC on the rental and my stockpiled cash and pay off the mortgage on my main home in full and call it a day until the crash comes along when I will have likely saved up more money and have equity in my home, but of an unknown amount.

--Become a hard money lender somehow

--Figure out how to get in on an apartment building somewhere (although I'm currently trying to build a new business and don't have time to simultaneously learn another one).

--Other creative thing I'm not aware of?

I have a financial adviser but he's a stocks/bonds/etc. person, and I don't want to increase my holdings in that area of finance any further, so I don't really know what kind of person to look for, for advice of this nature. I appreciate any thoughts you all may have. 

[Craig Jones]

Hey Kerri,

I feel your pain.  This is a challenging time in the market cycle.  Debt is easy to come by and still great rates, but of course the market prices are high in the areas you are familiar with which makes cash flowing the properties difficult.  

In looking at the options you are considering, I’d definitely steer away from taking on debt to stockpile cash waiting for the market to turn.  If you had a plan to put the borrowed money to work earning a net gain then that would be a different story.  Your mention of becoming a hard money lender could be an option to this end.  It would allow you to invest in some short term notes, maybe with builders, to keep your money earning a net return while only being committed for a short time frame.  This would allow you to reasses the market as each note comes due and decide if you want to lend again, or if the market conditions are right for investing.  Make sure you understand this business model well and the associated risks if you entertain this path.  Lots of risk as the market turns with this one.  Rates are also lower now as there is so much money looking for a good home.  I’m building now and there is plenty of hard money available at 8%.

Other thoghts to consider. You mention options of buying and holding properties which is a long term strategy. You also then are considering using a HELOC for funds to employ a long term strategy. In my book, these two don't tie together well. I know some banks are doing fixed rate HELOCs now, but I don't know how long the terms can be with fixed rates. Make sure your rates are fixed and make sure the term will work with your strategy. It is no fun to be caught holding property in a down market with escalating interest costs or notes coming due with your only options being expensive loans or selling at the wrong time. You might be better off paying more in fees to get a cash out refinance so you can fix your rate and term to match a long term investment approach.

Buying in solid cash flow markets could be a good option if you can find the right team.  I’ve considered this, but have yet to come close to feeling comfortable with this option.  I’ve heard way too many horror stories.

It sounds like you are busy building another business so another thought could be to partner with someone you trust who’s full time business is investing.  This would allow you to focus on your business.  I know my partners feel comfortable knowing that I’m looking after their real estate interests like my own because they are one in the same.  There are so many ways to partner with someone.  It is critical to find a structure that works well for you.  If this interested you then you can start by reaching out to your network and look for referrals.  If you want to keep your investments in the Portland area I can recommend some people with high levels of integrity to connect with.  Feel free to PM me for info.

One last thought with regard to vacation rentals.  We own some in Bend and I’d agree you hit the nail on the head with cleaning staff and turn over being a challenge.  I’ve lost count of the cleaning staff we have gone through over the years with our rentals.  It is one of the most challenging aspects of the vacation rental model.  Bend specifically is also challenging because of the newer laws making finding a well located vacation home difficult.  If you consider buying a vacation rental in another market, make sure you understand the laws associated with short term rentals.  Many markets are implementing changes.

Best wishes in figuring out your path.  Happy to help with additional input or get on the phone if that helps.  I’m back in the country July 7 if you want to PM me and set up a call.  

Cheers - Craig

[Thomas S.]

I would pull out all that dead equity that is costing you a fortune in lost income and put it in a money market or income fund.  You should be able to easily reach a 10% return. Anything is better that losing money on it where it now sits. Stop paying down your mortgages, it's is gaining nothing. 

Most would advise you buy more properties but presently most markets are over priced and in your case investing long distance is probably a bad idea if you are occupied building another business. You can not/should not try to build two businesses at the same time. Both would suffer.

Pull you money and put it to work.

[Ciarraghe G.]

Thanks Thomas for your reply. 

My husband manages the rentals as his thing, so we could theoretically take on more as he would be the one focusing on that, while I focus on my own business. But yes they could crash into each other, potentially. That is a good point. 

I will look into the possible funds I could put it into. The money markets I found are only at 1.5-2% or so right now and the HELOC at around 5-6%, so I have to make at least 5-6% to make it worth my while. I will ask my financial adviser about options.

