Your advice please! new investor, how to skin this cat.

[Cherie Tormey]

I am super green, well mostly I have owned a home for, 22 years, used some of the equity but not much, it has been a rental for about half of the 22 years. I am in Denver, CO where the market is on fire!!! I have 250k to 300k in potential equity in this house. Do I put it on the market and see what the current bidding wars will beget me? (I cash flow 1300 per month currently.) I have very little income, if I add the rental income I make about 20k per year. Getting a traditional loan would be tricky or would it? Good credit score but not quite 800. How can I do the BRRRR method if I do not have enough income to do the first loan and then a cash out refi? I could sell and reinvest in a smaller market but is that smart if I can't increase my cash flow? (Perhaps I can increase my cash flow) (A lot of realtors are suggesting I sell and reinvest in a smaller market and and they see a trend with more seasoned investors doing just that.). My bank is offering me a 12 month 1.9% heloc settling in at 3.64%. If they will give me 200k on HELOC should that be my loan for a second property? or at least my entrance. What I do see clearly is that I have equity sitting in a property that I should be able to translate into more money/cashflow shouldn't I? I hope I have painted this picture succinctly enough. New to BP and loving it. Thank you everyone!

[Greg Scott]

Cherie:

You have a great problem here with lots of (good) options.

First of all, not many people recognize what you seem to be intuitively finding here.  The property has appreciated so much that your current returns, well.... suck.

Huh?  Isn't $1,300 per month great?

Sure cash flow is great but $1,300 per month on $300,000 in equity is a 5.2% annual return on your equity.  The appreciation you have experienced over the years has ruined this deal. Not only is your ROE low, you are likely paying taxes on it now because your depreciation no longer offsets the income.  By being successful, this property has become a poor investment.

You should be able to achieve at least 10% tax free on a real estate investment if you buy it right.  What I'm saying is if you do it right, you should be able to DOUBLE your cash flow and REDUCE your taxes at the same time.

You talked about buying in a "smaller" market, but consider going even further afield.  For many years I bought SF rentals in Dallas (from Detroit) that typically yielded 20%+ returns.  I don't see those kinds of returns in Dallas any more but still see great deals in San Antonio and Houston.  Imagine QUADRUPLING your cash on cash returns and REDUCING your taxes at the same time!