I’m looking for some advice and feedback on my real estate investment strategy. Here’s the plan I’ve come up with, and I’d love to hear your thoughts on its feasibility, potential risks, and any improvements you might suggest.
The Plan
1. Pay Off Mortgage: I currently have $170K left on my mortgage, and my goal is to aggressively pay it off in the next 1.5 years.
2. Establish Emergency Fund: Before making any big moves, I’ll set aside 6-12 months’ worth of expenses as an emergency fund.
3. Extract Equity: Once the mortgage is paid off, I’ll pull out the equity from the property.
4. First Flip: Using the extracted equity, I’ll purchase another house, fix it up, and sell it for a profit.
5. Reinvest Flip Profits: Instead of buying another property immediately, I’ll use the profits from the flip to renovate the original property, aiming to increase its rental income and appraisal value.
6. Reappraise and Extract Equity Again: After renovating, I’ll get the original property reappraised and extract additional equity based on its increased value.
7. Purchase Rental Properties: With the additional equity, I’ll start purchasing rental properties that offer positive cash flow and have growth potential.
8. Leverage Equity Strategically: I'll use equity from the original property and any new properties while maintaining a healthy loan-to-value ratio (LTV), ideally around 70-75%.
9. Build Rental Portfolio: I’ll focus on acquiring a mix of property types (e.g., single-family homes, multi-family units) to diversify my investments.
10. Focus on Cash Flow: I’ll prioritize properties that generate consistent positive cash flow, ensuring that rental income covers all expenses, including mortgage payments, maintenance, and management fees.
11. Long-Term Hold: I’ll hold properties long-term to benefit from appreciation and tax advantages. I plan to regularly re-evaluate and refinance properties to pull out equity for further investments without over-leveraging.
12. Professional Management: I’ll consider hiring a property management company to handle day-to-day operations, freeing up my time for further investments and strategic planning.
Additional Consideration
I've considered using the BRRRR method instead of paying off the mortgage first. The BRRRR method could potentially allow for quicker expansion by leveraging equity to buy more properties. However, I feel that paying off the mortgage is a safer route for me. Here's why:
1. **Limited Ownership**: I don’t own a lot of properties yet, so paying off the mortgage on my current property provides a solid foundation.
2. **Realistic Timeline**: I can realistically pay off the house in a year, which gives me a debt-free asset to leverage later.
3. **Financial Security**: Being young and living in NJ, I want to build a strong financial foundation first to ensure stability before taking on more leveraged investments.
This approach might be slower than the BRRRR method, but it provides peace of mind and a secure starting point for future investments.
Pros and Cons
Pros:
• Initial capital boost from flipping the first house.
• Increased property value and rental income from renovating the original property.
• Consistent cash flow from rental properties.
• Long-term appreciation and tax benefits from holding properties.
• Diversification across different property types and markets reduces risk.
• Maintaining a healthy LTV and having an emergency fund reduces financial vulnerability.
Cons:
• Market risk: Property values and rental income are subject to market conditions.
• Management complexity: Owning multiple rental properties can be complex and time-consuming.
• Financing challenges: Extracting equity and taking on new mortgages require careful financial management to avoid over-leveraging.
My Questions
1. Do you think this plan is realistic and achievable?
2. Are there any potential risks or pitfalls I might be overlooking?
3. Any suggestions on how I could improve this strategy?
4. What are some best practices for managing multiple rental properties?
Thanks in advance for your insights and advice!
