Improving my business

Improving my business

Flipper/Rehabber · Bethlehem, PA · Member since 2015 · 134 posts · 39 votes

Hello Bigger Pockets community, hope everyone had a good holiday. Had some questions on my mind for a while but wasn't sure who to ask so  figured I'd pose this to the community. I've been investing in real estate for about 14 years now, initially part time, and full time for the past 5 years. I have rentals with good equity and do flips as well. I can give more details as far as numbers if needed.

I'm looking to sharpen up the way I run my business. I own some rentals outright, but have mortgages on all the rest and I use LOC's on that equity to fund flip purchases and rehabs. Is it better to pay the minimum mortgage amount to maximize cash flow and drag out the mortgage to take advantage of "free money"? Better to pay some extra principal only towards the highest interest rate mortgage of the rentals? Or only towards the mortgage of my primary residence since I gain nothing from that as far as cash flow (this is my lowest interest rate of them all). I grew up learning to be debt averse and it's been a struggle undoing that learning in favor of embracing good debt.

Also, I know I should be more business minded as far as my investments are concerned, but tough to disassociate myself sometimes since I've had some for so long and tenants are all good and set. Would it be wiser to sell everything off and buy something bigger and in one location that would bring more cash flow and greater return? I hesitate because why fix what's not broken? And who knows how long it will take me to find this larger multi unit with three right numbers. Also, a whole different animal than what I'm used to but know I have to live more out of my comfort zone. On the other side, it seems to make more sense to do that as far as present and future gains.

Thanks in advance for any input!

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  • Specialist · Paradise Valley, AZ · Member since 2018 · 3k+ posts · 2k+ votes
    6y
    Originally posted by @Chad Jarrah:

    Hello Bigger Pockets community, hope everyone had a good holiday. Had some questions on my mind for a while but wasn't sure who to ask so  figured I'd pose this to the community. I've been investing in real estate for about 14 years now, initially part time, and full time for the past 5 years. I have rentals with good equity and do flips as well. I can give more details as far as numbers if needed.

    I'm looking to sharpen up the way I run my business. I own some rentals outright, but have mortgages on all the rest and I use LOC's on that equity to fund flip purchases and rehabs. Is it better to pay the minimum mortgage amount to maximize cash flow and drag out the mortgage to take advantage of "free money"? Better to pay some extra principal only towards the highest interest rate mortgage of the rentals? Or only towards the mortgage of my primary residence since I gain nothing from that as far as cash flow (this is my lowest interest rate of them all). I grew up learning to be debt averse and it's been a struggle undoing that learning in favor of embracing good debt.

    Also, I know I should be more business minded as far as my investments are concerned, but tough to disassociate myself sometimes since I've had some for so long and tenants are all good and set. Would it be wiser to sell everything off and buy something bigger and in one location that would bring more cash flow and greater return? I hesitate because why fix what's not broken? And who knows how long it will take me to find this larger multi unit with three right numbers. Also, a whole different animal than what I'm used to but know I have to live more out of my comfort zone. On the other side, it seems to make more sense to do that as far as present and future gains.

    Thanks in advance for any input!

     Since we don't have all of the numbers you would go through the process this way:

    Make a spreadsheet of all of your properties. Figure each proeprty's market value (if you were to sell them on the MLS) and have rows for each of the items involved in selling, Principal balance, real estate fees, repairs, carrying costs during time of sale, taxes, depreciation recapture and on and on as though you were going to sell of the entire portfolio. Have your CPA review the numbers to be sure you haven't missed something.

    Then figure how much you have left over. That is your "equity".

    Take that imaginary number and start looking for a real opportunity that you can get into with that imaginary number. Then run the numbers. Are you making more or less after all of the work of selling your portfolio and creating a new portfolio? Do opportunities exist that you can get into with that imaginary number? Then ask yourself how long it will take to prepare your existing properties for sale and how long to actually sell the properties and how long to find and buy a new portfolio.

    Then the question is, do you want to actually go through the process? Some people enjoy buying houses and some people find it stressful.

    Until you itemize your portfolio, I don't think you can answer your question.

  • Member since 2019 · 89 posts · 65 votes
    6y

    @Chad Jarrah

    You need to read some of robert kiyosaki's books to understand good debt vs bad debt. And really understand what money is because it's not what most of us think it is. Debt that your tenants pay is good, debt that you pay is bad. Right now interest rates are low and money is cheap you should secure as much long term cheap debt as the properties can support. Any money you take out as debt is not tax free even if you put it in your pocket. ( all though I recommend you invest most of it. ) the rich frequently pay them selves with "good debt" and why wouldn't you its tax free. However don't over leverage your properties, when the next economic contraction occurs they will all lose value and you could creep over your loan to value and be required to make a capital call.

  • Flipper/Rehabber · Bethlehem, PA · Member since 2015 · 134 posts · 39 votes
    6y

    @Account Closed, thanks for the tip! I have to do a personal financial statement every year for my commercial lender so I have a good gauge on what equity I have. I'm a realtor as well so I've crunched conservative numbers as far as resale value and losses due to transfer tax and commission splits. Where I am falling short is finding the next opportunity and seeing if it is worth it to level up to a much larger multi unit or mixed use building. Everything I've read, watched and received advice on says that that is the way to go. Just haven't fully jumped to really committing to doing it -- partly things are comfortable and running well, partly hesitance because I don't want to jeopardize what I have built thus far with a bigger venture I'm not as sure or knowledgeable about. That's something I'm going to have to struggle or move forward with.

    @Ryan Webster, thank you as well. I am comfortable with good debt, have great equity and only bite off what I can chew. Where I am more unsure is fighting with myself about paying the mortgages off fast. I always feel like I want to pay more towards principal.

    Do you both pay the minimum on your mortgages to stretch out the term and maximize cash flow? If you pay more towards principal, do you focus it on your mortgage with the worst interest rate or better to put it towards the principal of your primary residence as that is not an income generator?

    Thank you both again!

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