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Updated almost 5 years ago, 01/22/2020
$224k in equity, $800/mth cash flow - how do I grow?
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?
What does your 224k equity represent as a percentage and what are gross monthly rents?
Thanks for your time @Todd Rasmussen
Equity = 47% of property values
Gross rents are $2995
You have great cash flow and a good bit of equity. To make your timeframe, you would have to leverage it significantly. There's no way to make your deadline with a conservative strategy. However, you have very little risk now compared with what you'd have to take on to do so.
If you are willing to let your timeframe slip, the properties you do own will likely appreciate further and continue to generate more cash flow. Put the money in your pocket and build you buying skillset to acquire future properties at a lower price point. Repeat until you hit your goal (likely at least double your current timeframe)
If you are willing to risk what you already have, you can suck a bunch of equity out which will eat all of your current cash flow and stretch it across as many properties as you can as thinly as you can to try and meet your mark. (I'd be surprised if you could do this in CA)
My vote is that you take the conservative approach, cut what expenses you can in order to save as much as possible for future investments and use the snowball strategy.
Full disclosure: I did the opposite.
If cashflow isn't the most important thing in your life, personally I would refi to pull enough cash to purchase another property IF AND ONLY IF you thought there were decent to be had. Cashflow is a great but if you don't necessarily need it currently to live and feel comfortable with reserves I would try to find another property. The reality is it depends on your goals. If you wanted to have two properties paid off and getting a higher monthly net, then keep chipping away at the mortgage. Your goals seem to be more in line with growing. Only way to grow is to acquire more. The sooner you get a few more properties, the sooner they will be getting paid off. Equity is great but if you can't access it or aren't selling the property then its just sitting in there like a savings account.
I would pull equity out, when time is right, to buy more....
However, time is NOT right now... Give it until 2022 or 2023.....
$800 monthly cash flow and $224k in equity are both amazing! However, that's only 4.3% ROE (800 * 12 / 224k).
Do you own properties in California? If your primary goal is to increase cash flow in the next few years, you might consider moving that equity to cheaper markets where you can get a higher ROE. If your main goal is increasing your net worth for the maximum cash flow in the long run, you should probably consider what market you're in and how much future upside other investors think there is in that market. (Credit to David Greene and his Long Distance Real Estate Investing book for those ideas).
@Todd Rasmussen Thanks for the information Todd. I think your idea of taking the conservative approach is a wise one. Much appreciated!
@Diane G. Thanks for your feedback Diane. So it sounds like you’d pull some cash out and then sit on it until there’s a correction in the market? I like that idea... next question - when’s the correction coming? 🧐
@Diane G. What makes you say 2022 or 2023? RR
Food for the thought. When the market start taking a dip the buyer will then say "is this the bottom?" or should I wait another year. Impossible to predict numbers and location don't lie. You can still buy a crappy deal if the market takes a dip. If you're going to hold the property for 15-20 years its not going to end up mattering in my opinion.
@Diane G. You’ve been predicting a downturn for better part of 5 years. Doesn’t it ever get old trying to time the market and always be wrong?
@Caleb Heimsoth - I joined BP in 2016 so apparently I could not have said for 5 years...
I understand you are NOT in California, so I don't blame you for what you said...
For those of us in Calilfornia, our market peaked in mid 2018 and has been down the last 18 months, exactly what I thought back in 2017...
the "next" correction has started about 12-18 months ago, depends where you are in CA... Lol
The real quetsion is how long it will last and how deep it will go....
I am waiting until 2022 for myself because i don't like to waste my hard earned money, but each for their own....:-)
I thought the next recession would hit by 2020 Q4. This was based upon the inverted yield curve on short term interest rates yielding greater return than long term interest rates. When making any prediction, one should state reason why, and not based on feeling or just because it is due. Now, the X factor is the Nov'20 election. If certain candidate wins, who proposes elimination of student debt, free education, and free healthcare, then we are sure to have a recession.
Just my two cents.
Terry
Originally posted by @Caleb Heimsoth:
@Diane G. You’ve been predicting a downturn for better part of 5 years. Doesn’t it ever get old trying to time the market and always be wrong?
Economists have predicted ten of the last five recessions.
I'm putting my chips on May of 2020 for things to really start cooling off.
The first sign will be the rising cost of money.
