What's my best option?

Question

Hey guys, love this community and would appreciate any perspective on what I can do to take my game to the next level. Here's what I currently have on my hands...

1 of 2 rental properties- I self manage

bought 2 years ago, fixed up in Denver, CO (DTC area)

nets $400 positive cash flow monthly

comps now selling for 225K

125K left on mortgage at 3.88%

(cash on cash return is 14.5%)

2 of 2 properties- also self manage

bought 3 years ago, in Denver, CO (wash park area)

nets $700 positive cash flow monthly

comps now selling for 580K

280K left on mortgage at 3.63%

(my cash on cash return is 8.5%)

I have 40K cash in the bank to go after another rental, but due to the crazy market in Denver it'll be tough to find anything better than a 5-6% cash on cash return. So I'm toying with selling both places (or one) + cash and 1031 for a good multi family unit deal elsewhere in the U.S. (20+ units)... or keep both and borrow equity from each place since these are PRIME locations in Denver, CO and the fact that I nailed them at such low borrowing rates a few years back.

Tell me what you guys would do to grow you portfolio, with 400K in equity, and 40K cash. Open to any thoughts on how to maximize earning potential here!

Justin Ross · Answer

Thanks for the input guys!

@Matt M. thanks for the info on Westerra CU, I will definetly be hitting them up!

@James Carlson I think I'll definelty keep both and HELOC or refi with the possibility that Denver turns into the new Seattle/San Fran!

Greg B. · Answer

That's a big question.  I guess I would say "it depends on what you want".  The wording of your post indicates that you're looking for cash flow (although you called it earnings, which can be very differnt).

I'll make some assumptions.  I assume at that comp level, your DTC property is a condo in DTC area, and that your wash park is a small SFR...maybe a bungalow or a condo?  Both are premium areas, as you stated.  You can truck along and make smaller cash returns and (potentially) larger appreciation.  That's the game with those types of properties in those neighborhoods.  I assume you aslo have some nice low rates locked in on those properties, which is very valuable as rates go up.  A nice conservative strategy could be to leave those properties as is and keep chipping away at them.  Down the line you'll have a nice equity position.

If you want to be a bit more aggressive and focus on cash flow, you can up your game to small multi family properties.  There are duplexes in the surrounding areas with better cash fflow (6ish cap rates).  Lakewood, Arvada, Littleton, Aurora.  You could either 1031 your properties into multiple multi-families, or throw a HELOC on top of your existing to free up some equity.

Even more agressive is the suggestion to go out of denver and get a 20+ unit somewhere else.  Lots of people on here making great returns out of state with this strategy.  I only call it more aggressive because you will have a lot of leg work to do to learn other markets and you'd be leaving your comfort zone.

I personally like #2, and that's just what I'm doing.  Small multi family in the denver surrounding area.  Cap rates aren't what you get elsewhere, but I love denver and believe in long term growth here.  I've toyed with the idea of larger buildings here 20+ units...but am concerned with the competition of all the giant new buildings that have hit the market.  Duplexes get the market of people who don't quite want an apartment, but maybe can't quite afford a house.

Hope this helps.  Just my two cents.  There are probably thousands of other possibilities of where you can go next.

Greg Scott · Answer

I would look at your return on equity.

• With your first property you are cashflowing $4800 per year with $100,000 in equity for a 4.8% RoE.
• With your second property cashflows $8400 per year on $300,000 equity for a 2.8% RoE.

Together, you are cashflowing $13,200 per year.  But, if you could sell your second property and buy three more like your first property, so that your entire portfolio had a 4.8% RoE, you would be cashflowing $19,200.  As an added benefit, having four properties spreads your vacancy risk.

James Carlson · Answer

@Justin Ross

I agree with some of the above comments. They're in good locations, and Denver's market's not going anywhere long-term. Looks like the growth is slowing in Denver a bit, but that doesn't mean you're not going to love your investments in 20 years when Denver is the new Seattle/San Francisco/etc.

Keep 'em both and do a HELOC or refi, add that to your cash and buy a small multi in Colorado Springs, a slightly easier market, or a bigger multi in the Midwest somewhere.

Good luck!

Curtis Rouse Jr · Answer

Hey @Justin Ross Congrats on achieving all your success so far and having that much equity on hand. No doubt I would package both of those houses and 1031 Exchance into a larger Apartment Community in a heart beat. I would definitely not look to exchange to a complex near Denver where you are located unless you find a killer value add deal where you can ride on the upside of this hot market we are in. I would definitely look in the Southeast where I am located like Georgia, Florida, South Carolina, North Carolina, Texas to name a few where you can buy at a little bit better cap rates that yield better returns. If  you ever need any help underwriting or looking at any deals on this side of the country, feel free to message me at anytime as I shop large apartment communities every weekend and would love to help out. Best of Luck!!!

Matt M. · Answer

I'd keep them and borrow against to buy more. They are in good areas that should see continued appreciation. Westerra CU does LOCs on rentals.

Did you talk to your lender about qualifying for additional property?

What's my best option?

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