Please tear this strategy apart (gently...)

Please tear this strategy apart (gently...)

Corey WrightPro Member
Keller, TX · Member since 2023 · 2 posts · 4 votes

Background:
-My wife and I have two single family rentals in Fort Worth TX where we live. 
-After PITI and 10% for maintenance/capex the rentals combined cash flow $575/mo or $6900/year which is approx 2.6% return on equity.
-If we sold both of the rentals as is, after we paid 6% in commission and 2% for misc/seller credits and then paid off the loans we would walk away with approx $260,000 before taxes.
-My income increased in 2023 and we are now saving $4,000/mo or $48,000 a year in cash to invest in more properties with.
-We currently have $35,000 saved.
-We are both in our mid to late 30's. We make great income and are looking at building as much equity as we can for the next 25 years. We do not need immediate cash flow and are looking at the long game here.
-Average home prices in our area in DFW are low to mid 300's. 

Game Plan:
We would like to sell both of the rentals and take that $260,000 and realize the gain on it (yes I know about 1031 exchanges but dont want to deal with that headache and handcuffs). After 25% taxes we will be left with $195,000 plus our already saved $35,000 would put us at $230,000. I would then like to take that $230,000 and buy a house cash, and BRRRR it. In a perfect world we would be getting back out all the money that we put into the deal, but realistically I know that is a home run. If we have to leave say $20,000 into a deal that is fine because we are saving $48,000/yr to invest with so we will still be increasing our chunk of money each year.

Long term we would like to do 1 BRRRR or more a year and at the end of 25 years have 25+ properties. By selling the two rentals and paying cash for a property we wouldn't have to pay interest during the rehab (low rate from a bank or high rate from a hard money lender) so that would save money. If your average hard money lender is say 13% plus 2 points and we borrowed $200,000 for 12 months that would be $30,000 lost. By paying cash it would be $30,000 saved. Lastly by paying cash we could move more quickly when the right deal comes along and close as soon as title clears. 

So....whats your thoughts? Do we:
A) Keep the two rentals, cash flow $6,900/year for a return on equity of approx 2.6% and then save our $48,000/yr and do the traditional 20% down payment to acquire a BRRRR every 18 or so months with our savings rate? Or
B) Sell the two rentals, pay the taxes on the gains, use that money to buy BRRRR's cash thus saving on interest/finance charges, move more quickly on the right homes by having cash, and as soon as a bank will allow we can refinance and move on to the next property.

I vote option B, but what say you? 

Thanks!

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Randall AlanPro Member
Investor · Lakeland, FL · Member since 2017 · 1k+ posts · 1k+ votes
3y
Quote from @Corey Wright:

Background:
-My wife and I have two single family rentals in Fort Worth TX where we live. 
-After PITI and 10% for maintenance/capex the rentals combined cash flow $575/mo or $6900/year which is approx 2.6% return on equity.
-If we sold both of the rentals as is, after we paid 6% in commission and 2% for misc/seller credits and then paid off the loans we would walk away with approx $260,000 before taxes.
-My income increased in 2023 and we are now saving $4,000/mo or $48,000 a year in cash to invest in more properties with.
-We currently have $35,000 saved.
-We are both in our mid to late 30's. We make great income and are looking at building as much equity as we can for the next 25 years. We do not need immediate cash flow and are looking at the long game here.
-Average home prices in our area in DFW are low to mid 300's. 

Game Plan:
We would like to sell both of the rentals and take that $260,000 and realize the gain on it (yes I know about 1031 exchanges but dont want to deal with that headache and handcuffs). After 25% taxes we will be left with $195,000 plus our already saved $35,000 would put us at $230,000. I would then like to take that $230,000 and buy a house cash, and BRRRR it. In a perfect world we would be getting back out all the money that we put into the deal, but realistically I know that is a home run. If we have to leave say $20,000 into a deal that is fine because we are saving $48,000/yr to invest with so we will still be increasing our chunk of money each year.

