Just Starting Out: Take the Cash or cash flow?

Question

Hello! I bought my first house three years ago in Tacoma, WA and (without knowing anything about real estate at the time) stumbled into a house that has both appreciated in value by $120k over the past 3 years, and after running the numbers, will cash flow $450/month if I rent it out. For someone who is just starting out and would love to build a solid cash flow portfolio in NC where I live, am I better off holding on to a solid (out of state) cash flow property, knowing I will have to save for a while to get my next deal, or selling the house and using the cash to help out with my next two to four deals? Thanks so much for your advice!

Michael Haas · Answer

I'm with @Justin Jackson - HELOC or Cash Out Refi and buy more properties in NC, while still holding the property in Tacoma. Take on as much (SMART) leverage as you can with properties that pay for themselves while we still have 3% interest rates, because locking in money for 30 years at 3% may be smartest financial move anyone can make right now. Rates are going up, as is inflation, and I'd expected the Real Interest Rate (aka inflation adjusted rate) on that loan over 30 years will be less than 1%, possibly even less than 0%.

Sherief Elbassuoni · Answer

@Meg Goode, if you are planning to self-manage, you can sell your Tacoma property.

With this $120K equity you gained, you can buy more properties in NC

Danielle Jackson · Answer

I would sell your WA property and reinvest in a market that is landlord friendly!

Justin Jackson · Answer

@Meg Goode

Highly leveraging when done correctly will always out earn a cheaper mortgage.

Let’s use a simple example:

You own a house paid off that is worth $100k and rent is for $1000 a month. All things simple you make $1000 a month. You have a tax advantage on one property.

2nd example

You own the same house valued at $100k and rent it for $1000. Because the property is leveraged and have an 80k loan you pay a mortgage of $500 a month and make a profit of $500 a month.

You are able to buy 4 other homes all with 20% down with same scenario each earning you $500 in profit.

5 houses @ $500 a month is $2500 a month profit plus tax advantages x5.

If I were you I’d refinance the equity out of the home (tax free of course) and use the money to build your portfolio!

Meg Goode · Answer

Hi everyone! Thank you so much for your advice. I decided to keep my options open and hold on to the WA house for at least a year to rent it out. I found solid tenants who signed a one year lease and it will cash flow $600 a month, and I’ll get my first experience in the long term rental market as well. I’ll reassess my strategy for this house in a year. Thanks so much again!

Jonathan R McLaughlin · Answer

So, I love holding properties but...you have a 120K gain potential, lets say 100K to be conservative and reflect selling costs. You are an owner occupant so you WONT pay the 30% approximately of investment taxes. On the other hand you can rent it out and cash flow $450 a month or $5400 a year. I'm assuming you have accounted for a capex/maintenance/vacancy reserve in that. Thats 5.4% of return on that same 100K of equity, plus loan paydown so call it 6-7% before any appreciation. Not too bad, but it will take you almost 15-20 years to get the same amount of money as you would if you sell. Can you do a better return by buying a new property?

Can you put that to a duplex in a place you want to live? Feels like that would be a great use of the money

Aaron Nelson · Answer

Hey @Meg Goode! I am a local realtor who is very active in Tacoma market. The housing market there is still going strong and I suspect 2022 will be a good year. But it may make sense to sell for other reasons based on your situation. I’d be happy to set up some time to chat with you shoot me a PM and we can get something on the calendar after the holidays. Merry Christmas!

Joshua Janus · Answer

If you don't plan on self managing I would definitely sell and purchase a property in a more landlord friendly area.

Nathan Gesner · Answer

There are a lot of variables and I don't know that either option is an easy answer. Washington is likely to appreciate more over the years, but NC is probably more affordable and can create a stronger cashflow. But Washington is also becoming more heavily regulated and favorable to bad tenants. Property in NC can be managed personally, but it's also nice to have investments that don't require your personal time.

Weigh the pros and cons of each. Good luck!

Just Starting Out: Take the Cash or cash flow?

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