Help! Need advice in regards to my next steps in investing

Buying & Selling Real Estate
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Help! Need advice in regards to my next steps in investing

John Wulf
Salem, OR · Member since 2014 · 3 posts · 0 votes

This is my first official post to the forums, but am really curious on what some of you might recommend for me on my next steps moving forward with my real estate investing. Here is where I'm currently at:

I currently have 4 rental properties which I have taken advantage of the low interest rates and have them each on a 30 year fixed mortgage (each at below 4%). They are each cash flow positive, and have never been vacant. 

I have a line of credit for $150,000 that I use to buy flips, but currently just bought a house for $150,000 cash and am in the process of doing a cash out refinance. So that will be 5 rentals currently owned.

Why I'm here, and why I'm asking all of your smart advice is that I just got notice on one of my rentals that the tenant will be moving out at the end of November. This is a house I thought about selling already because I actually lived in the house for 2 of the last 5 years as my personal home, so I would be able to sell the house and be sheltered from any capital gains tax.

With that said, I also should be able to rent the house quickly with a positive income of around $500/month after all expenses... or I could sell the house and take home roughly $130,000 in equity. 

My question for all of you is should I pay off one of my rentals (balance only being $72,000) and buy another rental property with the balance of the equity? Should I hang on to the house since it's producing solid monthly return? Should I use the equity towards flipping houses and not use my LOC?

Financing is just getting tighter and tighter...

I'm just in a situation that I'm not sure what to do, and would want to know each of your opinions. I hate selling the house on such low interest financing, but I also know I have the advantage of not having to pay taxes on any of the gains from the sell. 

Any thoughts? Advice? Anything would be appreciated!

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  • Chris Hiatt
    Field Engineer · Carencro, LA · Member since 2015 · 17 posts · 2 votes
    10y

    Seems like a WIN-WIN situation. I am curious to hear the responses.

    0Reply
  • Rick TurmanPro Member
    Flipper/Rehabber · findlay, OH · Member since 2015 · 118 posts · 46 votes
    10y
    John Wulf , I am also new to the forums as well as Real Estate Investing and looking into purchasing a 4-Plex with lots of questions in mind. However, after reading over your post a few times it kind of got me thinking. The home you have now (what you consider the 5th rental) rents for 500/mo correct? And you are willing to sell for 130k or make roughly that amount. If you were to keep that home and take the 500/mo for the next 21-22 years you would make your 130k. What I think you should do, since lenders are getting tight for you, is to look at selling the property and use both your LOC and your equity on this home to use towards future flips. Eg. You use the 130k cash to flip a home where you know you will bring in at least 40k from. Rinse and repeat 3 more times that year and you made back your 120k. Now you have 250k in liquid on top of your open LOC so now you have 400k in liquid that I would use towards either bigger and better ROI properties or use this as your investment funds for future flips of said caliber. Hope this helps. Good luck with your endeavor! -Rick
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  • Ari Bauer
    Realtor · Lakewood, NJ · Member since 2015 · 24 posts · 11 votes
    10y

    @johnwulf

    Calculate how much your return on your equity is by dividing your cash flow 6,000 by your equity 130,000 to see what your return on equity is 4.61%.

    If you pay off the loan on your property you will be saving under 4%.

    If you are only going to be saving 4% on the loan and you would make 4.6% by keeping the house the logical thing would be to keep the house or to use the money to purchase an investment with a cash on cash return greater than 4.6%.

    Do some research in your area to figure out if you can get a higher return for your money by using the $130,000 as a down payment on two or more houses and based on your research, go with the option that makes the most sense.

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  • Joel Gabelman
    Cleveland, OH · Member since 2012 · 28 posts · 22 votes
    10y

    There are some interesting ideas, but there are some faults in thinking too:

    1) While your ROE is low, this is due to the large equity, NOT the low return. As an example, if you cash-out refi or take out a LOC on the property and use those funds for ANOTHER purchase, your ROE will be considerably higher.

    2) @Rick Turman suggested your break-even would be 21-22 years. This is a little high level, as it ignores appreciation, rent increases, and other factors such as taping into the equity via a LOC or pure cash-out.

    You SHOULD be abel to get around 70% +/- LTV LOC or cash out. I would take this approach and look for another property to invest in. If you need MORE money than 70% for a bigger deal (or other personal reason), sell the property.

    Some other thoughts:

    Your CURRENT ROE is around 4.6%. What's the property worth? I'm ASSUMING the property is not F/C (Free & Clear). Assuming the house is worth more, this will effect your LTV with a cash-out refi. Additionally, I'm curious the ROA (Return on Asset).