Long term we would like to do 1 BRRRR or more a year and at the end of 25 years have 25+ properties. By selling the two rentals and paying cash for a property we wouldn't have to pay interest during the rehab (low rate from a bank or high rate from a hard money lender) so that would save money. If your average hard money lender is say 13% plus 2 points and we borrowed $200,000 for 12 months that would be $30,000 lost. By paying cash it would be $30,000 saved. Lastly by paying cash we could move more quickly when the right deal comes along and close as soon as title clears. 

So....whats your thoughts? Do we:
A) Keep the two rentals, cash flow $6,900/year for a return on equity of approx 2.6% and then save our $48,000/yr and do the traditional 20% down payment to acquire a BRRRR every 18 or so months with our savings rate? Or
B) Sell the two rentals, pay the taxes on the gains, use that money to buy BRRRR's cash thus saving on interest/finance charges, move more quickly on the right homes by having cash, and as soon as a bank will allow we can refinance and move on to the next property.

I vote option B, but what say you? 

Thanks!

@Corey Wright

 I vote (C) - borrow against the equity in the two properties to not incur a taxable event and keep the two rentals for an appreciation play since you are already into them.  Your ultimate goal is to acquire rentals, right? … why give up the 2 you already have?  

You would probably have to refi them both so the lender could be in first position… which now isn’t an awesome time to do that with high rates… so maybe for the moment you use your savings for your next purchase, and then when rates settle back down refi the 2 rentals to access your equity for the next project.  This has another upside which is that it gives you more mortgage interest and depreciation write offs.  

Check with a commercial lender who can probably do one loan that encompasses both properties. 

You probably won’t cash flow a lot on the two rentals with the increased leverage, but I have never had a property that I sold where I haven’t wished I still had it down the line (ie market appreciation… often times in the 6 figures!!! ). Plus along the way your tenants will pay down your mortgage and you can likely bump up rents here and there. 

Hope it helps!

Randy 

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  • Randall AlanPro Member
    Investor · Lakeland, FL · Member since 2017 · 1k+ posts · 1k+ votes
    3y
    Quote from @Corey Wright:

    Background:
    -My wife and I have two single family rentals in Fort Worth TX where we live. 
    -After PITI and 10% for maintenance/capex the rentals combined cash flow $575/mo or $6900/year which is approx 2.6% return on equity.
    -If we sold both of the rentals as is, after we paid 6% in commission and 2% for misc/seller credits and then paid off the loans we would walk away with approx $260,000 before taxes.
    -My income increased in 2023 and we are now saving $4,000/mo or $48,000 a year in cash to invest in more properties with.
    -We currently have $35,000 saved.
    -We are both in our mid to late 30's. We make great income and are looking at building as much equity as we can for the next 25 years. We do not need immediate cash flow and are looking at the long game here.
    -Average home prices in our area in DFW are low to mid 300's. 

    Game Plan:
    We would like to sell both of the rentals and take that $260,000 and realize the gain on it (yes I know about 1031 exchanges but dont want to deal with that headache and handcuffs). After 25% taxes we will be left with $195,000 plus our already saved $35,000 would put us at $230,000. I would then like to take that $230,000 and buy a house cash, and BRRRR it. In a perfect world we would be getting back out all the money that we put into the deal, but realistically I know that is a home run. If we have to leave say $20,000 into a deal that is fine because we are saving $48,000/yr to invest with so we will still be increasing our chunk of money each year.

    Long term we would like to do 1 BRRRR or more a year and at the end of 25 years have 25+ properties. By selling the two rentals and paying cash for a property we wouldn't have to pay interest during the rehab (low rate from a bank or high rate from a hard money lender) so that would save money. If your average hard money lender is say 13% plus 2 points and we borrowed $200,000 for 12 months that would be $30,000 lost. By paying cash it would be $30,000 saved. Lastly by paying cash we could move more quickly when the right deal comes along and close as soon as title clears. 

    So....whats your thoughts? Do we:
    A) Keep the two rentals, cash flow $6,900/year for a return on equity of approx 2.6% and then save our $48,000/yr and do the traditional 20% down payment to acquire a BRRRR every 18 or so months with our savings rate? Or
    B) Sell the two rentals, pay the taxes on the gains, use that money to buy BRRRR's cash thus saving on interest/finance charges, move more quickly on the right homes by having cash, and as soon as a bank will allow we can refinance and move on to the next property.

