Looking for advice and analysis to build cash flow and LEARN!

[Marc Estepa]

Hello!  As some of you know, I’m brand new to BP and loving it!  In the short month that I’ve been listening, It’s completely opened my eyes to a new way of thinking about real estate and money, while forcing me to reevaluate my financial position and set new goals.  I’m trying to absorb everything right now and learn it all, while trying to move my family from Hawaii to Washington In the next few weeks.  It’s overwhelming but I’m hungry and excited to learn.  While I’m trying to absorb it all, I need to focus on the basics and set goals, but don’t know the best way to do this.  I’ve tossed around a few ideas in my head, but need to hear other points of view from experts and vets who understand this Real Estate game way better than I do.  So I’m opening up my situation to all of you experts to help me analyze and figure out the best way forward!  I’m open to ANY and ALL recommendations!    

BACKGROUND:  Active Duty Army Officer with a very old school, traditional mindset toward finances and real estate.  I believe in living below your means, eliminating debt, never using credit cards, saving 6 months to a year of emergency funds, investing in retirement and only buying a home if I could pay it in cash or save at least 20% for a down payment.  I currently own two properties in North Carolina located near a military base:

1.  1400 sq ft, 2 bedroom, 2 bath with detached garage, Condo.  Purchased in 2005 for $120K and refinanced at 5.5% in 2008.  Remaining balance is $82K, Zillow estimates the property worth $82-102K or renting at a median $940.  Property is currently rented at $900 per month with a mortgage of $792.  Mortgage does not include property tax or insurance.

2.  2100 sq ft, 4 bedroom, 2 bath, single family home.  Purchased just before the crash in 2008 for $242K.  The market crashed, and the builders cleared the remaining land to build cheaper homes, bringing my property value down even further.  Home was refinanced in 2012 at 3.75%.  Remaining balance is $201K, Zillow estimates the property worth $237K-284K or renting at a median $1300.  Property is currently being rented at $1625 with a mortgage of $1442.  Mortgage does not include property tax or insurance.
 

SHORT TERM GOALS:

1.  Buy a primary residence/investment property (preferably a Multi Family Unit or Single Family Home) by JAN 2021 and House Hack

2.  Set my two properties on a new glide path to produce better cash flow and in a position to pay down the balance faster and leverage the equity for future investments and purchase another rental property in the following year?

What is the best way to do this? Is it worth it to refinance both properties and restart the clock for a lower mortgage payment and better cash flow? Should I pull out cash during the refinance, or wait and do a HELOC or Home Equity Loan to fund the down payment on another investment property?

I have the desire, but trying to build the vocabulary and confidence to know what I’m talking about without sounding too stupid, and also trying to hype myself up and grab my balls to stop analyzing and take some action!  I’m open to everyone’s ideas and analysis!  Sorry in advance if I ask simple minded questions.  No worries, I have thick skin!

[Joe Villeneuve]

OK, first never, ever, use Zillow's "estimates" as any guide to value your property or rents.  They are averages over a large area that covers multiple different markets, all of which will have different values that will impact the Zestimates and distort the true value s for your properties.  Learn how to analyze markets so you can find the exact values for rents and property in the specific market the property in question is in.

Next, paying down the properties using your own money is working backwards.  The total cost of a property is NOT equal to your cost, unless the entire Total cost comes directly from you.  In other words, the total cost to you is only what comes out of your pocket.  If the source of funds for the remaining total cost comes from the rent, then you are not paying for it...your tenant is.  Don't help them.

As a follow up, you start making a profit only when you have recovered all of "your" cost.  So the less that comes out of your pocket, the quicker you start making a profit.  For example, let's compare two options for paying for a property.  The property costs $100k, with a cash low of $10k/year.  If 80% financed, the cash flow would only be $5k/year.,,and this is a real deal.  Let's say both Options start out with $100k and all properties appreciated at 5%/year:

Option #1:  All Cash
Your Cost=  $100k
# of Properties = 1
Total PV at start = $100k
Total Equity at start = $100k
Total PV after 10 years = $163k
Total Equity after 10 years = $163k
Cash Flow = $10k/yr
Years to Profit = 10
Profit after 10 years = $0

Option #2:  20% Down, 80% financed
Your Cost= $100k
# of Properties = 5
Total PV at start = $500k
Total Equity at start = $100k
Total PV after 10 years = $815k
Total Equity after 10 years = $715k
Cash Flow = $25k/yr
Years to Profit = 4
Profit after 10 years = $150k

Assuming you would be buying additional properties every time you reached the required cash needed for each Option ($1 = $100k, #2 = $20k) add to this, the properties you could be adding to this every time you reach that cash amount.  That means 10 years for Option #1, and only 4 years for Option #2.