I Have $200,000 in Equity in an Investment Property and Confused

[DeNay Ramsey]

I have about $200,000 in equity on an investment property in Oakland, California. It sets on a large lot enough to add a second unit. I bought it for $265,000. Legally it's a four bedroom, one bathroom single family house. However it's technically a five bedroom, two bathroom house without permits. I bought it with the additional unwarranted bedroom and bathroom. It's being rented to Section 8 tenants who are paying $2675 a month.

It was a fixer so I had to purchase it with a hard money loan. Currently the loan amount is $212,000 at an 11 percent APR. I'm in the process of refinancing it into a 30 year fixed conventional mortgage at 4.375 APR. I'll be pulling out $80,000 to pay off credit cards totaling $27,000 and then use the rest to reinvest. After the refinance is complete I will cash flow $900 a month with the taxes and insurance included. This doesn't include vacancy and maintenance though. The tenants have been living there six years and aren't looking to move anytime soon.

I'm debating if I should immediately build another four bedroom house on the same lot or buy another investment property. I am looking for cash flow property to build wealth. Because the house is Section 8 occupied and the previous owner didn't require a deposit from them, I only did minimal rehab work; enough to increase the value and allow it to qualify for conventional financing. Although I've since added an addendum to the original rental agreement that requires them to pay a $2500 deposit. The only problem is they will pay it installments. I updraded the kitchen, bathrooms, flooring and painted for $5,500. The house recently appraised for $410,000 after the minor renovations. If I were to build another house on the lot the value would increase the property to over $900,000. The city of Oakland Building and Planning Office has already confirmed that the lot could support another house. I have blue prints for a four bedroom and two bathroom house.