If you were me - what would you do?

Question

Hey BP!

I'd love to hear various opinions on what you would do if you were me.

property 1:  SFH market value: 120K
                    Mortgage 59K (locked in at ~5%)
                    rented at $1125

Property 2:  MFH Market value: 170K
                    Mortgage 83K  (locked in at ~5%)
                    total rent $1735

I'm probably going to cash out refi and re-invest in my market, but I want to know what YOU would do given the same situation.

Also, I should mention I can still qualify for 3 more fannie mae loans.

Nathan Emmert · Answer

Infinite return is a cash on cash number.  You're into a property with $0 that's producing cash flow.  What cash on cash ignores is opportunity cost.

Remember, your goal isn't simply to get a return on your investment.  You can do that in a savings account.  You are trying to maximize the return you get from your entire asset portfolio.  This includes both your cash reserves as well as other assets, specifically equity in your homes being this is real estate.  That's what I showed you above.

In those two properties, you have approximately $120 grand of "liquid" (okay, selling real estate isn't exactly fast or easy) assets.  How do you maximize the value of that asset?  Do you leave it be and make a 6% return ($620*12/$120k)?  Do you leverage it further and make a 11% return($13k/$120k)?  Or do you diverge from those investments entirely because you can make a 15+% return elsewhere?

Think of them like stocks.  You bought a stock years ago for $5... it's now worth say $50.  What you paid for it is completely irrelevant (i.e. infinite returns, cash invested).  The face is it's now worth $50.  You have to look into the future.  Is your current stock going to go to $100 in 3 years?  Is it going to stay at $50?  Is it going to go to $20?  Now you have to look at all the other possible stocks out there.  Can you find a different stock at a risk level you like that you believe will go to $200, or $500??

Infinite cash on cash is an analysis based on the past.  You can't change or effect the past, you've won or lost already and are where you are today.  Now look forward and make the best decisions you can.

Andrew Jones · Answer

Cash out refi and re-invest in more SFH rentals.

Nathan Emmert · Answer

So you're achieving about 1% rents against FMV.  You have a couple options...

1)  Do nothing.  You're cash flowing about $220 and $400 on the two properties for $620 a month.  Not a terrible position to be in.

2)  Refi to 70% LTV which would pull $25k out of Property 1 and $36k out of property 2.  This would reduce your cash flow on property 1 to $110 and on property 2 to $210 for $320 a month total, essentially half of what it was before.  The question is, can you use the $61,000 you pulled out to generate that $3,600 a year?  Assuming you'd find a way to achieve 15% cash on cash returns, you'd be pulling in $9,000 a year (give or take) which means you've improved your overall cash flow by $5,400... going from $7,440 to $12,990... that's a 75% increase in your cash flow.

3)  Sell both properties and take the 10% hit to reinvest in a more lucrative area.  So $290 - 10% (closing costs) - $59k - $83k = $119k.  Assuming you can generate a 15% cash on cash return (rent = 1.5% of purchase price @ 25% down), you would generate $17,850 in cash flow.  That's $10,410 more than you currently do with those "assets" or a 140% increase!!

You need to decide if you're investing for cash flow or for appreciation.  If you want the appreciation play, go option 2.  Absolutely no reason to leave buried equity when you can pull the cash out at 5% interest.  If you're a cash flow investor, both those properties are lemonesque, you could do much better and are far better off selling them and reinvesting.

Elijah Rubin · Answer

I agree with alot of what the other posters said. Cash on hand is better then cash locked into the property. Especially if you can cash out and still cash flow plus receive the tax deductions on both of the rentals. The real key is how are you going to leverage the cash you pulled out to maximize on its use. Did you want to do another buy and hold, did you want to jv and do a flip to minimize your out of pocket cost, or you can always wrap a note create cash flow and still keep a portion of your cash. What is your end goal and I think alot of us here can give you a couple of different routes to get there... My focus is to always Add value... hope it was helpful

Michael Zuber · Answer

Agree with the other posters.  Pull out the equity, lock in 30 year money and go buy the next asset to continue building your asset base of cash flowing properties

Arthur Garcia · Answer

Monica,

Thank you for that suggestion.  I am working on trying to do that very strategy on my current property.  Unfortunately, my numbers won't look as good - I'll still have about 8K in the property once I'm done.

Great ideas!!

AG

Monica Breckenridge · Answer

I wouldn't do a cash out refi!  If you qualify for more loans is your intent to use the cash as down payment on a 30 year loan?  If so you can get more bank for you buck by buying a house using a hard money lender or any fix and flip lender.  Make sure the deed of trust is in the amount of the purchase plus the rehab.  Then refi the property with a low seasoning lender to get all your money out and then be out of pocket zero to up to $5k.  We are doing these transactions in Colorado.  I use Denver Mortgage Company here, but I'm not sure if they will lender where you are.  If not there must be other lenders in your area that are doing similar loans.

Will Barnard · Answer

Infinite returns? hell yes, with the exception of the actual cash flow or net profit is more than just a few dollars.

If you can get your initial investment out of any deal, and still have cash flow, you have generated arbitrage and dong so over and over will lead you to a path of full mailboxes with paydays in each one, each month.

The key is to always borrow at an amount below what you can take that capital, reinvest, and gain returns in excess of your loan payment.
With rates as low as they are, surely you can pull some of that 50% equity position out via refi, re-invest in moe assets that gain a higher yield than that of the loan interest rate. I say go for it.

Arthur Garcia · Answer

@ Nathan

I'm debating a few strategies here and I really appreciate you taking the time to run the numbers on my properties.

Just curious, do you buy into the whole idea of an "infinite return"?

Property one, I put about 22K in to get the property about a year ago.  I put about 34K in to get property two (same timeline).

thanks again for your detailed response.

AG

Tom Caruthers · Answer

As long as you can cash-out refi and still cash flow on your existing properties, that sounds like a good idea.

If you were me - what would you do?

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