Need advice on my real estate investment strategy

[Akshay Bhaskaran]

Hello fellow investors,

Need some serious advise on my real estate investment strategy

1. Currently having around $300,000 in equity from my primary home (in Hutto) 

2. Of this, I’m planning to take out a Home Equity loan for around $80,000 at 4.24% interest rate, and put it as a down towards a rental investment.

3. For the rental investment, I’m targeting Hutto, Taylor, and Pflugerville— to attract Samsung and Tesla crowd. House range I’m looking at are around $350,000-$400,000

4. Now, my monthly payment comes to around $3300-$3500 (PITI, HOA, Landlord insurance, property mgt fee, HE loan payment etc). Rental average is around $2200-$2500 in this area.

5. So I’m in a negative cash flow of $1000-$1200 per month. So even my NIAF is negative .

6. BUT.. BUT.. I’m “assuming”  the property prices will appreciate at-least 10% over the next 5 years in Hutto or Taylor. So, at the end of 5 years, after I sell the property, my final net is positive and it’s close to 80% ROI. 

Is this a good strategy? To bite the bullet with a negative cash flow? Am I assuming too much on the appreciation? Also, the schools are not so great here in the area? Should I re-consider rental over here?

Basis of my assumption: 

My house was $320,000 in 2020.
Now $550,000 in 2022

Target areas: Hutto, Pflugerville, Taylor 

[Joe Villeneuve]

Terrible strategy.  Assumed appreciation can't be counted on. Past appreciation rates have no bearing on any future ones.  Besides, you can't substitute gains from appreciation against negative CF.  Cash flow is real...appreciation is an imaginary number that can only be real when turned into cash...as in selling the property.  Appreciation isn't cash.

Negative CF means you are adding that negative CF to your cost of the property.  Positive CF means whatever cash you put into the deal (DP) is the ONLY cost to the property.  $12-15k negative CF/year is actually an exponential loss.  If you used that money to reinvest with, instead of spending it as negative CF, you would get a "real" cash return out of it.