Paid off property, should I sell to expand?

Question

Hey Everyone,

I have a paid off single family home with a good tenant who pays $850/month. After taxes/insurance I'm profiting about $7500 a year from this property.

My mom is a successful investor and it has always been a supplemental income for me. For a long time I never thought about become an investor for multiple reasons, mostly because I wanted to "do my own thing" but I have decided that I am going to pursue investing full time and make this my career while holding down a 9-5 that I enjoy for benefits and a safety net.

This begs the question. Do I sell my $85,000 property and leverage that money into a quad plex? Currently I can only get about $30,000 home equity line of credit which is not enough to make a big splash. I also do not want to partner with anyone, I have lost a best friend because of business and want to have control of my own business and follow my own vision.

I hate to give up a paid off no headache property but in order to get where I want to be (multi-family) I think selling will get me there faster. Do you agree and do you have any advice?

Appreciate any help.

Account Closed · Answer

Thanks for the heads up Albert, I will keep them in mind if I decide to keep the home and look into a HELOC to fund a new purchase.

Account Closed · Answer

Hey Greg,

Thanks for the advice. I renovated the house before it was rented and the tenant pays utilities and is responsoble for lawncare.

I may not be at $750 a month cash flow but this house wont need upkeep for a very long time. My only expenses are property tax and insurance. Everything else is pure profit for me at this point barring an unforeseen repair that would arise out of nowhere.

Curious how I wouldnt be able to afford a HELOC. Payment would be very low and that HELOC would bring in another rent check every month.

Regardless Im leaning toward selling at this point. I think it offers the fastest route to growth for my portfolio and much more lucrative profits.

Account Closed · Answer

Daria,

Thanks for your feedback. My house is also in a good neighborhood and its located on a quiet culdesac. My realtor has also told me that I should be charging $1000/month but I dont want to lose a good tenant.

I just started my search for a fourplex so I havent done a cash flow comparison yet but based on my estimations I would double my cash flow with a fourplex.

The other option I have is to buy another cheap single family foreclosure with the line of credit, renovate and repeat but the multi-family convenience as far as management and the ability to then leverage my multi families into an even bigger cash cow (apartments) is very tempting. On the other hand, the $850 I have coming in every month is a very nice safety net that could help me pay bills if future properties end up vacant/need repairs.

Would love to hear back from some others who were in my same situation and see what they decided and if they regret it.

Albert Bui · Answer

Kyle E. - Greg was making certain assumptions about your operating expenses on this free and clear home and about what the payment for the line of credit will be to arrive at his opinion that you "would not be able to afford," this and remain cash flow positive however actual real life results may vary.

You can often get a line of credit on a rental property for up to 70-80% depending on the credit union. www.penfed.org I believe offers a 4.75% interest only line of credit up to 80% for a max of 3 financed properties last I checked, but you may check them out when you have free time.

This roughly translates to $39.58 monthly interest payment for every $10,000.00 borrowed.

What you can afford or not is your own preference because even if you were in a situation that was "break even," you could be taking that money to make much higher returns else where so I think you should determine if you can or cannot afford it.

Daria B. · Answer

Hi Kyle,

Congratulations on your payoff.

I am a buy and hold  investor and would not sell my paid off property that is now 100% income producing but that's me. And I do have one like this.

Depending on each individual's circumstance, goals, and knowledge, this is a different answer.

I save my money while I still enjoy the fruits of my labor. I work full time for a company currently and do as much RE as possible (i.e. Reading, attending my local REI group, constantly running analysis and looking at properties. Also putting in serious offers.)

I would not sell because it took time to get to the point of full ownership and my properties are in well established neighborhoods that are stable. Yes I know that can change but for a long time there has been good steady economic growth.

Understanding you want to leverage but are unable due to low equity so you are thinking why not sell.

Ask this question, by selling do you get out what you need to only buy this one property and if so will you profit more than $625 per month? I took your 7500$ down to a monthly figure. Or can you get two properties and perhaps look to double your return.

You should do the analysis on the quad and this will get you closer to your answer.

Good luck!

Thomas S. · Answer

At a 5% return on the $85000 being about $355/month and normal expenses on a SFH being around 50% you are at best only making $70/ month positive cash flow on the property. $840/year is no where near the $7500 you think you are making and really not enough to make holding the property worth your effort.

You can not afford a HELOC on this property and remain cash flow positive so I would suggest you sell and find a better investment.