Need advice on making decision hold or sell

[Andrew Yip]

Hi Bigger pocketers,

Through bigger pockets, I've been a big fan of BRRR. I bought and hold properties in southen california area ( total 6 investment properties). My investment properties would be considered class B or C... with close to 1 % rule (0.8-0.9%) rental income.

Properties value has gone up.. and if I were to sell the properties I would have been making around 50-70% gross profit.  ( about 55k-70k)

Now the problem is that I have about 280k in helloc... that kinda burden my finances especially due to FED increased rate. I feel that I need to take care of this problem ASAP before rate goes up to 5 or 6 % ( currently it's the same as prime)

I need your advice, 

Should I start selling my houses in order to pay off the helloc? or should I do cash out refinance... ( max I could get is around 80k for all the properties) and continue the BRRR strategy?

or what other better way to handle this situation?

I'm not sure how far are we to recession, this make me nervous especially on holding C class investment properties.  During recession, house price went down significantly and there were scarcity of qualified tenants.

Thank you very much for your time and advice.

[Kristina Heimstaedt]

Refinance!!! Don't sell a performing asset. You rarely hear someone say, "I'm so happy I sold my performing asset and paid the capital gains tax". Refinance, hang on to the cash. Hold yourself to your 1% rule so you don't buy something just for the sake of buying something. Be cash flush during the next correction, recession, or whatever term you'd like to use. 

[Alex Lucille]

@andrew I think we would need more details about the properties and your goals to give you an opinion but if I make the assumption that you are looking to maximize cash flow then I would compare what your return on equity is (after factoring in increased heloc rate) compared to what alternative investments you would use that cash for if you sold.

At first glance, based your numbers it would seem that the transaction costs of either option (selling or refi) would weigh heavily on this calculation since you don't have that much equity, unless there is one property with a lot of equity that doesnt cash flow that well - in which case the best option is obviously to sell/refi that property to at least lower your variable rate heloc

[Dylan Vargas]

@Andrew Yip This question is really for some pros to answer but I will give my two cents anyway. I have noticed many homes took 10 years to get back to the price people paid for the house in 2007. If the economy does change or the housing market dips you will be hanging on to these properties like it or not. Yes, you will have principal pay down over the years. Can you 1031 these homes into anything? Sometimes its ok to take the money and reevaluate or wait for a correction and buy again. People have a real hard time with debt during tough times. Make sure you make a decision that lets you rest comfortably at night. Consider your age as well. The younger you are the more time to allow these homes to be paid off. Remember, during a downturn or anytime really "cash is King"!

[Jim D.]

Can you provide some more information on how your loans are structured? It's hard to answer without knowing what your HELOC is tied to, what you owe, etc.

If you can list the value of each property, what is owed on them, and what they rent for, people here can give you better advice.

[Andrew Yip]

Thank you @Kristina Heimstaedt @Alex Lucille @Dylan Vargas for responding to this! just a bit more details about my situation.  I have 2 other properties that has plenty equities.. about 800k and 500k. I utilized Heloc on one of them, but I 'm not planning to refinance any of them since I got record low interest on them. 

The chips that I could play around is with the 6 properties that I have. If I were to sell them... I will be making gross money between 103 k to 111k  ( sorry I made a mistake when writing the original post) but then again I have to calculate the renovation that I did, agents, bang on the tax...   so I'm guessing net profit would be about 55- 80k for each houses.

In terms of loan, I don't have much room on this, at most I could cash out 80k... probably 100k if I'm super lucky on the appraisal.   so that would leave my heloc to 200k.

Or should I do combination... selling 1 house and refinance?  so I would be left with around 130k in heloc?

I agree with Dylan that during recession and tough times,  people would have real hard time and I need to really minimize the risk. Given the properties in class C neighborhood, it might be hit quite hard on the price.. and probably it's difficult to replace tenant during that time. 

I just got married last year and now have a baby. There are lives dependent on me, thus I have to be wise on making decisions and not just following my guts. This is why I 'm asking for help at this forum.

