Cash, equity, or both??

Question

Hello, I'm brand new to BP. I just started listening to the podcast, and very excited in learning from anyone willing to share. I currently own two rental properties, and my goal is have a passive income of $100k in 5 years. My current properties are in good shape & in good locations (Chicago & Summit County, CO by the ski resorts). They both yield $600 monthly a piece ($7200 yearly) after mortgage and bills. I know it's subjective depending on your situation/goals. But I could use some advice on cashing in on my equity, or using some of my own earnings ($355K) to finance the next deal(s). Ideally I would like to purchase an apartment building with 6-12 units in Dallas, Vegas, Nashville, Atlanta, and maybe the Carolina's. But open to duplexes or 4 unit properties that makes sense...and money of course!

I currently owe $135K on the condo in CO., and can conservatively get $440K for it without a realtor. I'm not looking to sell it though. But if I took the monthly positive cash flow and put it towards the principal, it would be paid off in about 14 years, and would yield over $25K a year. So you can see there are many ways to use this vehicle. I can pull some money out, and still generate a couple hundred dollars each month, or hold it and leverage my Chicago place which will never get paid off (owe $276K - appraised at $470). My initial thought was to sell Chicago, and 1031 exchange it into the apartment building. My lender is telling me they can lower my payment by $150, and take out $55k to use. That, plus 2 units are long over due for a rent increase and could be generating about $400 more a month.

I'd appreciate any advice on how to achieve my goal. Or basic investing guides to live by and be successful when there's a good amount of equity built up.

Dave Foster · Answer

@Michael LaPlaca, Your cash situation lends itself ideally to a reverse 1031 exchange. You could use your cash to finance the purchase by your qualified intermediary of the perfect apt building when you find it. Then 1031 the condo and Chicago property into that building returning your cash to you. After that you will have your cash back to then invest at your will in additional duplexes or small multi families. Or you can use it to rent some nicer places in Summit while awaiting the next buying opportunity.

When you do a reverse exchange like this it not only lets you lock up the new property first so you get just the right deal. It also let's you double dip the appreciation and cash flow of the IL and CO properties for many months and the cash flow and appreciation of the new apt complex.

When you do a reverse exchange like this it not only lets you lock up the new property first so you get just the right deal.  It also let's you double dip the appreciation and cash flow of the IL and CO properties for many months and the cash flow  and appreciation of the new apt complex.

Andrew Johnson · Answer

@Matt Leavell You're right on the money, I'm awful at telling people what they should do!  I just try to add some perspective.  🤷🏻♂️

Matt Leavell · Answer

@Michael LaPlaca I think a lot of what you need to do is up to your personal comfort level.  I think that @Andrew Johnson give some really good advice without trying to tell you what to do, but I would probably lean towards @Brendan Harrison thoughts due to my situation.  I think the timing is right to take advantage of low interest rates, just do it within reason as @Andrew Johnson was cautioning.  Good luck!

Michael LaPlaca · Answer

@Bendan Harrison thanks for the words Brendan! I agree I should use the equity to buy more properties, and take advantage of the lower rate. I'm refinancing the Chicago property to fund a 5 unit I got under contract this afternoon! With the lower rate my payment goes down $150, and I can pull out $50K . I'll most likely do the same with the condo later this year for something else.

Michael LaPlaca · Answer

Thanks for the replies. All solid advice for sure. Kind of overwhelming with all of the options. Not a bad problem to have I guess, haha! But I'm not sure I understand @Thomas S, what you mean by my equity is killing my cash flow. My mortgage on the condo is $800 + $357 for HOA, and I rent it out for $1800. Tanya mentioned a unit selling in my complex (Prospect Point) sold for $470. I owe $135. What am I missing besides not charging enough in rent? Same goes for the Chicago place. My note is $2450, I pull in $3200 in rent. Both properties generate positive cash flow last time I checked. But I am interested in learning from your experience.

Tanya Delahoz · Answer

@Michael LaPlaca-Frisco, CO townhomes are currently averaging $438 per square foot and the average price sold in March was $496,000. A 2BR at Prospect Point sold in Jan for 470K. The market is increasing month after month and inventory is at an all time low. I manage about 25 rental properties in Breck, Frisco and Silverthorne and see 2BR's in Frisco renting for $1900-$2100 a month, depending on what utilities the HOA include. I can't tell you what to do with your two properties-that's your choice alone! But, I do think a rent increase or a sale will help put more cash in your pocket, if that's the ultimate desire.

Aaron Vaughn · Answer

hey Michael I'm going to be biased because I know my own backyard in Chicago but based on what I'm seeing in the market here there are a ton of opportunities in the 2 to 4 unit rental arena that you can get involved with that will yield fantastic cash flow returns p.m. me for  Additional details thanks

Andrew Johnson · Answer

@Michael LaPlaca I guess first things first, I wouldn't pay off anything completely.  Mortgage interest and depreciation will likely help you actually keep the $7200 annually rather than having the pay taxes on it.  If you take away the mortgage interest (especially in nice areas...read: high land value) the depreciation won't make a dent.

Now that that is out of the way, if I'm in your shoes I'd look at the deals in front of you before making any decisions.  I'm a little atypical here as I don't think equity is a "bad" thing.  "Dead" equity doesn't yield ROI but it does give your flexibility.  If something unknown if your life happens (like a great 1031 opportunity comes along) and you have to cash-out then you at least know you're in a position where you actually can sell and not take a loss.  If you have solid equity in your property you to can do today of down the road even if the real estate market drops 20%.  If you max out your LTV and the market drops 20% then you're underwater,  can't afford to sell, and are "stuck".  Which goes back to my original suggestion to look at the deals first and then solve the financing challenge.  It looks like you have options.

Side note, if I were you I'd also look at what $100K means to you after taxes.  Is that $100K in marginal income over your job?  It is $100K after taxes?  Or is it just $100K top-line?  The great thing about real estate is that you do get to write-off deprecation and mortgage interest.  So if you're looking for $100K top-line you really only need $68K tax-free.  If it's $100K on top of your current income that probably translates to less than $68K (aren't marginal taxes fun?).  Start looking at your current (and future) properties to optimize for post-tax income.

One guy's opinion anyway...

Cash, equity, or both??

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