Refinance rental property for stocks

[Trent M.]

Hey guys, first post here. Today I was speaking with a friend about maximizing cash flow on my rental properties and he came up with a BRRR method minus the last R and I thought it seemed like a good idea.

I currently have 2 rental properties and both are paid for.

One is a small house that I have about 15k into and it cashflows about 500 per month.

The other is a quadplex that I have about 70k into and it cash flows between 800 and 1500 per month (one room is an airbnb).

Would it make sense to take a loan against each house for max value (assuming I could get 120k total) and invest it in something like S&P500? Basic math with a 10% return and keeping dividends seems like it would increase cash flow by a few hundred dollars per month just to get a mortgage on them. Am I missing anything here or would this be a good option? Thanks in advance for your opinions/ideas!

One last thing, I'm looking to increase my cash flow more passively than buying another property. I know I would make more with real estate but I would like to get my feet wet with some stocks and could use some guidance.

[Joe Villeneuve]

No, no and NO. You're completely missing the main reason REI is the best investment vehicle...leverage. The fact that you have two properties paid off tells me you don't understand this. You have $120k in total Property Value, and the same in equity...which means you're losing money. Why? Here's how:

1 - When you buy all cash, your equity is equal to the PV..as in a 1 to 1 ratio.  In other words, your cash got you a PV equal to what you paid for it.  When you buy using leverage, you can take that same cash ($120k) and buy a property worth 5 times that amount (in this case = $600k).  If your CF were to be cut in half on the original properties, you would most likely be able to increase your total CF by 5 times that of the new reduced CF.  This means the total new CF should be 2.5 times that of what you have now.

2 - Percentages lie when you are comparing the SM to REI. See #1 above. If the SM had a multiplier of 10%/year, and the RE had only 5%, if you did #1 above, you would end up with a return the first year of the following:

     A - SM:  $120k x 10% = $12k;  New total = $132K
B - REI: $600K x 5% = $30k; New total = $630k
...and, thanks to the power of compounding, every year after year 1, the spread between the two gets wider....in favor of REI.