Thank you for your help

[Andrew Yip]

Hi @Jim D.  sure... here's the breakdown

properties breakdown:

House	Balance	Rental income	Retail value
1	371346.44	4000	1300109
2	138545.83	1475	242463
3	174045.71	1700	287037
4	209424.01	1750	323573
5	199397.36	1900	340277
6	171854.66	1700	283025

All of them are single family house,   house no 1 used to be my previous house and it has heloc balance of 286k 

but APR is only 3.3% for the main mortgage. Rent is low because I only rented out the rooms, I could rent the master room.. and get another $1600

FYi, These are the balances from December of last year,

[Andrew Yip]

Sorry for the break down... it got truncated. I'm attaching the image. Thank you for your help

[Jim D.]

If your biggest desire is to get rid of the variable rate HELOC, it looks like by far the easiest way would be to refinance your primary residence and use the proceeds to pay it off.

[Andrew Yip]

my primary residence has around 600k balance and 1.5 M in value..   but I'm not sure about dissolving the old heloc to the current primary residence ,  since rate now is higher than before..      That means I would have higher mortgage  for total balance of 900k.   Thank you

[Robert C.]

@Andrew Yip, I think refinancing is still your best option. I know it's tough to let go of that 3.3%, but I just recently got a refi quote for 3.875%. If you can do something like that, half a point isn't that bad a compromise in order to remove the uncertainty of the HELOC. Plus, if you can pull a little extra out and turn that into positive cash-flow, that could be an even better deal.

There are still some numbers missing here to make a fully informed recommendation, but you'll want to compare refinancing your primary vs refinancing house #1. I'm assuming house #1 has a primary loan from before, so you would have to refi as a rental. If you could figure out a way to refi that house as a primary, that might give you the best mix without touching your 3.3%.

You can think of it this way, too. If you plan to continue investing, your overall interest rate average is going to go up anyways. So can you get a better deal on that rate by refinancing your primary, or by taking more loans on the new investments. 

[Account Closed]

So I'm just guessing here from your numbers because they are not perfectly clear. You have a 3.3% fixed rate on your primary residence at $371k and around a 4.75% (implied b/c you mention going up to 5%) variable rate on your HELOC also attached to your primary residence at 286k. And then who knows what on your other loans. The effective interest rate on your primary residence would then be a 3.94% (using a sumproduct calculation divided by the sum).

If you can do a refi for less than that or close to that, it seems to me a no-brainer. I would go as far as taking cash out to invest more if you can stomach the risk or at the minimum pay down any other higher variable or fixed loans on your other 5 properties. Your equity is not doing much for you sitting there being pretty. 

[Dylan Vargas]

@Andrew Yip Any word on being able to 1031 these properties?Can they be combined into one bigger asset like a multi family? Sure is tempting to take the million and put elsewhere. Would give you more peace of mind. Deals are always out there.

[Andrew Yip]

Thank you you @Robert C. and @Account Closed

Perhaps I'm not giving enough details up there regarding property no 1 and my primary house

my current house has mortgage balance of around 600k and also heloc of 300k.

property #1 used to be my primary property. it has mortgage of 3.3% and heloc that has balance of 286k. But total heloc is 700k.  thus I'm not sure if refinancing my primary or house number #1 would be something that I would like to pursue at this point, since both of them would give me investing leverage when opportunity comes.   

I'm just wondering what are your experiences on class C property investments during downturn.  

2 months ago, I burned more than 30k to fix one of the house. Tenant destroyed the house and took me 3 months to evict them.

for that property, thankfully, I was able to rent it out again and now it's more than 1% rule. But yea.. things can go the other way around if I didn't have the right property management.

[Andrew Yip]

@Dylan Vargas  I could sell the property and do 1031 exchange ... within 6 months.. if I can buy similar or better property. Yea I can buy multifamily property.. but currently the market  doesn't make sense. I'm prone to make mistake on buying property at this time of the game. Unless you know anything worth investing within or near los angeles area, and I'm also open with commercial properties.