It's hard to look at the cheap prices in other markets and think they are overpriced- an average 3 bedroom in my area is going for 350-400K +, if not in the 600K range, and a 4 bedroom is nearing a million- while I look at the midwest and see prices around 100k, that seems like a vast discount from my perspective. If it cash flows well, even if it's higher priced for that market, is it still not a good investment? 

[Dennis M.]

Lots of options for someone as smart as you have been with your money ! You are in a good position to be in no doubt . The way i see it is We are at the top of the market and you are located at one of the hottest markets in the country right now . A couple hundred grand can’t get you much these days there . I would also echo Thomas s.’s comment and say get the the money to work for you and don’t pay extra on those mortgages, why do the bank a favor when you can earn good money on that cash . Get a good return on your cash in a fund and when market eventually drops ( 1-2 years) I would take the cash out and buy an apartment building /complex with as many doors as you can afford . Wait for the prices to stabilize first though so that your dollar goes further.

[Eric Jacobs]

Many an investor has lost their fortune looking at the disparity between prices in their "hot" market and other markets.  Real estate is impacted by macro factors but is ultimately hyper-local.  I would say many investors have also lost their fortunes investing outside their known market.  I am not however saying investing in other markets is a bad idea.  To the contrary, I think its a great idea but you need to be very, very careful.  I would absolutely recommend Long Distance Real Estate Investing by @David Greene.  It is the absolute best book on the subject I have seen.  Good luck.  

[Ciarraghe G.]

@Dennis M. I am a chronic saver/cash hoarder. I started off as a Dave Ramsey follower which is why I've been aggressively paying off my home and rental and saving like crazy and living on "rice and beans" so to speak for years, but in the last year or so I've been branching out to listen to other perspectives and realized I'm actually losing a lot of potential income this way. You're right, a couple hundred thousand doesn't really go anywhere in Portland. It's crazy! I wish I'd bought 10 properties back in 2012, but I was still terrified of debt. 

@Eric Jacobs this is great advice, we looked at other markets a couple of years ago and shied away because of the complications- and now we feel like we're kicking ourselves for not going for it- but it does bring a lot of challenges. I'll read the book, thanks for passing along! 

[Dennis M.]

Dave Ramsey offers good solid advise for the average middle class slob who can’t control himself but his approach is so conservative in this day and age that you won’t make much for fear of risk and you will save till your dead using his methods . 

[Josh Garner]

If you're looking to grow your portfolio, I'd do it in a place that cash flows (probably not the West Coast or Northeast). If you have family or friends that live in the South or Mid-West, start looking at rentals there, as these are classic cash flow areas....probably not going to make you 10% year-over-year appreciation like Oregon has the last 7 years, but you'll convert your appreciation into monthly cash flow. David Greene's book is fantastic at touching on these scenarios. If you have 260k in equity and it's only making you $500/month, that's a 2.3% cash on cash return. I bet you can do better elsewhere:) Happy investing!

[Steve B.]

Pretty sure dave Ramsey or anyone else fairly financially literate isn’t going to suggest taking out HELOCS to “stockpile” Money

[Craig Jones]

Hey Kerri,

I feel your pain.  This is a challenging time in the market cycle.  Debt is easy to come by and still great rates, but of course the market prices are high in the areas you are familiar with which makes cash flowing the properties difficult.  

In looking at the options you are considering, I’d definitely steer away from taking on debt to stockpile cash waiting for the market to turn.  If you had a plan to put the borrowed money to work earning a net gain then that would be a different story.  Your mention of becoming a hard money lender could be an option to this end.  It would allow you to invest in some short term notes, maybe with builders, to keep your money earning a net return while only being committed for a short time frame.  This would allow you to reasses the market as each note comes due and decide if you want to lend again, or if the market conditions are right for investing.  Make sure you understand this business model well and the associated risks if you entertain this path.  Lots of risk as the market turns with this one.  Rates are also lower now as there is so much money looking for a good home.  I’m building now and there is plenty of hard money available at 8%.

