First Post: What Next?

Question

Looking for some feedback on planned next steps and how best to execute on them.

I currently have 2 rental properties and am looking  to acquire a third through the HomeReady plan in Chicago as my first  house-hack and first multifamily (2-3 flat).  As I’m saving up for the  down payment I’m starting to consider whether  it would make sense to re-finance or sell one of the other properties.

The first rental was my own townhome that I lived  in for 3 years before starting to rent it out.  It doesn’t really check  the boxes of an efficient rental property (less than 1% rent to value,  low cap rate, tied to an HOA, etc.) however  it performs well in that I cash flow positive every month, it’s new and  doesn’t require much (if any) maintenance yet, and my tenants pretty  much never bother me and keep the property in really good shape.

The biggest problem it has is that I have around  75% equity in it but find it really hard to refinance to pull money out  since it’s sitting with a 2.75% rate right now.  It performs well each  month and doesn’t cause me much of any headache  so I’m apprehensive to change anything there.

The second one was just purchased last year and I  am not ready to sell, refinance, or add equity since it’s a cheaper  older condo.  I purchased this in an attempt to pick up a property that  was intentionally purchased as a rental, low price,  and a condo to minimize repair work to inside the unit.  It does okay  but has traditional financing at a pretty high rate.  Not much room to  do anything with it right now.  It’s been a really good learning  experience if anything.

As I see it these are my options:

• -Leave the first two properties alone, continue saving, and purchase once I have enough saved up
• -Refinance out of the first property back to a 30 year mortgage with  considerations on maintaining a positive cash flow and use that money as  part of the down payment
• -Sell the first property outright and do a 1031 exchange.

Pros: Get out of a new property before needed repairs, get rid of a property that doesn’t perform that great by rental standards
Cons: Lose low financing, lose good tenants
• Pros: Get out of a new property before needed repairs, get rid of a property that doesn’t perform that great by rental standards
• Cons: Lose low financing, lose good tenants

• Pros: Get out of a new property before needed repairs, get rid of a property that doesn’t perform that great by rental standards
• Cons: Lose low financing, lose good tenants

Are there other options I'm not considering?  Also thoughts about timing the real estate market would be appreciated since I keep hearing it's supposed to drop.

Aaron K. · Answer

Well in Chicago I would expect the normal seasonal drop in prices for winter, so unless you move today you probably wouldn't want to sell until at least next spring.  However a 2.75% loan is not something I'd want to give up I'd keep it and just keep saving for the next one.

Andrew Goodwin · Answer

@Jordan Propp Thanks for the additional info. Have you explored taking out a HELOC? You'd be able to access the much of the equity if a deal came along, but wouldn't lose out on your current great interest rate. Generally, HELOCs require interest only payments for 10 years, but then they require either a balloon payment or a refinance into a different type of loan. Downside, interest rates follow the market rate.

Michael Facchini · Answer

Well, that's a tough one.  It also depends on how quickly you can save up for the next purchase, what opportunities you want to focus on this next time around, and the "opportunity cost".  I don't think there is a clear answer here...it's a matter of factors we (as the BP community) don't have at our fingertips, as well as preference.  I don't think I'd sell it though based on what you described.  You've paid the cost to entry and the dividends should only increase over time.....I'd probably refinance and take a slightly higher rate (cost of doing business to open up more opportunities) if I had the rest of my ducks in a row, and I had a line of sight on that the next purchase...and that purchase yields returns that make up for the higher rate via the refi.

Jordan Propp · Answer

@Andrew Goodwin

@Michael Facchini

I’ve owned the property since 2014.  It was new when I purchased it so I’m far from maxing out on depreciation soon.  I don’t expect to need to replace anything major soon but I know that the longer I own the greater that risk is.

I do have some money set aside in a HYSA to cover for unexpected repairs, vacancy, etc.  Luckily it’s treated pretty much like a townhouse in that I only have to make repairs to things from the walls inwards.  The HOA is run pretty well with large reserves so I’m hoping any major repairs would not cause a big assessment of any kind.

Since it was purchased as a first home I put way too much equity into it to minimize my mortgage payment.  I have about 75% equity right now and a 15 year mortgage (12 years left)

Andrew Goodwin · Answer

@Jordan Propp For the townhouse, how "new" is it? Are you currently setting aside money to cover the expenses that come with time, or will you lose money on it when it's time for a new roof/etc? After owning for a only few years are you in a position to have enough equity built up to make selling worth while?

Michael Facchini · Answer

That's a hard call without knowing all the numbers.  How long have you owned the 1st property?  Much more than the 3 years you lived in it?  Asking to see what kind of depreciation you're claiming and if that is providing much benefit...and if you'll be maxing out soon.  That in combined with some maintenance/management projects down the road, perhaps selling is the way to go....if you have a plan for a larger investment with greater returns.  Likewise with refinancing...if you will exit the 2.75% rate for something higher, that could make sense if it allows you to take advantage of another opportunity that will be a front-runner in your portfolio.  Can always wait and save too of course, but if you're seeing opportunity that you feel strongly about, perhaps selling/refinancing is worth considering.

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