How to maximize equity and preserve capital?

Question

Hello!

I would like to ask for your advice on what strategy I should consider giving my situation and goal.

I have W2 and I can save $30k a year from my salary.

I am a passive cashflow guy (so far).

I live in Seattle, pretty expensive and low cash flow.

I currently buy and hold of 3 duplex, which I live in one of the units.

Duplex A (I live in) has about $300k equity, and I pay $600 mortgage out of pocket (rent $1850 - monthly mortgage $2450 = -$600)

Duplex B has about $50k equity, and produce net cashflow of $1200 a month

Duplex C has about $40k equity and produce net cashflow $1200 a month

Recently I’ve inherited $100k cash that I can invest.

<Goal>

My goal is $10k cashflow a month in 5 years.

I know that $10k a month is not gonna happen by just raising rent. And WA (Seattle) does not produce much cashflow any more. I have to go outside and I have to go big to achieve my goal but I would need to go smart.

My first question is how to maximize equity that those 3 duplex. I am hesitant to sell them unless I find better cashflow deal. I consider cash out refi even if current cash flow might suffer a bit due to mortgage increase. I also thought heloc to obtain additional fund for short term use for acquisition.

My second question is how to sustain my capital. WA (Seattle) does not produce much cashflow any more, so I consider BRRRR in out of state, but also wonder if it is too late to enter since everyone seems doing it.

My third question is that personally I like multifamily better than SFH because of better cashflow. But it is more difficult to sell. I am cash flow guy so it's ok but taking time to sell is a problem. Do you have any opinion on that?

So wrapping around, I am thinking of BRRRR of out of state, multifamily (2-4) or bigger apartment by getting cash out refi or heloc. Agree or any better idea?

Thanks for your time!

Account Closed · Answer

Don't be concerned about the time to sell a property if you're a cashflow guy, leave that to the flippers. Probably time to sell all three duplexes if the market is hot and look for one larger property. Best of luck with your investment.

Yoshi Uem · Answer

I think it's time for me to networking for out of state deals, and homework. Thanks all!

Yoshi Uem · Answer

Absolutely. King, Pierce, Sno still have a room to grow. My dilemma is the equity that is not working for me. I am a cash flow guy, so I want to make the best use of equity to produce maximum cashflow. One scenario that I would also like to figure out is to keep properties and get the equities out like cash out refi to buy another one.

Elo Xen · Answer

Many good suggestions in this thread, but before you sell: if you're holding in the Seattle market, you're upside may be quite good both in continued appreciation and increased cash flow. Rents have been rising consistently. There will much debate on this point, but I don't see the market pressures easing up in Seattle for 7 more years, and that's only because I'm not comfortable speculating to that degree. What I do know is that there is a massive influx of corporate and investment money flowing in, and there's a good chance this will continue for years now as we're relatively cheaper than Bay area and Vancouver.You can do better, if you go active with your money, but I think there's still upside in Seattle, and your cash flow will continue to rise, if you stay on top of market rents. Remember, if you sell you're going to take a 8-9% haircut on the sale (assuming you 1031 and avoid further reduction due to taxes). Sometimes no action is the best action.

David Thompson · Answer

Hi Yoshi,You have some good experiences and I hear you about cash flow. I think you are smart to look out of state in markets that are still growing solidly and that cash flow better. Out of state is great for a passive strategy. You might want to start researching large apartment syndication and learn about what these experts are investing in, where and what results they are expecting and have experienced. Track record and reputation are key. In this area, you are a limited partner and are providing capital to experienced teams that invest in these types of deals you are looking for. It takes many years for folks to take down a 300 unit apartment on your own but w/partners you can get in the game much sooner. Two things I like about this area is scale and forced appreciation. You don't get either w/duplexes but if the market slows down and does sideways for awhile big apartments are more insulated and value add players have a way to continue to create value on early in projects. Typical syndications pay distributions quarterly, often look to reward investors after a few years of re-positioning the asset w/equity out refi lowering investor risk further while you continue to stay in the investment typically 3-5 years before they sell and move onto the next value add play. Cash on cash yield targets up to 10% w/all in high teens to 20% IRRs over the hold period still quite doable with the most experienced operators in the right market w/the right deal.

Dave Foster · Answer

@Yoshi Uem, Two tips might help you if you desire to sell all three and 1031 together. First look for a seller who will sell pieces to you at a time through a lease option. As each duplex sells you use the proceeds in a 1031 to buy a % of the new property. This way you don't have to time all three within the same 180 day period necessarily. And the seller gets to spread their sale and tax consequence out.Second, if your playing in bigger numbers it's time to graduate to a reverse exchange. You lock up the new property when you locate it and the QI holds it as an exchange accommodating titleholder. Then when you sell your duplexes they purchase teh % TIC interest from the EAT. Yes, more complicated but the bigger the prize the more complicated it's going to be anyway. And this goes a long way to mitigating risk.

Yoshi Uem · Answer

Thanks for your advice! you might be right about selling MFH, but selling 3 duplex at desired prices and do 1031 exchange will be possible but tricky in timing wise. Now it makes me wonder how people can make a transition from small MFH to larger apartment. I can sort of see myself moving up from 2-4 MFH to 15 units apartment, but I cannot quite imagine how to leap to like 100 or more units apartment. I am aware that every case is different but can you share any example that you might have or know?

Jeff B. · Answer

I've been strictly C.F. for 19yrs on my MFU 6-plex. I have no idea why you assert they are more difficult to sell. Put mine on the market and within 10days I was engaged in a bidding ware - - got FMV.The 6-plex is obviously a commercial loan and those bidding were serious, not first time SFR buyers beginning their REI experience.

Scott Jones · Answer

I vote to keep the duplexes, use the 100k to find a couple more.

Patsy Waldron · Answer

With the equity you have in the duplexes, the market at an almost-all-time high, I think you should consider selling them (seriously looking into doing a 1031 exchange to avoid paying taxes on the appreciation), adding the proceeds to the cash you inherited, and trading up to a much larger multifamily, possibly out-of-state. Just working off the equity you have in your duplexes + inheritance, you have $500K in hand. That's a handsome down payment on a $1.5 million- $2 million apartment complex. Large multifamilies are the way to go for huge cash flow with minimal hassle (given that you would likely have management in place).