Debt paydown vs. scaling

[Jake Salisbury]

Hello all,

Warning, this question has many parts.  My girlfriend and I have been going back and forth on this question and would love to hear what the BP community thinks. Our goal is to have financial freedom, at least $10k a month from RE investments in the next 10 years. We are struggling to know which direction we should go.

We currently live in a condo that if  sold in this market we would net $80k. It is an older property with new condos being built within our communities. Our first question is, should we sell this place now and use the $80k for a multifamily property or hold and use for a rental property. It would cash flow as a rental property but not as much as a multi. We  currently have enough cash on hand to invest in another multi family without selling this property. Additionally, by September we will have lived in this property for 2 years. Is it worth waiting until September and hope the market is still as strong or take the hit on capital gain taxes and sell now.

Secondly, if we do hold this property would it make more sense to prioritize debt paydown (instead of investing in another property, put our cash towards our mortgage payment and have it paid off within 10 years. Then we would be profiting a clean $2k a month from just this property alone and still have money for a down payment for a house hack. 

Thanks all! 

[Jake Baker]

@Jake Salisbury

Real Estate has several wealth generators:
Cash-flow
Forced Appreciation
Market Appreciation
Debt-Paydown
Tax-Benefits

I look at Cash Flow and Forced Appreciation as a hedge against market corrections. Cash flow (in my portfolio as a whole) covers my expenses. Forced Apperception (BRRRR or buying at a discount) allows me to build in equity from the beginning of the investment in case I need to fire sale the property for an unforeseeable reason.

Debt-Paydown and Tax-Benefits are just a result of owning real estate and can be more-or-less predicted over a time period. A good CPA will help you save a ton on taxes as your wealth grows.

Market Appreciation is where you will make the most money over a 10-year period but is the least predictable. However, real estate values (on a national average) have never gone down over a 10-year period. https://fred.stlouisfed.org/series/MSPUS

Here is what I do:
I live in San Diego, a high-appreciating market with a lot going for it economically and very little cash flow. I try to buy a primary residence every few years to take advantage of the favorable financing with the goal to eventually turning them into rentals.

My company does 20 Flips/BRRRRs per year in Jacksonville FL and we use a hybrid approach. It is very hard to "perfect BRRRR" here with consistency or anywhere for that matter with today's rate and insurance costs. Of those 20 projects, we BRRRR 8-10 per year, and the flips supplement the money left in the BRRRRs.

How do we choose which ones to BRRRR? - Location. It is not about how much is left in the deal for me. It is about the long-term appreciation of the asset. The key is to make sure there is enough cash flow in the portfolio and enough reserves in the account for capital expenditures.

I believe house hacking a primary residence is the best way to generate wealth. No matter what strategy you pick, sacrifice is required. Whether you are sacrificing your comfort to house hack, money for a downpayment to cash-flow more, or one of the wealth generators based on the market itself; there is no one-size-fits-all perfect investment.