    I agree with @Chris Hiatt - this seems like a win/win situation.  

    In summary, if you have no better use for the money (vis-a-vis investing in a higher return property), at least get a LOC on it. If you NEED the cash, sell. Finally, I'd check with your CPA as they'd have good info. For all I know the cap gain shelter might be gone next year - your CPA should be able to give you some good advice, and hopefully they own CRE and can put themselves in your shoes.

    Best of luck!

    -Joel

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  • John Wulf
    OP
    Salem, OR · Member since 2014 · 3 posts · 0 votes
    10y

    Thanks to everyone who replied!

    I'm still not sure what I will do, but this helps give me some thoughts

    0Reply
  • Jacqueline Carrington
    Investor · Corona, CA · Member since 2014 · 746 posts · 372 votes
    10y

    Do you invest full time? What is your end goal? To produce enough monthly cash flow to quit a job? To cover your personal monthly expenses? 

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  • John Wulf
    OP
    Salem, OR · Member since 2014 · 3 posts · 0 votes
    10y

    I do flips and rentals on the side... I would like to build up enough income and cash flow to retire early... With that said, I would like to keep buying up properties and rentals as fast as I can for the time being, but want to be wise with my investments as well.

    0Reply
  • Matthew Murphy
    Investor · Rochester, WA · Member since 2013 · 221 posts · 30 votes
    10y

    $500 a month cash flow from a SFH is hard to find. So wanting to retire early and giving up that cash flow is something I would consider. Or like you said use the 130k pay off your other rental (72k) then buy another with remaining capital. Or down payment on a multi-family? Either way I think you have a win-win scenario.

    0Reply
  • Rafael Norat
    Investor · Lodi, NJ · Member since 2013 · 487 posts · 179 votes
    10y

    Hey John,

    I also wouldn't worry too much on interest rates creeping up. We will probably be very low historically speaking for years to come. The fed is struggling to even move 25 basis points after 7 years!

    Seems like you have to find a good balance between capital growth and cash flow to meet your retirement goals. So, I would just focus on tweaking that balancing to fit your timeline and not worry on interest rates.

    Hope that helps a bit..

    0Reply
  • Gino BarbaroPro Member
    Rental Property Investor · St Augustine, FL · Member since 2014 · 2k+ posts · 1k+ votes
    10y

    @John Wulf

    Hi John

    Have you considered purchasing multis, small apartments.  You can continue to fix and flip, accumulate that chunk of cash, but reinvest that cash into apartments that will cash flow for you and offer tax advantages.  You can have the best of both worlds

    Gino

    Podcast Guest on Show The “Conveyor Belt” System That’ll Build You a BIG Rental Portfolio Quickly
    0Reply
  • Nuhan Demirkan
    Rental Property Investor · La Plata, MD · Member since 2011 · 216 posts · 117 votes
    10y

    @John Wulf if your goal is to accumulate enough cash flowing rentals for early retirement, paying off houses is going to slow your progress. Personally I would not touch the equity in the house either for two reasons: 1- if you do you may not cash flow, 2- In a downturn high equity will protect you. Figure out how many rentals you need to reach your goal, acquire the rentals, then start paying them off. At the same time find a local bank (a portfolio lender) that lends on rentals so you can keep converting your cash purchases.

    0Reply
  • Andy Wu
    Rental Property Investor · Atlanta, GA · Member since 2015 · 44 posts · 7 votes
    10y

    @John Wulf I would look at it from a Gross Yield perspective. If you are getting you're getting below 4% interest rate and your Yield is above 4% I would keep on making money on other people's money. However, if you're looking from an IRR standpoint it'll be better if you sell the asset right now. You'll have to do a full analysis on all your properties and really compare the two scenarios, simply spend an hour or two build something in excel and compare the outcome of two options. Since you're doing flips on the side, I would look at IRR & NPV....

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  • Lucero Sanchez
    Contractor · Queen Creek, AZ · Member since 2014 · 155 posts · 37 votes
    10y

    Flipping makes your money grow faster and can get you to the point where you pay cash for properties and owe no loans on future flips and on rentals.

    We would use the $130K you mentioned and make it grow with flips, just like the snow ball effect. ;) 

    0Reply
  • Nick Sotelo
    Salem, OR · Member since 2014 · 20 posts · 4 votes
    9y

    Hey John! I see you must have made a choice, as it appears you have a house listed on the MLS.

    Do you have an update for us? 

    BTW I'm in Salem, and looking to go down the same road as you. 

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