Whats best Cash or Leverage?

Question

I own 2 properties that I’m currently renting, a condo in Tampa FL (appraised at $400k) and a single family home in Asheville NC (appraised at $330k). Both properties were my former residences that were purchased in cash. I’m currently netting about $2800 off both properties. My question is, am I being foolish by not financing these and putting the money to work in an additional 2-3 properties?

Is it work the additional risk to purchase in this hot market?

Interest rates are super low right now which is what is making me consider this.

Is it work the additional risk to purchase in this hot market?

Interest rates are super low right now which is what is making me consider this.

Basit Siddiqi · Answer

@Dan VasileNormally, when you get to properties that high in value, you will likely not cash-flow; however, they are more likely to appreciate in value.

If you lived in one of the properties for 2 out of the last 5 years, I would consider selling it to get the 121 exclusion.

Nick Barlow · Answer

@Dan Vasile like @Andrew Postell said, the forums really can’t answer that question, and all of the points he brought up came to mind.

Leverage will almost always give you a better return than a cash purchase, but if you own them both outright, there is nothing wrong with owning 2 paid off rentals. So, you really can’t make a “wrong” decision. Congrats on that!

If you are at FI with them as is, I don’t know that I would do anything other than hold them.

Maybe put each one in an LLC so frivolous claims on one won’t affect the other? That’s a question for your lawyer...and I am not one lol.

Andrew Postell · Answer

@Dan Vasile Oh, yeah, I would not suggest selling them.  Please continue to keep them.  I would only sell them if you lived in one of them for 2 years out of the past 5 (to avoid capital gains tax) or through a 1031 exchange.  If you take a loan out of them, that money is tax free.  A line of credit is a popular choice but there are reasons to that type of a strategy.

To answer your last question "is it worth it" is probably a question that we can't answer in a forum like this.  That would take exploring your personal finances, how long you have until retirement, your apitude and tolerances, your market conditions, etc.  LOTS to consider.  Having said all of that, we ONLY invest in things that make us money.  So if paying someone $100 allows me to make $300...that of course is worth it.  I have a Property Management company on all of my properties.  At first they charged 10% and since I have more properties now, they are currently at 8%.  But 2% doesn't make or break my deals.  But I NEVER take a 2am phone call for something broken.  I don't screen my tenants.  AND they get me MORE for my rentals than I was getting on my own...so the extra profit they bring, helps pay for their fee.

It's all risky, right?  Life is risky too.  And you won't make it out alive! Understanding your risks will help with your decisions.  I would suggest to network with some local real estate investors in your area to see how others are doing it.  I think if you can see different strategies you can make a better and more informed decision.  Hope this helps!

Dan Vasile · Answer

@Andrew Postell

I bought both properties for under $200k, but they’ve  appreciated quite a bit over the years.  What has stopped me from doing anything is: Selling them is a large expense in realtor fees and transaction costs, then the amount of time required to find replacement properties and making sure I’m getting a worthwhile investment.  Then if I’d go do with say 5 total properties, the management of these properties would take up substantially more effort to maintain.  From friends, I’ve heard that finding good management companies is a challenge and they take 20% of your rental income (not just in fees, but in wasted resources on things like maintenance and repairs).  Right now I manage everything myself including finding and screening tenants, scheduling repairs and move in move out maintenance.

My main fear is, Am I just complicating my life for just a little extra $$$$?  Or is it worth it in the long run?

Andrew Postell · Answer

@Dan Vasile I want to be very clear here...the amount of equity you have in those properties would allow you to buy 20-30 properties. That's what the whole BRRRR method is designed to do.  As mentioned above, I would NOT buy properties as the price points of your current homes.  Every market is different of course but most markets show that properties $200,000 and under make better rental properties than those priced over $200k.  Feel free to ask anything additional here if you need.

Timothy Borg · Answer

It all depends on what you are comfortable with.  There is the most "efficient" way to make more money with leverage but you have to do what you are comfortable with.  You might leverage one and keep the other one as a foundation.  A HELCO might be an option to look at.

Edgar Rodriguez · Answer

@Dan Vasile

Based on the information you shared, the best bet is to sell those properties and 1031 into better cash flowing assets.

I just say that because a property for 400k may not be as cash flow “efficient” as two properties for 150k or a 4 plex.

If you wanted to keep the properties, you could refi and buy more cash flowing assets. Rates are low. There are still deals to be had.

It just depends on personal preference really.