How would you grow from this position?

Question

Hi guys, I am wondering what you would do if you found yourself in this situation. I feel this could be a good learning opportunity for myself and other's who are in the early stages of their investing career. My question is, how would you grow from this position?

Scenario-

You bought your first duplex one year ago for $205k. Your mortgage balance is $173k at 5.25% annual interest. Monthly PITI is ~$1400. You are currently living in one unit and the other is rented for $1000 per month. Your unit could rent for $1300. Both units have been renovated. The property has updated electrical and hvac. The water heater and roof do not have much life left, but the siding and windows are in ok shape. The property is now worth $240k. You have $5k cash.

Question-

1) How would you grow from this position?

2) How would you manage your cash flow? I.e. how much to set aside for reserves/capex/maintenance etc.

This post leaves a lot of room for you to be creative and is intended to help new investors grow their portfolio, so please provide as much detail as you can. All ideas are welcome!

Derek Diamond · Answer

@Dillon Dale

This is a very similar situation to mine(first investment was a duplex- I lived in the back unit and rented out the front). I pulled some equity out after two years and then bought a condo. I then pulled money out of the duplex again and the condo after two years and bought a SFR for a live in flip. I was highly leveraged and did not have any reserves. This was more risk than I take on now.

For your situation, do you have a solid job? Good income? i.e. make sure you are set up if your property takes a hit. $5,000 is a good base for emergencies. But if you roof goes quick so with that $5,000 plus more very fast.

Also, make sure you numbers work for buying another property. If you take out money and refinance at the $240K will you be able to cover all your expenses ( capital expenses-roof, vacancy, maintenance, property management - no or in the future, etc.) plus your debt services- $1,400. I ran the numbers and it could be tight.

But if it were me(when I was starting out) and I had no one relying on me, I personally would pull the money out and buy another one. Now, I would sit on it for a few years until the equity is higher and then pull money out and still have a rock solid investment.

Real estate is not a sprint but a marathon. 5 years ago I would have said it is a 50 yard race to financial freedom but things change.

Good luck!

Jonathan Bombaci · Answer

This is an interesting position. I’d say focus on reducing your spending. You’re living at a solid discount so you should be able to find a way to save some money every month. If not then maybe take on roommate and save that money. Your goal should be to save up enough for another downpayment without touching the equity in the duplex. You may need that for the roof at some point so I’d leave that untouched. Once you save up the downpayment look for a 3-4 family to owner occupy, it will generate more $$ and you should be able to live for free. Then rent out the unit your currently living in. With $2300 a month in rent and PITI of $1400 you duplex should easily stand on its own and start building a nice $ reserve to be used for capes repairs your next downpayment. You’ll probably want at least $10k in reserves Incase you need it until you start pulling money aside for your next downpayment.

I’d be hesitant to put yourself in a position where you’re cash poor since that's always when problems seem to arise.

I was in a similar position a few years ago. Let the properties take care of themself and focus on reducing your income to save more. Making more $$ and spending less will compound your cash position very quickly.

Dillon Dale · Answer

@Derek Diamond thanks for the reply Derek!

How would you grow from this position?

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