    I vote option B, but what say you? 

    Thanks!

    @Corey Wright

     I vote (C) - borrow against the equity in the two properties to not incur a taxable event and keep the two rentals for an appreciation play since you are already into them.  Your ultimate goal is to acquire rentals, right? … why give up the 2 you already have?  

    You would probably have to refi them both so the lender could be in first position… which now isn’t an awesome time to do that with high rates… so maybe for the moment you use your savings for your next purchase, and then when rates settle back down refi the 2 rentals to access your equity for the next project.  This has another upside which is that it gives you more mortgage interest and depreciation write offs.  

    Check with a commercial lender who can probably do one loan that encompasses both properties. 

    You probably won’t cash flow a lot on the two rentals with the increased leverage, but I have never had a property that I sold where I haven’t wished I still had it down the line (ie market appreciation… often times in the 6 figures!!! ). Plus along the way your tenants will pay down your mortgage and you can likely bump up rents here and there. 

    Hope it helps!

    Randy 

  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    3y

    @Corey Wright

    Depends on where you think rentals will appreciate over next five years. Assuming zero appreciation then sell as you could invest in treasuries and get a better return but if appreciation will continue that’s a different story

    7e investments53 Reviews
  • Rental Property Investor · Fort Worth, TX · Member since 2021 · 48 posts · 40 votes
    3y

    You don't mention how you acquired your 2 rentals. If you acquired them via BRRRR then you already understand the risks and your strategy is viable, although I don't like the idea of giving up roughly 35% of your equity.

    If you've never done a BRRRR, you will be adding more risk and a lot more work. Try a BRRRR without risking the equity from your first 2 rentals, first. If that goes well, then you will be in a better position to make the decision. After all, the goal is to grow your portfolio, not sell them all, right?

    i know a local investor, @Andrew Postell, that uses a similar strategy. He sells 1 each year and uses the equity to buy 2 via BRRRR. You might consider that as an option as well.

  • Jaron WallingPro Member
    Rental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes
    3y

    Agree with @Jason Howell especially if you're sitting on low interest rates. You said you're playing the long game so play it. Don't sell these cash-flowing properties. The BRRRR strategy is great but it's not easy. It's quasi flipping. Hold them and borrow against them (small junk) and combine it with your cash savings to tackle the next deal.

    Investors need bedrock properties. Unless you see future capex expenses or negative market trends I'd be holding these for years and kicking taxes down the road. 

  • Wholesaler, Rehabber and Landlord · San Antonio, TX · Member since 2014 · 2k+ posts · 2k+ votes
    3y

    IF you want to do at least one deal a year, you need to get good at finding good deals. To be able to buy rehabs and fix them up and have some equity, you have to really know what you are doing. Get good at finding and fixing. It is not 2015 anymore where anything that you buy will be worth 50k more in a year.

    Keep what you have, you can get hard money for the new ones. 

  • Columbus, OH · Member since 2023 · 427 posts · 254 votes
    3y

    $65,000 is not a bad compensation for headaches and handcuffs.

  • Realtor · Dallas - Fort Worth Metroplex, TX · Member since 2016 · 1k+ posts · 925 votes
    3y

    @Corey Wright just my opinion. you already have 2 rentals. unless you were getting a substantial appreciation, keep them.

    with regards to BRRRR, would you be doing the work yourself or hiring skilled workers? that has to play into your budget and your timeline.

    if you would like to have a more in-depth conversation about the DFW market and/or your current assets, please reach out anytime.

  • Corey WrightPro Member
    OP
    Keller, TX · Member since 2023 · 2 posts · 4 votes
    3y

    Thank you everyone (@Randall Alan, @Chris Seveney,@Jason Howell,@Jaron Walling, @Rick Pozos, @Account Closed) yall have given me more things to think about. The rates on the two existing properties are 5.875 and 5.375. They were refinanced in 2018 when rates were about 4.5% so for investors it was mid 5%. 

