Portfolio management question
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Investor · Bryan-College Station, TX · Member since 2020 · 27 posts · 27 votes
1yQuote from @Dave Hart:
I have 4 rentals. All cash flow positive. I’m running out of capital to buy more. One option is I can cash out refi one property that has $400k in equity.
If I take out $200k, that property will have a negative cash flow of $500, but the overall portfolio will still cash flow positive and I'll have capital for another purchase. My attempt will be to BRRRR and recycle as much capital as possible.
Any thoughts if an individual property can negative cash flow to provide capital as long as the portfolio is still positive?
Thanks all
I think this ultimately comes down to the following: Will your return on investment be better with a new purchase than your current return on equity for that $200K?
If your property is cash flowing $500 a month right now, that is 6k a year, so your return on equity for your 200k is 3%. If you can get considerably better than 3% on a new deal, it may make sense to extract that 200k and move it into a new deal.
Keep in mind though that your return on equity on your 400k equity goes from 1.5% right now (assuming 500/mo positive cash flow) to getting a -3% on the remaining 200k in equity, so that is also a factor. So basically, whatever new investment you get would need to make up for the now -3% return on your remaining 200k in equity. So I would think the new investment would need to shoot for 8%+ return to be a better move than just leaving your capital in the current property.
3 Replies
- Real Estate Agent · Tooele, Salt Lake City UT · Member since 2020 · 136 posts · 54 votes1y
Using a cash-out refi to unlock $200k makes sense if you're confident in your BRRRR strategy, as long as your overall portfolio remains cash flow positive. Although one property will have negative cash flow, the ability to reinvest could yield higher returns across the portfolio. Just make sure you're prepared to cover any shortfalls on that property and have a strong plan for deploying the new capital effectively. Keep an eye on your debt-to-income ratio and overall leverage to avoid overextending.
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes1yIf it was for a fix and flip I would say do it but for a BRRR it would depend on whether you think you are adding that much value - as whether you are borrowing from a LOC or getting a loan for a new purchase - you are still borrowing money. (which blows my mind how many people think that if they take equity from a property they do not view that as borrowing)...
Quote from @Dave Hart:
I have 4 rentals. All cash flow positive. I’m running out of capital to buy more. One option is I can cash out refi one property that has $400k in equity.
If I take out $200k, that property will have a negative cash flow of $500, but the overall portfolio will still cash flow positive and I'll have capital for another purchase. My attempt will be to BRRRR and recycle as much capital as possible.
Any thoughts if an individual property can negative cash flow to provide capital as long as the portfolio is still positive?
Thanks all
7e investments53 Reviews - Investor · Bryan-College Station, TX · Member since 2020 · 27 posts · 27 votes1y
Quote from @Dave Hart:
I have 4 rentals. All cash flow positive. I’m running out of capital to buy more. One option is I can cash out refi one property that has $400k in equity.
If I take out $200k, that property will have a negative cash flow of $500, but the overall portfolio will still cash flow positive and I'll have capital for another purchase. My attempt will be to BRRRR and recycle as much capital as possible.
Any thoughts if an individual property can negative cash flow to provide capital as long as the portfolio is still positive?
Thanks all
I think this ultimately comes down to the following: Will your return on investment be better with a new purchase than your current return on equity for that $200K?
If your property is cash flowing $500 a month right now, that is 6k a year, so your return on equity for your 200k is 3%. If you can get considerably better than 3% on a new deal, it may make sense to extract that 200k and move it into a new deal.
Keep in mind though that your return on equity on your 400k equity goes from 1.5% right now (assuming 500/mo positive cash flow) to getting a -3% on the remaining 200k in equity, so that is also a factor. So basically, whatever new investment you get would need to make up for the now -3% return on your remaining 200k in equity. So I would think the new investment would need to shoot for 8%+ return to be a better move than just leaving your capital in the current property.
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