Thoughts on this plan to get to $6k / month?

Question

My longterm goal is to get to $5-$6k in rent cashflow per month (not counting cap ex etc). I work a full time job and so does my wife so we're working on real estate on the side and aren't particularly wealthy so we're funding through frugality.

Here's the situation.

• We live in ATX where buying property is generally expensive
• Rents are relatively low compared to Home Values and the 1% rule never ever comes close here
• We currently own 2 duplexes. 
• One Duplex has both sides rented with about $120k in equity from mostly appreciation
• We are house hacking the other duplexed financed with FHA loan (deadbeat tenants removed from side B and rehab under way). I expect to have about $170k equity after the rehab

The Austin market has appreciated significantly in the last 5 years but rents haven't really increased. I'm sitting here trying to figure out how I can earn $5k a month on cashflow since it will take forever to pay down these properties and I won't be able to snowball very well with rent.

I realized what might be a better way.

• Finish rehab.
• Cash out refinance both homes the max they will give me
• Use my newly released FHA to buy a 3rd duplex to house hack with a low down payment.
• Use extra funds (lets say $200k in this example) to purchase 2 $100k homes in local, less expensive markets like Waco, Temple, where we can achieve a 1% rule rent.
• $2k earned in rent
• Continue to pay down the ATX duplexes, hopefully continue to earn appreciation on their large home values and simply refinance every time we have $120k+ in equity and use to buy $100k single family home in full in a better market. Add $1k from the new property so this makes $3k/month
• Continue infinitely.

Of course crazy appreciation doesn't last forever but is there something else I'm missing? Seems like this strategy would help me reach my goal a lot faster than sticking to house hacking and then sitting around with unrealized equity but no cash flow.

Thanks for your thoughts! Every time I post someone really blows my mind with an idea I haven't thought of.

Scott Fehrenkamp · Answer

Hi @Jj Horst - if it sounds like your primary goal is cash flow, then I agree that you could probably find a better use of that equity in other markets.

So the cash-out refi idea *could* make sense.  Of course the devil is in the details.  Keep in mind you will be capped at 75% LTV.  So how much can you really borrower against these homes, and what will that get you for new properties?  And how will the new loan affect your cash flow on the existing duplexes, as @Jim Robertson mentioned?

Also given that 75% LTV cap, not sure how many times you could continue to tap the same houses over, so not sure about 'continue indefinitely'.

Selling one is definitely an option to explore as well -- although if it is cash flow positive now, possible trade-off of future appreciation if you sell now.

All in all, sounds like a good problem to have!

Jj Horst · Answer

Parker lane just E of i35 and N of 71. Neighborhood has been getting better every day.

Jim Robertson · Answer

A cash-out refinance will reduce your current cash flow on the existing properties. Have you thought about selling the duplexes through a 1031 exchange?

What neighborhood(s) did you purchase your duplex in?

Jj Horst · Answer

@Justin Robert so I forgot final numbers

House A cashflows about $600 total after the mortgate/insurance/etc

House B I expect to cashflow about $700 total after the mortgage/insurance/etc

At least they're cash flowing, but for 2 properties totaling $850,000 in total home value it seems like if you had eight $100,000 properties you could make like...40% more rent then these 2.

Jj Horst · Answer

@Danny Webber No kidding!

Jj Horst · Answer

@Justin Robert You're totally right the numbers are pretty fudged just for that example. We purchased both properties with FHA (one after the other) to get the ball rolling so almost all the equity is from appreciation. They are both fairly close to downtown (8 min or so)

• Property A is probably worth around $350k
• Both sides rented = $2225 (which is actually decently high for the home and area)

• Property B is hopefully worth around $500k once the rehab is complete (we bought for $332 in abysmal condition, I don't know how we passed FHA inspection  .... :) )
• Property B would rent for probably $3500 total ($1650 for the smaller side $1850 for the larger side)

Neither will ever come close to earning $1k of rent per $100k of home value so seems to make sense to try and take that equity and spread it out into properties where it can earn more rent, even if those properties aren't appreciating like these two seem to be.

Danny Webber · Answer

Long conversation and much more info needed......

Justin Robert · Answer

@Jj Horst If you had potentially $290K in Equity between 4 doors, that should mean you have some decent cash flow, right? You *should* be well above 1%? I am in Temple and I know Austin really is a different market but that seems off. I am not questioning you, rather am generally curious.