    I guess for now the plan will be to save for another 9 months or so. Next spring we will have another approx $35K saved, with our existing $35K to put us at $70K. If I am able to refi them both at 80% LTV I will be able to put out approx $190K, which then will put us at $260K cash. That will almost allow us to BRRRR an entire deal with cash and go from there.

    Appreciate all the responses thus far

  • Jaron WallingPro Member
    Rental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes
    3y

    @Corey Wright That's absolutely amazing! There you go crushing it and holding assets. I'm a firm believer in holding quality properties. So many investors say they wish they never sold properties (specific ones). My wife and I decided to hold my first house and pay it off in 15 years or less with extra payments towards principle. We have a lot of reserves. It's less about the numbers and more about creating a safety net.   

    I wouldn't go max LTV if I'm in your shoes. Maybe leverage less at 65-70% LTV to preserve the cash-flow.

  • Investor · Denver, CO · Member since 2023 · 161 posts · 52 votes
    3y

    Cory,

    I work at a real estate investment firm that specializes in helping clients invest in syndications. Can get you morethan 2.6% ROE. Happy to chat. 

  • Real Estate Agent · WA · Member since 2021 · 254 posts · 173 votes
    3y

    2.6% return is pretty small. You could have the money in a dividend account that pays even more than that. I would suggest that you either consider selling the properties and trying to find a higher cap rate WITH a 1031 exchange or continuing to hold to current rentals and praying that you can refinance in the end. 

  • Rental Property Investor · south carolina and michigan · Member since 2023 · 348 posts · 226 votes
    3y
    Quote from @Corey Wright:

    Thank you everyone (@Randall Alan, @Chris Seveney,@Jason Howell,@Jaron Walling, @Rick Pozos, @Account Closed, @Lucia Rushton) yall have given me more things to think about. The rates on the two existing properties are 5.875 and 5.375. They were refinanced in 2018 when rates were about 4.5% so for investors it was mid 5%. 

    I guess for now the plan will be to save for another 9 months or so. Next spring we will have another approx $35K saved, with our existing $35K to put us at $70K. If I am able to refi them both at 80% LTV I will be able to put out approx $190K, which then will put us at $260K cash. That will almost allow us to BRRRR an entire deal with cash and go from there.

    Appreciate all the responses thus far


     100% the right call

  • MI · Member since 2018 · 12 posts · 4 votes
    3y

    Hey Corey, looks like you have some good options.

    Make sure when you calculate your ROE you are including mortgage paydown, appreciation, tax benefits, and leverage. 

  • Bruce WoodruffPro Member
    Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
    3y

    A 1031 is not all just 'headaches and handcuffs' as you say. Why give Uncle Sam $65k? He didn't do anything to earn, it....you did.

    And most importantly, as @Chris Seveney said....what is your expected appreciation in the next 3-5 years? That would be the real question for me.

    I vote A (or C as someone else said)......I think you're just getting antzy and wanting to make a move for the sake of making a move.......(maybe ?)

  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    3y

    I think that investors should have a discussion with their CPA prior to selling their property.

    You estimated that your gain is about $260,000.
    A lot of clients that I speak with underestimate the tax that they will be subject to.

    A) They do not factor in the depreciation taken on the property which increases the gain
    B) They forget to factor in State Taxes, Maybe not an issue if you also live in Texas with no state income tax.
    C) They forget to factor in additional circumstances that may increase their taxes such as 'Net Investment Income Tax" and tax on depreciation recapture.

    It may make a 1031 exchange more appealing with the potential increase in estimated taxes as a result of the sale.

  • Samuel CoronadoPro Member
    Investor · Huntsville, AL · Member since 2016 · 348 posts · 182 votes
    2y

    I was in a similar situation. We sold everything and through the money in a mobile home park that is doing well. We only plan to do commercial and small time developments here on out.

  • Samuel CoronadoPro Member
    Investor · Huntsville, AL · Member since 2016 · 348 posts · 182 votes
    2y
    Quote from @Dylan Speer:

    Cory,

    I work at a real estate investment firm that specializes in helping clients invest in syndications. Can get you morethan 2.6% ROE. Happy to chat. 


     What is the minimum buy-in? 

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