Next move for a small-time investor?

Question

Greetings.I've owned and rented out a duplex for a few years, and am currently finishing up some rehabbing on the now-vacant side. Other side still rented, and the rent from one side pay PITI. Likely ARV no less than 110,000 fairly conservatively. About 48,000 left on the mortgage. My total rent from both sides after the rehab is finished might be 1400 -- probably a bit more than that given the market.My question for you would be what you would do next were you in my position. I'm a relative novice when it comes to deal-making, so please feel free to give me as many details regarding how to go about moving forward as you can spare time for... and thank you in advance. I'm looking to buy and hold properties. What might be the smart next steps for me?

David Tomich · Answer

Personally, I'd hold onto it and not refinance and to pull the equity out. But many investors would pull the cash out. I like minimizing risk, and keeping equity is important there. But to maximize income you'd probably want to pull your equity out and reinvest it in another property. Because of the low interest rates it is an attractive time to pull equity out and reinvest.

Doug McLeod · Answer

You can find deals that cash flow 20% after rehab even with SFR. Should get better on a duplex. I would suggest this as a minimum target plus some equity capture. Don't settle for equity pay down only with break even cash flow. Find out how to use hard money lenders to make your cash go further - even though the financing costs more.

Jean Bolger · Answer

Well, the paid off primary residence is a great tool for investing! I think you might do better staying where you are and getting a line of credit or an equity loan on your house. I'm in the same situation. I love having my house paid for and not having the mortgage (especially since I am self employed and my income is variable) so at first I was loathe to borrow against it. But eventually I got a home equity line; our rule is that the heloc can only be used for investing. The advantage of the line of credit vs, the equity loan is that you only pay for it while you're using it, so you can wait for the right opportunity to come along. Mine is maxed out right now on a property that I paid cash for and am rehabbing, but I'll be able to refinance that property soon and pay off the heloc.Also, (at least around here) the credit unions are offering excellent terms and high LTVs on home equity lines -- definitely lbetter deals than you'd get for a new investor mortgage

Kurt F. · Answer

Thanks all for the input so far.@Phillip Hunt Nice approach. Left to my own thought processes only, that is exactly the path I'd likely follow. I'm really more of a "plodder", although that just doesn't sound very cool... @Mark Elliott and @Doug McLeod Your ideas sound like something I've been considering. I'm pretty conservative toward real estate, but I've been wondering if I should essentially "spread out" my equity, at least into one more property -- maybe another duplex. I'd need to really study up on exactly what this approach might entail. @Jean Bolger First off -- thank you much for your time to write the long list of advice for me -- very considerate people on BP!Your first paragraph is something I am considering as a viable option. Take out the equity and buy another property. The 27K down would pretty easily get me another 2 or 3 plex, but that wouldn't count all the additional expenses from the transaction. Or, the same 27K might represent the downpayment and some expenses on a "lesser" duplex in need of some rehab, which is fine as well, and very much within my wheelhouse.Your idea of renting my current personal residence and buying another house to live in is interesting, and it has crossed my mind once or twice. My home is paid off, and in a nice neighborhood. I doubt that it would be very difficult to rent. However, if we were to consider the 2% rule, I can't get that level of rent. More like the 1 to 1.25% level. (Not even sure how the 2% rule applies to a paid-off property?) But rules aside, I could buy another house of about the same value and "break even" on the PITI for the new place. The plus side would be that another property would be building equity.

Mark Elliott · Answer

my opinion, refi the property. let the tenants make the payments just as you are now. use the proceeds from the refi to buy and rehab another property. then, when that is rented and going well, refi that and do it again. always us other peoples money. leave yourself with some positive cash flow from each place, but if you really want to move ahead, equity that is just on paper will do nothing for you. idle money does no one any good

Doug McLeod · Answer

First decide your goals. If you want to grow your portfolio faster, refi out as much as you can from this property and your residence (assuming the cash flow is still decent and your income and credit are otherwise solid). Then make sure you know what a good deal looks like and go buy one (sounds like you've done it once before).

Jean Bolger · Answer

Well, there aren't many banks that will do a line of credit on investment properties, so if you wanted to get cash out you'd probably need to refinance. At 70% LTV you could end up with roughly 27k after closing costs. Is that enough for a downpayment on another place in your current market? (You may be able to find a bank that would go up to 80% LTV, but of course the more you borrow the more you cut in to the cash flow on the current property- and increase your DTI for when you're looking for the next mortgage). Or perhaps you have some equity in your personal residence and could get a Heloc. OR --and this is probably more trouble than you want to go to -- you could think about renting out your current house and getting another owner occupied loan for a third property that you would live in for a year or so and then convert to a rental. This is usually a more attractive option for young people starting out, but I'm just throwing it out there since I don't know your age, situation, or anything else. And of course it depends on whether your current home would even cash flow as a rental...

Phillip Hunt · Answer

Hi Kurt, I only own three properties and they are basically in the same shape yours seem to be. I can only tell you what I would, and am doing. Considering it takes me about 30k to buy and rehab another property, I would chalk this one up to being finished. Now I would bank the positive cash flow, continue to save my own money, and when you have 30k, do it again. Until, it comes to a time when you want to focus on paying them off rather then acquiring more. From a buy and hold investor point of view.

Kurt F. · Answer

@David Tomich thanks David -- I like your conservative approach -- at the same time, I feel like I need to move forward in some smart way.