Rental net, what to do?

Question

Hi folks, thanks for all the good content you provide. I recently purchased 3 homes, all for about half what they are worth (3 family members passed away in last 1.5years). I am going to live in one, and am renting the other two. I purchased for about $150k total and the three are valued at around $350k in todays market. Should I use net income to apply towards principal of loan or use equity to purchase more property? Would like to grow to $10k passive income a month but do not want to over extend. This is a side business. Mike

Caleb Heimsoth · Answer

I would cash out refinance at 70 or 65 percent LTV and go buy another one or two properties. Then keep buying while you pay off one property at a time.

Andrew Syrios · Answer

It depends on your strategy. Overall, I think you will make a much better return using that income to acquire new properties. But paying off the principal would reduce your risk. If you want to use a conservative strategy, paying off your principal is not a bad idea. If you want the highest returns, I would use it to buy more real estate.

Michael Thompson · Answer

@Grant Rothenburger, Very True. I figure its between 10-15 properties assuming they are paid off. I can use my FT job to pay them off, then fast track my "retirement" or I can use BRRRR strategy, who knows. I guess you make me reconsider a management company.

Grant Rothenburger · Answer

@Michael Thompson To me, the important number is cash flow. A property could be 100% leveraged and as long as it cash flows I'm okay with that. Obviously that is a bit extreme but just illustrates my point.The reason I ask about self managing is because of you wanting to be passive. Managing that many units on your own will never be passive. It might be a new career for you if that's what you want, but far from passive.

Michael Thompson · Answer

@Grant Rothenburger I appreciate the optimism. I will be self managing, and like most of my adventures, I tend to wade into things rather than jump, sometimes to my detriment. I think the market is sorta leveling out around here and in some cases softening (correcting). I am new to all of this, and I have really good tenants, which may be causing a false sense of security. Anyways, I appreciate your approach. I was hoping there was a good rule out there, amount of equity amount of REI, amount of "x" before you make a move. I will check out your blog...

Todd Posson · Answer

My response would be to run the numbers. If you "cash out" all three properties at 70% (so you aren't over-leveraged), I'm estimating that you have about $95k that you could pull out in "cash" by refinancing. You could then use that $95k to secure financing for another $300k in property. If that's 3 houses at $100k each with a cash flow of $200/month each, that would net you an additional $600/month in income after expenses. If you can buy cheaper houses and get the same cash flow per house, your cash flow can go up. From there, let the net income build until you have sufficient cash flow to buy another property, or sell them all to buy a small multi-family or something else.But you just have to run the numbers based on what your current properties are renting for, what your payments are, etc., and what you think you can buy additional property for. As others have stated, read and listen to BP podcasts and then make the decision that's right for you.

Joshua D. · Answer

@Michael ThompsonThe age old question. Pay off debt or grow the biz? I remember the first time we had some significant equity, like you describe, a few years ago. I spent a ton of time trying to figure out, what the heak do I do with this wealth?!? IT kinda freaked me out that I might make the wrong choice, so it propelled me into a massive quest for investing education. I looked as stocks, realestate, gold, insurance, etc... I soon learned that REI was the best place for ME to leave my equity.As time went on I realized for ME the best plan was to grow to the 10 properties that I wanted and THEN pay them off. I would recomend listening to all the BP podcasts or reading as many books as you can till YOU feel comfortable with whatever decision you or direction you come up with. Sadly enough there is NO right or wrong answer here. Educate yourself, know the risks, and move forward.Good luck out there.

Patrice Penda · Answer

@Michael ThompsonTo ever be able get to $10k a month of passive income, you need to have a lot more properties than the 3 that you currently own.To ever achieve that ambition, given the 2 options you mentioned, you are only left with using the equity you have to purchase more houses.

Grant Rothenburger · Answer

@Michael Thompson If your goal is to grow to 10k a month passive, you'll need a lot of houses, so use the equity to buy more gets my vote. Will you be self managing?