Cash Out Roughly $170k Equity in SFR to Purchase Multi-Family in OOS or Other?

Question

I purchased a SFR (condo) in 2017 for around $130,000. I currently still owe around $111,000 on this property. Rents are $1475 per month and it cash flows about $250 per month after all management expenses, HOA, maintenance, etc.

My return on equity looks pretty bad (roughly 3.7% per my calculation). Current value on the high end would put this SFR at around $280,000. Worst case I sell for closer to $250,000. There are plenty of opportunities out there it looks like to deploy the roughly $120,000 capital (worst case) that I would see from selling in an OOS market. At the very least I could roll this into a duplex or triplex in the same market (Bakersfield, CA) and probably cash flow quite a bit more than I currently am. However, appreciation would likely not be as high on said duplex or triplex.

This feels like a no-brainer even with sky high rates. It feels like I should take that equity and put it into a Multi-Family property as I am only 30 years old and have plenty of time to continue to acquire and build my portfolio. At the very least that capital would allow me to control $400,000+ in Real Estate value v. the current $280,000 or so. If I took said cash from the sell and put it into a $200,000 property out of state I feel I could even cash flow WAY more than the current $250 monthly.

What are the drawbacks? What am I missing? Need some help navigating this idea. Cash out re-fi would eat all cash flow and I'm not sure it would give me enough capital to tackle a quality property with current rates (I'm locked in at 4.25%).

Thanks!

Dalton

Eric Fernwood · Answer

Hello @Dalton Thornsberry,

Instead of pre-determining the type of property to buy, I recommend focusing on your financial goals. Let's assume that your goal is to have a reliable passive income. A reliable passive income must meet the following requirements:

• Inflation compensating: Rental income keeps pace with inflation, compensating for rising prices.
• Persistent income: Your income will last, ensuring you and your spouse won't outlive the income.

The above is dependent on the investment city.

In order to have a reliable income, your property must be continuously occupied by what I call a "reliable tenant." A reliable tenant stays many years, always pays the rent on schedule, and takes care of the property. You will hold the property for many years you you will need multiple reliable tenants over the years.

How do you have the highest probability of always having a reliable tenant? There are two key success factors:

• A property manager who is skilled at selecting reliable tenants. I know many property managers in Las Vegas, but only two of them are skilled in selecting reliable tenants.
• Selecting a tenant segment with a high concentration of reliable tenants. This is what I did when I set up our investor services business in 2005.

How do you identify a tenant segment with a high concentration of reliable tenants? Multiple property manager interviews. Once you identify this segment, determine what and where they rent today. Then buy similar properties.

Summarizing

I see investing as a three-step process.

• Choose a location where rents keep up with inflation. Maintaining long-term financial independence is only possible if rents keep pace with inflation.
• After selecting a location, interview property managers to identify a tenant segment with a high concentration of reliable tenants.
• Buy what your selected segment is willing and able to rent.

We’ve delivered close to 500 investment properties and I did not decide on any of the properties :

• Where to buy
• What to buy
• The property type
• The property configuration
• The renovation components

Everything was defined by the tenant segment we want to occupy our properties.

If you make decisions based on your financial goal and not other people’s opinions, you should do well.

DM me if you have questions.

Dalton Thornsberry · Answer

I appreciate this perspective for sure. This is where my mind keeps going. Time for the 1031 and upgrade to something with more doors is the logical situation. Even if I sacrifice a bit of cash flow in the long run a duplex, triplex, fourplex will likely cash flow better as rents increase depending on my entry price.

Michael Smythe · Answer

Seems your rent should be considerably higher given the $250k value.

Probably time to sell and buy something bigger.

Dalton Thornsberry · Answer

It just feels like I'm sitting on capital that can be deployed in a much more profitable manner. I realize my feeling might not match reality with current rates and everything else, and I realize there is a bit more risk but the bottom line at the very least is I could be using that equity to control more $$$ value in Real Estate. Albeit maybe in a market with less appreciation potential or cash flow which seems like the main drawback that I'm running into.

Caleb Brown · Answer

1031 it into something else. You can definitely increase cash flow. It has been a great property for you but it's time to trade up. I'd look local first and OOS if nothing looks great.

Justin Moy · Answer

3.7 ROE is pretty low, but with all investing the question becomes what can you do that's better on a risk adjusted basis.

If you refi you'll have a higher rate, so what does that do to cash flow there?

Once you get your refi cash where can you put it and at what cash flow will you get?

Combining those properties, what will it do to your overall portfolio?

Taking on new acquisitions also brings on new risk. Are the additional returns enough to justify taking on more risk

Dalton Thornsberry · Answer

Thanks! Currently working with a friend of mine who's an agent OOS in a target market to discuss actual rental comps, etc.

Preston Porter · Answer

I would explore this FIRST.  Make sure your gut matches up with reality.

Devin Peterson · Answer

Hi Dalton,

Would love to set up a call to discuss evaluating your numbers with you and see what a successful strategy would be. Lets connect!

Cash Out Roughly $170k Equity in SFR to Purchase Multi-Family in OOS or Other?

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