Other thoghts to consider. You mention options of buying and holding properties which is a long term strategy. You also then are considering using a HELOC for funds to employ a long term strategy. In my book, these two don't tie together well. I know some banks are doing fixed rate HELOCs now, but I don't know how long the terms can be with fixed rates. Make sure your rates are fixed and make sure the term will work with your strategy. It is no fun to be caught holding property in a down market with escalating interest costs or notes coming due with your only options being expensive loans or selling at the wrong time. You might be better off paying more in fees to get a cash out refinance so you can fix your rate and term to match a long term investment approach.

Buying in solid cash flow markets could be a good option if you can find the right team.  I’ve considered this, but have yet to come close to feeling comfortable with this option.  I’ve heard way too many horror stories.

It sounds like you are busy building another business so another thought could be to partner with someone you trust who’s full time business is investing.  This would allow you to focus on your business.  I know my partners feel comfortable knowing that I’m looking after their real estate interests like my own because they are one in the same.  There are so many ways to partner with someone.  It is critical to find a structure that works well for you.  If this interested you then you can start by reaching out to your network and look for referrals.  If you want to keep your investments in the Portland area I can recommend some people with high levels of integrity to connect with.  Feel free to PM me for info.

One last thought with regard to vacation rentals.  We own some in Bend and I’d agree you hit the nail on the head with cleaning staff and turn over being a challenge.  I’ve lost count of the cleaning staff we have gone through over the years with our rentals.  It is one of the most challenging aspects of the vacation rental model.  Bend specifically is also challenging because of the newer laws making finding a well located vacation home difficult.  If you consider buying a vacation rental in another market, make sure you understand the laws associated with short term rentals.  Many markets are implementing changes.

Best wishes in figuring out your path.  Happy to help with additional input or get on the phone if that helps.  I’m back in the country July 7 if you want to PM me and set up a call.  

Cheers - Craig

[Mike Nuss]

@Ciarraghe G. you've had some good input so far.

I'll add two points. Opening a HELOC, but not actually drawing on the HELOC, is like "stock piling" cash without the cost of the interest burn. That's a really good strategy in my opinion. HELOCs do not cost much to set up, but give you the ability to bring cash to the table in a short period of time. The downside to HELOCs is that they are adjustable rates and callable notes, they're not long term debt instruments, but they're very useful none the less.

One thing I would mention, in regard to "cash flowing" properties out of state. Based on your comments, it doesn't seem like cash flow is really a goal of yours. You're strategy of highly accelerating principal pay down suggests this. It seems you're more into wealth building than cash flow. 

There is always an argument of cash flow markets versus appreciation markets, but given your circumstances it seems an appreciation market is a better wealth building tool for you. I don't mean this due to the appreciation either. I mean this because "appreciation markets" are typically more expensive markets. This means, if your acquisition is leveraged, you'll have much more principal reduction over the life of the loan/ownership. You'll also receive much more depreciation than in cash flow markets, which can be very helpful to you as a high income producer. Cash flow markets can be great for the right goals, but principal pay down alone, in say a Portland property, can out produce the cash flow of say an Indianapolis market alone. Then you have more depreciation and most likely appreciation over time. Also, if your goal is to hold long term, a potential downturn in the market shouldn't be a huge concern, as long as the property continues to have a net positive cash flow. Portland's fundamentals are very solid for the long term so I wouldn't just ignore the market you're already in. There is still a ton of opportunity in Portland in my opinion. 

[Grayson Graham]

A couple people have suggested taking an HELOC and investing that money. Where can we invest money for a safe return above 5%? I would love to know!

@Thomas S.

[Frankie Woods]

@Grayson Graham, since you don't really have the time to find deals yourself, I would seriously considering being a hard money lender to a renowned Flipper in your area. That way, you will be able to identify whether the borrower has a good deal to protect your capital while earning a decent return (10 - 15%). Using your HELOC, you would essentially be arbitraging other peoples money. I'm getting very interested in the note space and am currently in negoitations to do my first note deal.

[Brad Hammond]

Hi Kerri, I agree with a lot of what @Mike Nuss said. I would not wait for a downturn to occur to invest. I’m not sure we will see anything significant in the next 3-4 years and the lost opportunity would be greater then the reduction in prices. 

I’m a multi family guy but I understand if you are too busy to get into something new. If that’s the case I would look into hard money lending.