What do should I do with Rental Equity

[Chris Waugaman]

So my wife and I own one townhouse rental property in Clayton NC and have about 200k-225k in equity. We have only had one family rent it and they have just signed for another 2 yrs ( once that lease ends they will have lived there for 5 yrs will zero issues). My question is should I sell and take the equity and buy potentially 2 or 3 additional townhomes? I’m typically a very conservative investor in general but just looking for some different perspectives. Thank you in advance. 

[Aaron Arnold]

Given your situation and interest in potentially expanding your investment portfolio, you might consider the BRRRR method as a strategic approach. The BRRRR method stands for Buy, Rehab, Rent, Refinance, Repeat. It's a real estate investment strategy that allows investors to build a portfolio of rental properties over time by recycling the capital invested in one property into multiple deals. Here's how it could apply to your case:

Buy: Use the equity from your current property to purchase one or more additional properties. Given you have $200k-$225k in equity in your townhouse in Clayton, NC, this could serve as a substantial down payment for one or more new properties.

Rehab: If the properties you purchase need updates or repairs, invest in making those improvements. This increases the property's value and can allow you to charge higher rent, improving your cash flow and the property's appraisal value for refinancing.

Rent: Lease out the newly acquired and rehabbed properties, preferably to reliable tenants similar to the family you currently have in your townhouse. This step is about generating income from your investment.

Refinance: Once the new properties are stabilized (occupied by tenants and generating income), look into refinancing them based on their new, improved value. This step is critical as it allows you to pull out much of the original capital invested, which you can then use to repeat the process.

Repeat: Use the funds from refinancing to invest in additional properties, repeating the BRRRR process.

This method could potentially allow you to expand your real estate portfolio more aggressively than simply selling your current property and buying a couple more. It leverages the concept of using "other people's money" (in this case, bank financing) to grow your investments. However, it's important to consider the risks involved, including over-leveraging, the costs associated with rehab, potential vacancies, and the complexities of managing multiple rental properties.

Given your conservative investment approach, it's essential to carefully assess these factors and perhaps start with one additional property to get a feel for the process before scaling up. Consulting with a real estate investment advisor or a financial planner who understands the BRRRR method and your local market conditions can also provide personalized insights and help you make an informed decision.