$224k in equity, $800/mth cash flow - how do I grow?

[Nathan Shankles]

I’m 32 years old, and a full time teacher. My wife and I own two investment properties with $224k in equity that are currently cash flowing $800/mth after all expenses and after accounting for vacancy/maint/capex. Our goal is to be at $12k/month cash flow in 8 years. What would you do to grow if you were in my shoes?

[Bob Green]

WOW! Lots of chatter about a recession. Fortunately, I lived through the 2008 recession as a investor, however many of my clients were not so fortunate and lost 50-100M real estate portfolio and went broke. In my opinion I would not leverage over 60-65% loan to value if your current financing on the 2 properties was less than a 10 year term. Therefore if a recession does happen and values do dip 10-15%, you can likely survive the dip and refinance  in 10 years.  Now on the other hand if the 2 properties yielding $224,000 in equity are fixed for 15-30 years, I would risk leveraging to 70-75% as the term is not due for 15-30 years, therefore risk is much lower.  You need cash to reach your goals, and learn how to leverage funds. Its possible to acquire properties and cash back out based on fair market value of appraisal after owning the property 90 days. In addition lock the term for 30 years.  30 year mortgage is as close to recession proof as you can get.

[Nathan Shankles]

@Glidden Rivera I wish I knew how to say this better, but thank you! I so value the BP community for this very reason

[Nathan Shankles]

@Jonathan Pflueger thank you Jonathan!

[Nathan Shankles]

@Bob Green I appreciate your feedback Bob - thank you!

[Gabe Radovsky]

PhD economists and hedge fund managers with large teams and complex computational models can't reliably predict recessions. Frankly, if you trust small time real estate investors, or your own gut, to succeed where those people have failed, then boy have I got something to sell you.

[Ryan Hall]

@Glidden Rivera

Glidden, can you elaborate on equity LOC vs. refinance and pull equity out? Why one over the other?

Thank you

[Glidden Rivera]

@Ryan Hall

Sure:

Line of credit: allows you to leverage your equity without diminishing your cash flow long term.

Consider it like a credit card but with checks.

When you pay it off, you can use it again and again. ( it should go without our saying, I’ll say it anyway.... pay off the dang card)

The power of the line of credit, is having resource available and ready to deploy immediately and repeatedly. If you don’t use it, there is no payment to be made.

This debt weapon can be used to fund your down payments and rehabs. When your project is complete, refinance or sell.. pay back the LOC and do it again. Depending on the line available, you can potentially fund the entire acquisition and rehab.

Imagine being able close on a property in a matter of days and not weeks ( you are now the bank....and can move quickly)

An equity refi moves slower to close, you will have a payment because it’s a loan. On an investor loan, you will diminish cash flow because you have raised debt and keep in mind, over leveraging can leave you compromised ( always dangerous). These instruments are long term (5,10,20 yrs) when you pay the principal down, you can not use the money again ( it’s gone)

A refi can still be a powerful debt weapon if you are buying an asset that is going to produce enough of a return to make the cash out refi worthwhile.

In the case of this forum, a large amount of equity is in play. Depending on the investing model, a play can be made to sell the asset and upgrade from 1 or 2 doors to 16 and 20 doors or more. The captured equity is a down payment on a 500k-700k ( have to consider due diligence and closing cost - 224k won’t get you a million property the conventional way but depending on the market; it can get you 15-30 doors) multi- family. They may opt to aggregate funds from others like themselves and buy 100 doors ( add value, force equity... refi or sell) capture new equity and recover personal funds. It wouldn’t take many deals before the equity on hand doubles and quadruples. Honestly, everything is relative to your model. Knowing when to use what is important. Some of these instruments may take you into the end zone quicker or slower.

I have done it many ways, my favorite debt weapon is the LOC "line of credit"

[David Flores]

@Nathan Shankles

You have sooo many options! All I can say is what I would do as a serious investor. I don’t know your commitment to this. What I would do is move out of your current home and rent it out. Increase that cash flow! Then i would purchase a home that needs rehab. I would live in that home, rehab, refi, and rent it out. You get your money back and your cash flow goes up more, and in my opinion the most important part you will learn how much things cost and how to do your own repair work. I would keep doing this until my cash flow allows me to quit my job. Because of your equity though you can definitely hunt for other rentals to buy during this journey. The live in rehabs you could leverage on so you are protecting your capital. Have the cash flow and refis pay for your properties. Once you get this snowball going I think you can definitely achieve that 12k goal in 8 years.