Right now, my concentration is to make sure my money flows in the right place with minimal risk as possible. I think something is going to happen with the rate especially when they change Janet yellen in february. 

If there's any fix loan out there with less than 5% interest, I'll take that.. hehehe.. 

[Sam Shueh]

We are at the peak or almost at the peak price.  Recession is likely to hit US in about 18 months or so per Wall Street.  The commercial borrowing interest will be hit first to make it harder to borrow. Residential interest will rise later. 

Business will gradually slow down. Most investors I have worked in Northern CA (SFBA) are unloading when the price is at the peak. I will focus unloading properties 2-6 whenever you have tenants moving out. Looking at the retail value the capital gain is not much.  I would venture to pay off other mortgages. Coming from Silicon Valley used to look at dual income high tech professionals your principle mortgage is slightly higher than borrowers from Apple, Google or Facebook at 300-400K per year. The worst thing can happen to home owners is one or both borrowers are out of work and tenants have no income to pay your multiple or 8 mortgages.

[Account Closed]

If you have problems sleeping at night because of this, now is a pretty good time to unload if you so choose for a better state of mind.

That said, I have a few houses in class C+/B- neighborhoods and as far as appreciation percentage-wise they have done the best, and I don't plan to sell whether a recession comes or not. I think that last tenant you had is giving you a bad taste in your mouth and you may be succumbing to unreasonable emotion at this time. Wait until you've calm down a little bit and perhaps you can see the bigger picture. You'll make better decisions then. I've never been in a downturn with my rentals so I don't know but I figure the worse I could do is lower rents a little bit.

Personally, I would never sell a cash flowing house in California, and SoCal at that! Besides 3% more on $500k is only $15,000 a year which is really not much for someone like you. And getting money at 7-8% money is still a good deal in my book.

[Andrew Yip]

Thank you @Sam Shueh I'm also in high tech and have similar income to the professionals. Just few weeks ago, I got a bitter taste of life. One of my clients  outsourced development to dominican republic, thus it caused quite a  ding to my income and some panics in me. I also started and fund new tech projects ... with all these.. I really hope my real estate investment can stand by itself without causing extra burden on me. You're right many can go wrong especially during downturn when businesses are not doing well. 

I remember how difficult life was when I had nothing... I have to prepare myself especially that I have a family to feed now.  Most investors are always looking on the upside... but I think wise investor should prepare for the worse. 

My concern with class C investment, during downturn.. it'll be difficult to find qualified tenants and house price would generally take greater hit.  Do you agree with this?

This recession would probably a blib and not as bad as 2008. (expert predict 10-15% correction and 20-25% if it's long recession). Thus  with that number..  my inexperienced mind still think that the house value still make profit even after correction (#2-6). Is this true to your experience?  I assume you've been in several recessions in your career.

Thank you for your time on answering my question. 

[Sam Shueh]

That depends on the neighborhood. East LA, Inglewood etc. I stay away from them at all times. You could beg non-performing tenants to stay keep the places from vandalized. Fixed assets are the hardest item to unload. Retain the  treasured ones and weed out problematic accounts.  Focus on your career and have a balanced life.  

[Lauren Speidel]

@Andrew Yip If you have held/rented these properties these properties for a significant amount of time (and depreciated them) it's important to note that not only may you have capital gains tax which can range from 15-20% but you may also have depreciation recapture at 25%. If you decide to sell, that liability can eat into your profit quite significantly. If you have considered a 1031 exchange, I would not recommend completing a refinance prior to the sale. If you do that, the IRS may view that transaction as taking profit out of the property right before the exchange which may be interpreted as pulling cash out at closing (which is taxed). You could sell your properties and complete a 1031 exchange, therefore you are deferring your tax and depreciation liability, providing you the ability to reinvest all of your profit and net sales price. You could refinance after the exchange is complete on your new property. This transaction can be viewed as acquiring debt that must be paid back to the lender.