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Updated over 7 years ago, 04/21/2017
Maximizing Cash on Cash (Need Advice)
Hey Everyone,
Thanks for taking the time to read and give input! Here is my scenario:
I want to make sure my rental portfolio is at its maximum potential without over-leveraging. I have been so focused on my flip business I have not taken serious time to evaluate my current portfolio performance (other than basic p&L's, etc)
When I first purchased my rentals they were performing at about 20%-25% Cash on Cash. BUT, now with all the equity growth an principle pay down they are performing around 6% cash on cash. In other words I have a ton of capital making a tiny 6% cash on cash return. Good problem, but just can not seem to make up my mind on how to proceed, would love your input... I have about 2 Million in equity and willing to leverage at 80% LTV
1. Refinance and Purchase More Properties
*I am in the Northern Colorado Market and I can find new (off market deals) rentals for about 10-12% cash on cash in our current market. I have considered buying out of state to get better returns
2. Sell and 1031 into Large Multi Unit (apartments)
*current properties are mostly 2-4 plex student housing and single family
3. Continue to Pay Down and Payoff Properties
I have gone over the pro's and con's of these (and others) options many times, rather than list all of that I would love to get any input you wise BP'ers have!
(obviously I know all advice is market specific, but would just like to get your general input)
Thanks,
Matt
#2 General Landlording & Rental Properties Contributor
1 and 2 will work, both good options. If I were you I would do a combination by unloading all SFHs and smaller (duplex) investments. Bigger is always better and you will want to get rid of all properties that are not valued by cap rate. Once the real estate market turns most properties valued by the home owner market will drop in value..
3 is a option for the most conservative of investors not seeking maximum returns on their cash. It is similar to stuffing it in a mattress, adding more cash to it on a regular bases, and feeling good about a perceived growth.
I do not consider #3 as investing in income. It is simply parking cash and letting it die slowly.
Thanks @Thomas S.
I appreciate the input, some good things to think about!
@Matt Rosenbohm I have had this same internal conversation more and more frequently lately .
The math will always indicate that buying more is better - more appreciation, higher rent rolls, easier to grow net worth, etc. So getting cash out and buying more is the easy spreadsheet answer. But because you asked the question and considered option number 3 there is something in your gut that says it may not be what is best for you.
Assuming you plan to stay invested in Northern Co - I think you will find that once you start looking to buy more rentals that the deals don't perform as well as what you have already purchased with out increasing your overall debt for down payments. If you are going to 1031 - explore a reverse exchange - in a competitive market it allows you to be more selective and not forced by the timeline to buy a marginal deal.
Going to a bigger apartment deal (assuming in CO) are trading at such low cap rates and in a raising rate environment isn't that attractive to me. I have preferred a larger portfolio of 1-4 units - easier to liquidate if you need to sell just one building.
Option 3 isn't out of the question - sure it doesn't provide the highest cash on cash or return on equity - but it does provide easy steady income for the future. I am paying off properties now - once I achieved the monthly gross cash flow I wanted it makes sense to me to preserve it and take my foot off the gas on acquisition.
One last thought - You mentioned not spending a lot of time on your portfolio until recently - I was guilty of the same and found that if I more effectively manage the properties I already own - I was better off than buying additional units.
Just one persons opinion - good luck!
This gave me a couple thoughts. I think it depends on you personal/lifestyle goals.
1. Do you want to keep increasing your number of rentals? Is there a threshold where you "have enough" properties in terms of a holding strategy?
2. Are you interested in having all your building paid off and generating cash flow for the rest of your life so you can remove yourself geographically/have a freer lifestyle?
I personally think a 10-31 would be a good path just to reduce the number of units. The economy of scale to me seems attractive.
just some thoughts! Hope Ive generated something useful to you!
@Matt Rosenbohm so one thing you didn't discuss or mention is interest rates. When you switch out to multies remember the 30 yr fix mortgage goes away. Most are 5 year balloons or something similar. In five years we could be in a high interest rate environment where your 10% cash on cash could evaporate if rates were say 5% higher. One thing your options don't mention is risk. The options that look good on paper have the greater risk. Remember the first rule of investing to make sure you have return OF capital and then you can worry about return ON capital.
Hi @Matt Rosenbohm your challenge is a great one to have. There is not really a bad answer and only time will tell what the best option would be. One other option is more of a combination of all 3.
