Pay Off Second Home or Leverage into New Property

[Anthony F.]

Looking for feedback from folks who have been in similar situations and have lessons learned or advice, as I am just getting started and this is literally my first post.

Wife and I moved out of our first townhouse and rented it out to grow our family 3 years ago. We originally used an FHA loan with 3% down, took on MIP, and now have a $2,100/mo mortgage with $225 HOA/mo - so about break even on cash flow. There is roughly $275k left on the mortgage and its value is est $430k.

We have a brokerage account w $300k that considered as discretionary investments because we also have 401k contributions and emergency savings.

Our options we're reviewing:

1) Do nothing. Let brokerage grow, tenants pay down mortgage, and save up for another property organically (Cons - slow growth, waisting equity// Pros - low risk)

2) Cash out the $300k brokerage account, pay off the townhouse, start cash-flowing $2,400/mo, and save up for new investment or 1031 into multi family(Cons - cap gains tax on cash out, high Oregon income tax penalty, hard to find deals being $2,400 monthly cash flow) // Pros- cash flow, increased leverage into large investment)

3) Cash out $300k brokerage and put into separate Multi Fam property, hoping for $2,400/mo+ cash flow, keep townhouse rented as is (Cons - cap gains tax on cash out, not utilizing equity PROs - increase portfolio value, higher upside with value add or rent increase on new units?)

Looking for a gut check here because my CPA/tax guy is advising against dumping the brokerage account bc taxes, missed upside - but he also admits to not specializing in real estate asset/tax protection strategies.  Any and all comments are welcome thank you!

[Vince Scipione]

Welcome to the forums!

If I was in your shoes, I would find it really hard to give up that entire brokerage account. That is a great nest egg to build upon, and it diversifies your wealth. I would also find it hard to want to sell a property that has an estimated $155k in equity this early on. If you HELOC/Cashout the townhouse, obviously the property will no longer break even/cashflow. What if you keep the property the way it is, use it as an equity builder.. You didn't mention the interest rates but 3 years ago, I am going to assume it was much better than it is now. Keep the property clean, updated and rented to good tenants. Rents will keep raising in most markets so bank on that for additional cash flow in the upcoming years. I would reinvest future cash flow from increasing rents to the principal to pay it down faster. Think 10-15 years for wealth building.

Short Picture: Instead of dumping 300K out of a brokerage account all at once, how about you find another investment you are comfortable with, multifamily specifically, and only withdraw the needed funds for the down payment on it from your brokerage account. Find a lender that works with a lot of investors in your market and have a conversation with him. Explain your goals. It sounds like you want cash flow and to scale, in this time and most markets you need to find a deal where you can add value. Underwrite a multifamily deal, find the ugliest house in the best neighborhood if possible. Use the brokerage account to fund the downpayment and repairs to bring it up to the comps in the area. From there you will hopefully have a multifamily that you have equity and cash flow in. From here analyze how you can then leverage this new equity and cashflow to scale.  

There are people here with WAY more experience than me. But overall, with a young family, I would be cautious about gambling the whole farm (Brokerage account) on RE investments. Take your time! 

It sounds like you are in a really good spot right now and have a lot of options, I hope some of this info helps, or gives you a different perspective perhaps, I wish you all the best!