What would you do? RE Advice needed.

Question

Hello everyone, my name is Jack. I am an amateur investor trying to figure out the best course of action to grow and scale my RE portfolio.

For context, I purchased a SFH in AZ for 370k in 2018. Owner occupied for 2 years and it will be in its 3rd year of rental in September. The property is a 4br/3bath in an A class community which has appreciated quite a bit with comps recently sold for 660k. As of now, I have a 15 yr loan @ 2.75% with 231k balance and 13 years left. I know I should have refi'ed to a 30 yr loan when the rates were low to maximize cash flow... but rookie mistake. After PITI/maintenance/HOA my monthly cash flow is around $100.

I am seeking advice on what my best course of action is in extracting equity to invest in other properties. I have considered a cash out refi to a 30 yr loan or sell the property. Although it will be a higher rate, I think I will actually be able to lower my monthly mortgage a bit (I have not run the exact numbers with a lender yet), so I am really entertaining this option. I am not a huge fan of selling because I think the property will continue to appreciate nicely and it is a property that my wife and I really like (I know I shouldn't get emotionally involved with investments)... My W2 job earns 300k+, so I am not dependent on the cash flow to make a living. Although it would be nice to ultimately replace a good chunk of my salary with cash flow in the future.

With all that said, I would love your input on these strategies or any other strategies that you would utilize to maximize growth. TIA!

P.S. I now live in the Bay Area CA and would love to connect with other likeminded individuals and invest in other local/OOS opportunities.

JD Martin · Answer

I don't know how old you are but unless you are a typical realtor with a 30 year old head shot, you look pretty young in your avatar pic. Given your salary, the minimal amount left owed on the property, and your age, I would do one of two things:1. Sell and take a tax-free capital gain assuming you actually lived there for two full years and you bought it late enough in the year to qualify - if you live there 2 of the past 5 years there's no capital gains up to 500k for married couple.2. If #1 doesn't apply, or you like the property so much that you don't want to sell and take the capital gains, then I would do nothing. You have a crazy low loan rate and owe a pittance on the property. In the current state of things I can't think of any good reason to trade a loan at 2.75% for an investment loan at 7+ % for a property probably already peaked/peaking. You have $430k of equity in the house, true, but 5 points is a huge jump on a mortgage at those rates.You're young enough that you already sound like you're set up pretty nicely. Live low, bank most of your current salary, and just prepare for the next property.

Jack S. · Answer

Thanks for the feedback! That makes a lot of sense. Yes I refinanced when interest rates dropped significantly during covid times.

Bjorn Ahlblad · Answer

@Jack S. Look on google and find local REI and LL Associations so you can network with other folks in your area. Think about what your goals are with respect to REI, what are you hoping for an outcome and how do you measure progress. I'd keep the place AZ it sounds too good to sell.My wife and I lived in Silicon Valley for 30 years (Los Gatos) we had rentals that never made a dime till we sold them eventually, then we made out big time. We left in 2017 and now live 2 hours south west of Seattle. We have rentals here and live off the income. But you can't buy cash flowing properties here anymore either. That pretty much came to an end 6-8 years ago.Take your time and you will figure it out. There is no need to rush in this market. Be sure you can master the numbers fully, otherwise it is hard to tell the difference between a deal and a dog. There are helpful podcasts on the site here. Up top there is a tab "Learn". All the best!

Jack S. · Answer

Thank you for the feedback. I would say growth, but I also don’t want to rush and get into trouble. I have searched and contemplated about BRRRR, but since I have a demanding w2 and being OOS seems like it will be a very challenging process, especially when it comes to hiring a good, honest contractor. Do you think HELOC would be a good alternative for turnkey even though there won’t be any forced appreciation to start? Will refinancing be a problem? Perhaps a liteBRRR+turnkey?

Doug Spence · Answer

@Jack S. Its a common goal indeed! My profile has an overview of the properties I've acquired, including the strategy and location. Let me know if you want to discuss further - I'm happy to help however I can. Good luck!

Gregory Schwartz · Answer

Are you looking for a secure investment or growth? What is your risk tolerance and or the intended gaol? Secure - keep the great interest rate, the great property, enjoy the fact that you're paying down the principal at a rapid rate with the 15 year mortgage. Us a HELOC to help you acquire a BRRRR or similar investment. Growth - Sell it, avoid capital gains tax. Take the $400k and use that to buy $1.5 million worth of rentals. $1.5 mil appreciating at 3% is 45k per year vs the same 3% on $660k, $20k. The cashflow on the current house is good but not great so find a market or a niche that has equal if not better cashflow. Its a good or better situation. Congrats!!

Doug Spence · Answer

@Jack S. What are your long term goals? My first reaction to your question is that you should sell and put the capital elsewhere, mostly because your return on equity (ROE) is abysmal. You could take that 250k-300k profit and put it to work in many other places that will yield a higher return!Good luck and keep us updated on your decision and your RE journey as a whole. Most of my portfolio and real estate experience has been doing out of state stuff as well. I live in San Diego and own properties in Wisconsin, Florida, and Oklahoma, as well as multiple syndication deals around the country.

JD Martin · Answer

Generally the stories of people scaling like that are either liars or engaging in some extremely risky strategies that can just as easily backfire. Real estate is a long game. You can have good timing and get in before things take off, but that's true of almost everything - stocks, business opportunities, etc. Where you're going to make your money is on the long game because in the beginning when you don't need/want that money for your own sustenance (because you have a good job), you can be rolling every dime the thing makes back into the "business" instead of harvesting dividends. That becomes a powerful multiplier. And you are doing this already because you are paying off a 15 year mortgage with the money from the tenant. That's pretty powerful (how come there's 13 years left if you bought it 5 years ago? Did you refi?). So you're already rolling the extra money back into the business, and in 13 years when you're 43 you're going to have what is likely a million dollar asset free and clear. At that point you almost certainly should sell and 1031 (assuming the 1031 survives 13 more years) into a nice multifamily or several SFHs to compound the money since sitting equity is essentially dead equity without being used. Or if the interest rates come way back down again, keep the property and finance 75-80% of the equity out of it then.

Josh Young · Answer

@Jack S. You are smart and I love that you recognize the 15 year term was a mistake (not a big mistake though), I did a 20 year once and later regretted it when I learned to calculate return on equity. If I were you I would consider the HELOC to use as a down payment on another property, a cash out refi would be tough with that big of a jump in rate, but calculate the blended rate and compare the two just to make sure. You can pay the HELOC back when you do a refi on this property or on another property in a few years. You don't want that much equity just sitting there not working for you, especially if you have a high paying job and can afford the payments on the HELOC. You should calculate your return on equity to help you make a decision, but generally as a rule of thumb if your equity gets above 60% in a property then you should take it out with more debt and keep growing; the use of relatively inexpensive debt/leverage is one of the major advantages real estate has over other asset types.

Kerry Baird · Answer

Sell for capital gains treatment, as @JD Martin said. Or keep and pay off. If you do this, set aside funds for repairs on this house. And then save up for the next one. Our current portfolio is a mix of property types. We have a large tier of houses in a laterally trending market in Texas. Their purpose is to cash flow. Our second tier of houses are in a beach side location of Florida, and their purpose is to appreciate. At the top, are a couple of expensive STR properties, which are a cash flow and appreciation play, but riskier than the others, as well as high-touch. I couldn't do the ones at the top without the ones at the bottom. I do have thoughts of going from all those single family houses to apartments, as I have been collecting houses for about 20 years. --->My original goal was to replace my enlisted military pension when I got out to be Mom, and I wanted 5 paid-for houses.