Below is snapshot of median priced homes by county for Southern California. Median SFR still going up from 2018 to 2019.
SF Bay area did go down in most counties. I don't think bay area is indicative of whole California as shown by chart below. SF Bay area had to go down due to outrageous gains and prices from previous years. I think the key driver was stock options offered to key employees by top tiered companies like Google, Facebook, or any company that offer free food.
@Nathan Shankles. I'm in a similar situation and would agree with what others have said regarding what your goals are and if growth is your main goal, then you need more properties. But that doesn't mean that it's wise to buy a property that's not a good deal or that the numbers don't really work on.
Here's what I'm doing right now: my goal is to increase monthly cash flow by means of forced appreciation because the market where I live has been simply insane and I have not had much luck finding any good deals. So instead, in 2017 I finished off some attic space in one of my rentals and increased rent from $950 to $1600.
My current, most ambitious project yet has been to build a full second story onto another property and am very confident that it will increase my monthly cash flow by $1500-$1700. Time will tell if this was a good idea or not.
Definitely need to leverage.
I would look for a bank or credit union that will let you put a LOC on each of the properties. I have been able to get an LOC on an investment property without paying any fees and I don't have to make payments until I use the money. You can use it as a down payment for more properties or you could use it to purchase a property with "cash" and then refinance after.
@Nathan Shankles I'd honestly suggest looking into better cashflow markets. $800/m from 500k in assets is very low. If you're looking for cashflow, check out some cities in the South or Mid-West. It's not uncommon to find SFH with 10% ROI.
@Nathan Shankles This is an interesting situation because if you max out on your equity now then the cash flow, ultimately, suffers.
Now, the strategy that got you here to $800 will likely not get you to $12,000. You probably want to start looking at large assets such as Apartments or even Mobile Home Parks. A radical strategy is to sell your two investment properties and deploy that capital into the larger stuff to get you closer to your 12k goal.
Risky, but hey, if you want to hit that 12k goal, there will be some form of risk involved.
@Nathan Shankles
Easy: get an equity line of credit on the property.
Have it at the ready ( notice I didn’t say refinance and pull equity out)
With a line of credit you can be the bank, use it when you need it and repay it and use it again and agin and again.
Always be on the market, looking and ready for when the right deal comes along. You can find deals even in This market.
Here is what I know to be true out of experience: in the world of investing there are two tragedies. The first is: not knowing a good deal when you see one and the other not having the resource or understanding to gather the resource to buy when the good deal is in your face.
To overcome the first, you must stay active, know your numbers like the back of your hand. When you drive through a neighborhood, or someone calls you up and says “ I have a house I want to sell, you know it’s market value immediately and without hesitation. In fact, you know the market so well, you are not afraid to make your offer over the phone or on the spot.
You will beat 9 out of 10 investors every time.
This is called investor reflex ( just made that up, but I could preach about it) . Always be in the market, always be studying, no such thing as luck if you are always present. The good deal is going to find somebody you just need to be on the road.
The next obstacle you have overcome already (Pat your self on the back) you have resource to buy your next. I suggest you BRRRR. 12k/ month is easy. If you follow BRRRR, you will do it in 3 yrs conservatively.
Focus on understanding the market!
Last thing: you will lack in the areas where you lack focus, do not lack understanding or expertise. Build your acumen daily!
@Diane G. Why 2022?
Well, where I live, price peaked in Q1 2018 and it has been dropping for 18 months now... down about 10% to 15%....
I dont know how long this down cycle will be or how deep it will cut, but I feel 2022 is a good time to re-evalute things, and we will probably have better visibility then...
@Glidden Rivera could not have said it better - pure gold. Follow this advice to a T and you will do great things. It is exactly what I do and it has been huge for me - so much so, it has allowed me to compete in Bay Area markets and score great deals.
As investors, 90% of our success will hinge on our preparedness. People attribute a lot of what we do to luck, being in the right place at the time, or just happenstance - this is because they fail to see the hours and hours of studying, exploring, and experience that has brought us to our successes.
As Branch Rickey once said "luck is the residue of design."
@Nathan Shankles congratulations on your current success. In my opinion that is a lot of equity with fairly low cash flow. I like the idea of taking LOC and parlaying that into more properties. Best of luck on whatever path you choose!