Bought it right. Got equity. What's next?

Question

It's been a long journey and I've finally arrived at the beginning!

-Jester Bobbity

TL;DR: I have ~$200K equity in my first (and only) multi-family. How do I get it out? And once I do, what next?

I bought a multi-family with an FHA in 2017. I owe ~$340K and I believe it is worth between $600K-$700K right now. The property makes about $5657 gross each month with minimal repairs and upkeep due to rehabbing it over the years (~$590/mo. Including all bills and property management fees) and the mortgage is ~$3200

Time for the next step. I want to someday be buying large apartment complexes and commercial properties so I'm not looking to manage anything myself. Buy, repair, hire a PM or a realtor and move on to the next big thing. My goal is to scale as quickly as possible.

As I see it these are my options and im looking for some advice/refinement that will help me move forward.

#1) What's the best way to get the equity out of my original apartments? Refinance? My current rate is 3.75% so I'm not sure how much I could get from an 80% LTV :(

I could sell it but that would mean a 1031 exchange. Rushing around trying to find a new property in 90 days doesn't give me time to wait for the right deal. My marketing plan takes half that long to start producing leads, let alone deals. And lastly, this is a property with some great cash flow! I'm really not eager to sell it given I can raise rents 3-7% a year in that area like clockwork.

#2) Once I get the 150K-300K equity out of my apartments what do I do with it? The way I see it I have three options.

a) BRRR - I can start acquiring properties that cash flow, pay me back on the refinance and keep doing that until I have the money to buy multi-families. The downside is (as far as I understand it,) this approach could take a decade or more since due to refinancing restrictions I can only do it once every four months or so.

b) Use it as 20% down on another multi-family. The trouble here is that, while I can get ten units immediately, once I do, I'm right back in the same boat waiting for appreciation and rental increases before I can buy the next one. Yes, if I buy right I can raise rents, rehab and maybe refinance to get enough out to do it again but I dont know if that's a reasonable assumption to make.

c) Buy more FHA properties. Since FHA allows me to buy a multi-family as long as I live in it for a year, and I have no problem moving each year, I can save the money and use it to buy a four-plex each year for the next five years. The trouble is that it seems slower. I don't know if it is, but it seems like it is. The lower interest rate on FHA loans and lower down payments would drastically increase my ROI but I don't know if that makes it a better idea.

In case you couldn't tell, I'm just a touch impatient :P

It's taken a while to get this far and now that I'm here, I'm eager to reach my goals.

So that's the landscape. What would you do if you were me?

Thanks in advance for the advice :)

-Jester

Jill Addison · Answer

@Jester Bobbity I agree with @Scott Trench. If you have the flexibility in your lifestyle to move frequently into new properties you buy with FHA loans, that's awesome. Low interest rates and low down payments is super smart and an extremely great advantage. 5 years might seem like a long time, but you'll be surprised how fast it goes by and you'll look up one day and find that you're financially free, which is a great foundation from which to scale even more. Don't put too much pressure on yourself for speed, just get a plan and work the plan. Real estate is a long game by nature.

Nick Riccio · Answer

I would second @Scott Trench here. I think adjusting your current mortgage with a refinance could be counterproductive. I would continue to explore house hacking for as long as you can.I, like you, am very impatient. But, I've continued to house hack over the last several years and it's been the best decision I could have made. Especially with uncertainty right now, it might pay to be prudent. Then, once we identify where the market is at, you'll have more opportunity to strike.I'd continue saving, continue house hacking, and maximize your cash flow and equity. Do this a few times, and you'll be ready to scale!

Scott Trench · Answer

I like the FHA approach the best. You shouldn't really need to take out cash from your current property to buy an FHA property with 3-5% down. So, you can keep stacking wealth, right now, without having to sell or trade your great mortgage for one with a higher interest rate. If you are willing and able to do a ton of work to reposition an asset or remodel one, then buy an FHA property that requires a ton of work, and add a lot of sweat equity. This will have the added bonus of being subject to significant tax advantages if you can live in the property for two years.

Gary L. Fisher Jr. · Answer

Hi Scott, Great to meet you and thanks for taking the time to reply. One every two years is even slower :( But I will look into the tax break. I believe I would need to refinance for an FHA right now. I just bought a single family to live in a few months back with a VA loan and this place will never cash flow lol. That means an issue right now with my debt-to-income ratio. I can't imagine a bank giving me a second look without a large lump of cash in a checking account and some revolving debt paid off. Not to mention, a run-down four-unit, and sweat equity doesn't intimidate me but I don't know a way to fold repairs into an FHA loan so they would have to come out of pocket right? The other issue is scale. I really feel like I should be able to do more in the next few years. If I buy an FHA for the next five years (which I agree, would be no issue.) At the end of five years, I'll have 24 units making ~$300 each. $7200/mo. That's nice and all but it's not the glorious, shining, empire my ego is currently demanding :P Is this the fastest way to scale my business? If so, why? Feel free to tell me if I'm being too impatient. Thanks again :)

Gary L. Fisher Jr. · Answer

One every two years is even slower :( But I will look into the tax break. I believe I would need to refinance for an FHA right now. I just bought a single family to live in a few months back with a VA loan and this place will never cash flow lol. That means an issue right now with my debt-to-income ratio. I can't imagine a bank giving me a second look without a large lump of cash in a checking account and some revolving debt paid off.Not to mention a run-down four-unit doesn't intimidate me but I don't know a way to fold repairs into an FHA loan so they would have to come out of pocket right? The other issue is scale. I really feel like I should be able to do more. If I buy an FHA for the next five years (which I agree, would be no issue.) At the end of five years, I'll have 24 units making ~$300 each. $7200/mo that's nice and all but it's not the glorious, shining, empire my ego is currently demanding :P Is this the fastest way to scale my business? If so, why? Feel free to tell me if I'm being too impatient. Thanks :)

Gary L. Fisher Jr. · Answer

Hi Nick, thanks for the reply.I'm afraid there isn't much more fat to trim off this place. I've negotiated lower landscaping costs. I didn't raise rents for covid, but they are getting back on track now. I've added w/d hookups to each unit and raised rents accordingly when one of my tenants mentioned she spent about $60/mo at the laundromat.Any other improvements I've thought of, wouldn't likely result in increased rents. I've hacked this place as much as I know how, which is why I'm thinking it's time to move on to the next property. Seems you are suggesting I keep getting FHA's as well, is that the case?If so, how will I know when I'm "ready to scale."