What would you do in this situation?

Question

Every once in a while as investors we need to take a step back and evaluate how our portfolio is doing and look at where we want to go and see if the two sides are working together the way they should. That is what I have been doing lately. I know where I want to go and know what it takes to get there, but where I started and what I am doing currently are not necessarily the same strategy. I want to pose a scenario to get the communities input on what would you do

The facts

1. There are 5 SFR houses on the same street sitting side by side that you own free and clear (4x 3/1 and 1 2/1 bed/bath)

2. 3 are currently rented generating 1475/m and 2 are vacant needing total rehab

3. As is value is 75K but if you fixed the two vacant props and minor repairs on the other 3 (total rehab 65K) would bring the total ARV to 165K and produce $3350/m in rents

4. Cash is not in your account currently to do this and you are still paying the taxes and mowing the grass

So here is the breakdown of that scenario.

Currently I have spent 50K to generate 1475/m and if factoring 50% in expenses for maintenance, management, vacancy, etc. results in a 17.7% ROI - with 25K equity not bad but....

if fixed would be 115K total spent generating 3350/m which is still 17.5% ROI but your equity now would be conservatively 50K and eliminate any cap x for years to come.

This is a C-D neighborhood. Appreciation is pretty flat but a good working class neighborhood that is relatively safe (I personally used to live there and would again if needed)

I have other properties, and other opportunities that I believe will out perform but as always there are no guarantees. With cash comes options, but without passive income how long will the cash last? Do you roll the dice on your gut to do better quicker, or do you take the slow and steady with the above numbers and dig out slowly to achieve what you want and possibly miss the potentially better deal?

This is a real scenario with real numbers that I'm willing to share and looking for your opinion... there is no right or wrong answer here just the opportunity for everyone to throw in their two cents.... that isn't what most want to hear.

Ozzy Smith · Answer

@Thomas S. yes I agree with you that would be the best option and if I could do that this post wouldn't be here. The problem is that I don't have the $65K right now to do it.@Jd Martin doing owner financing might be an option that I haven't thought about before. I have considered selling them all right now and still might but it's a hard pill to swallow since they are free and clear with so much upside and currently generating income. Sometimes you got to step back to get a running start forward however. As far as being a rough neighborhood it is a C-D neighborhood but not unsafe by any stretch. I used to live in this neighborhood and never had any issues. This is the type of area I prefer to invest in so don't let the price fool you. It is a niche that is widely debated but it's my specialty and I do very well with it. I constantly look for MORE properties in this neighborhood because I have a waiting list of people who WANT to live there.@Ryan Detig I totally agree with sharpening up the credit which is what I'm doing just not there yet. Getting a job is not the best option for me. Being an investor is my job and I do ok at it. I have already done over 10 wholesale deals currently, am working on a flip now, and building relationships everyday with several oos investors looking to buy all the time. I do have a local lender that I use all the time for my flips and for transactional funding. This is out of his box because either it is a longer term loan which is not his thing or the end is based on projection to get the money out on a refi. Even though he 100% agrees with my numbers, strategy and everything (we talked in depth about it already) he is hesitant to do it because he already has a successful lending business and has no need to go outside of his traditional lending criteria for me. Basically he turns and burns his money on short term loans because it is more profitable for him and I would need it longer than he likes. That being said we are going to sit and look at the numbers next week and it is possible to do but I'm afraid it might be even more pricey than usual which is why I'm looking for other opinions from the community.Thanks to all for the input.... keep it coming!

Thomas S. · Answer

I would invest the money to get them all up and operational. Once the renovation work is completed I would consider two options. First would be to find a way to get as much if not all of the equity out of the properties. Dead equity is a death sentence for cash flow. The opportunity value of cash generally turns a investment into a liability. True cash flow can only be generated with 100% leverage.If the equity could not be pulled you need to determine what is the best avenue to sell, rented to investors or vacant to home buyers.

JD Martin · Answer

I might try to owner finance 1/2/3 of the occupied units to generate cash for the rehab of the other two units, which would allow me to continue receiving cash flow on those units without losing total control or position or having to get a traditional loan. Alternatively, I might seek a partner for the rehab of the two vacant units either as flips (sounds like a rough neighborhood) or as a buy & hold. Thirdly, I might look to owner finance the vacant units to another investor to generate some immediate cash and (hopefully!) improve the immediate neighborhood, increasing my own property value. Fourthly I might look to owner finance the entire portfolio to a new investor and reinvest the cash proceeds in a better neighborhood or build my cash accounts. Finally, I might look to sell outright the entire portfolio and go all cash on 2-3 better properties.I'm familiar with Dayton (I lived in the area for a couple of years) and 5 houses cumulatively worth $75k has got to be a rough neighborhood.

Ryan Detig · Answer

@Ozzy Smith We all have different tools in our tool belt and after use (or abuse) we have to spend the time and money to sharpen them so they can be useful to us in the future. Sounds like it is time to sharpen that credit score tool in your tool belt. Another option if you have the time is to get a job. Even if it is just for 6 months to be able to refi. Finally you could try to make contacts in your local reia that do lending and start to build that relationship in hopes that they can put less weight on the low credit and no job because they know you personally and know what you do and how you run your business.

Ozzy Smith · Answer

Thanks @Ryan Detig for the input. I've tried that a couple of times and continue to do so every couple of months. The problem is low loan amounts. The ones currently rented are only about 20-30k each which is tough. Also this is my full time gig so in the eyes of a bank I have no income bc I always re invest the profits into more properties. When going hard money it is still a low loan amount. I also have low credit scores due to a divorce from 3 years ago and bc I pay cash for almost everything hasn't risen high enough yet to attract the attention of a portfolio lender

Ryan Detig · Answer

@Ozzy Smith If I knew a trusted contractor I would get a HELOC for 80% of the paid off properties (60k), use that to rehab the two vacant ones, rent those 2 out, and then see about getting a portfolio lender to refi all 5 properties as a bundle at 70% LTV (115k). Then you have that money you can use on your other better performing opportunities, assuming those other opportunities are not time sensitive.