1. Find all underpreforming properties and determine:
A. Can they be easily brought up to a higher performance level
B. Sell of some that may not preform as expeted. (probably SFR's vs Duplex/quadplex)
2. Use the proceeds from the sell to make the underpreforming properties preform better
and then
3. Buy into maybe 1 medium sized apartment complex or personally, I like office complexes
4. Buy some properties out of state to simply get more for your money while protecting yourself from a disaster or a market downturn in Colorado so that while Colorado goes down, other states will go up.
I really liked what
said. Lifestyle and goals will make a huge difference.
Do you want to be a mega landlord or an investor that has a good/Great monthly income from rentals? Does increasing your risk help you achieve your goals? Does 2 million in current equity give you everything you want/ need for your lifestyle. Does leveraging all your properties to make bigger acquisitions put you in a risky place to reach your goals for retirement?
Just some thoughts.
Great input! I find myself thinking right along the same lines as what you've posted. I am continuing to buy properties and adding to my portfolio, but for some reason am having a hard time taking conventional wisdom on leveraging my equity and buying more with it. Seems almost all the advice I get is "take the money and buy more, stay leveraged that is the only way to make huge money"
I agree spending time focusing on managing current assets and not so much on acquisitions would do me well for a while!
Thanks for taking the time to respond,
Matt
Love the thought behind this. I currently have a bunch of spreadsheets on my computer evaluating many of these options!
And I agree @Louis L. It is all about figuring out long term goals. One of the difficult things for me is drawing that line in the sand of what is "enough." Ultimately, I am passionate about real estate because of the lifestyle it can provide, yet I never let myself enjoy the "lifestyle" because of the constant desire to make and do more. Definitely a good reminder to think about the end more often!
Thanks guys!
Matt, I had that exact same conversation with myself a couple of years ago. After going over the pros and cons for some time, I decided that, at my age, I needed to preserve my available cash by keeping my rentals leveraged at 70-75% so I can continue to acquire more properties. I am extremely conservative by nature and would love to pay down and pay off my properties, but in light of having a couple of decades before I need that bump in passive income to retire, I decided to keep my cash out, continue to get great ROI, and grow my revenue by continuing to acquire cash flowing properties. At some point I may let them ride and continue to pay down, but right now I need the cash for continued growth. Hope that helps.
And remember, in real estate...CASH IS KING!
Originally posted by @Matt Rosenbohm:
Great input! I find myself thinking right along the same lines as what you've posted. I am continuing to buy properties and adding to my portfolio, but for some reason am having a hard time taking conventional wisdom on leveraging my equity and buying more with it. Seems almost all the advice I get is "take the money and buy more, stay leveraged that is the only way to make huge money"
I agree spending time focusing on managing current assets and not so much on acquisitions would do me well for a while!
Thanks for taking the time to respond,
Matt
I would use the term "conventional wisdom" loosely - show me one person that has 10 free and clear rental properties and is regretting it. Much easier to see a lot of people who lost it all using conventional wisdom. Of course we want to stay in great equity positions but when I bought property with 25% equity at $100k that felt safe, having the same property now selling for $270k feels awesome - but cashing out 80% LTV on $270k to buy more properties at $270k, a lot less comfortable.
When someone says take cash out buy more - my next question to them is always "how many properties do you own?" followed by "what percentage equity does your portfolio have?" I typically find that they are not in a position to offer advice on my position.
Of course there can be a happy medium but it is a different measure for everyone.
Keep up the great work!
Great points for sure. I think I wrestle most with this question for the same reason you mentioned, age. I am only 34 years old and would like to increase cashflow sooner then 15 years from now (when everything would be paid off). So I completeley understand why you chose to leverage at 70-75% and purchase more.
Thanks for your input!
Matt
Completely*
Definitely a loose "conventional wisdom" as like you mentioned I have friends who have 10+ paid off properties and hare very happy. I love your example 25% on 100K vs 25% on 270k. I agree it changes the comfortably level a ton for me.
I am currently leveraged at about 50% LTV on my overall portfolio, so I have a little wiggle room on my LTV if I want to get cash out and reinvest, just trying to get a philosophy nailed down for my overall investing goals.
Luckily my flips are producing enough income to help me continue acquiring more rentals as I reinvest the profits from flips to holds so its not a matter of wanting to get more properties per se, I just hate seeing 2 million make 6% Cash on Cash.
Thanks again I appreciate your willingess to help the conversation thats going on in my head :)
Matt
@Matt Rosenbohm Similar to @Kevin Grinstead and @Louis L. comments on lifestyle, I would ask What part of real estate is the most fun and satisfying to you? Do you like managing a buy/hold portfolio? Fix and flip? Hard money lending?
Rather than maximizing return, what would give you the most personal satisfaction? Once you answer that question, you have the luxury of structuring your portfolio accordingly.