My wife and I currently live in a home we purchased for $12,000 seven years ago. We are located in the Buffalo/Niagara region of New York. The home was zoned two family and we left it as such but have lived in it while we rehabbed and utilized as a full home. We used hard money to rehab with a mix of our own money and refinanced once all repairs were done.
The home was assessed at 70k upon completion, seven years ago, and comps in the area are now between 80 and 90. We will be closing on a single family, for us, in August. As soon as we close and move we plan to rent the two family out for approximately 1400 per month (combined) which allows us to cashflow 1,000 with the 15-year mortgage payment. The cash flow is only taking mortgage, ins, and taxes into consideration. We plan to put all cash flow in an account with a goal to reinvest prior to the money being considered income so we need to make sure we are reinvesting it relatively quickly (outside 30% for repairs and incidentals).
We are looking to leverage the equity as soon as we are fully moved and this place is fully occupied (goal is by October 1st to be occupied). I have found a lender willing to lend 85% of the assessed value minus what is owed (30k). This leaves us 29,500 to invest (at 70k assessment). We have personal money saved for incidentals and cushion in case of something unexpected hitting while we build up savings from cash flow for cap-ex.
Now that I am done with the long-winded intro, on to the question. Would we be best to focus on a single BRRRR with a target to refi by jan/feb 19 or is there a potentially better strategy one may recommend to build out a stack and increase available capital to reinvest?
The longterm goal is buy and holds. We plan to focus on BRRRR's but are not opposed to turnkey or flips if the deal is right but it is not where our focus is. We truly believe our area is at a low end and has a ton of upside before we look to expand to other areas. Any help, direction, or reference material is greatly appreciated. I have read the book on rental property investing as well as other sources of information, but am always open to more knowledge. I value real-life experience just as much so please feel free to share.
@James Partsch Jr It sounds like you got a great rental. The rental income is considered income by the IRS. Reinvesting it has nothing to do with your tax return. I would not borrow on the rental to only get $29K. You only owe $30K on it, so I would use the new rental income and your regular income to pay off the rental. How cool would it be to get $1400 per month in cash flow with no mortgage? Then you will be able to save aggressively for your next purchase. If it were $100K of equity, then you could buy another rental with cash, but $29K is not going to change your life.
Thank you for the honest feedback. I know that 29,500 could easily get me one, if not two, properties in my area with commercial loans to boot (riskier and more expensive I know). I definitely struggle with the camp of no debt/full equity vs leverage the money you have to work for you. I am 34 and willing to be a bit more risky to scale. If I wait to be paid off, I put scaling off and that 1400 is great but I don't plan to spend it so it is not compounding if I am not reinvesting. I cannot buy more time to invest more aggressively so want to make sure I don't look back and wish I did more sooner. I want to know I responsibly attacked opportunities but as aggressively as financially possible.
The advice is not falling on deaf ears at all. Maybe the dose of reality is what I need to keep me grounded and patient ;).
Thank you for the reply!
@James Partsch Jr keep in mind, some areas of the country are at all time record home prices. Not the best time to buy. If you stash $1400 per month away for a few years, the housing cycle will turn over again and you will not only have dry cash on hand, but prices will be lower. Getting rich slow is the fastest way. Best of luck.
Definitely agree on the market in certain areasbut that is not the case here. There are areas of buffalo that are closer to a “peak” but many areas are far from it. We are a redeveloping city and the market is heating up. I truly believe there are several neighborhoods that are prime for investing now. Granted, there will be others in the future.
Our job market grew .6% last year and is targeted to grow over 30% in next 8 years. This is all speculation but I cannot ignore the data.
I can put my money away for a few years and miss out in compounding, or find a way to ensure I am leveraging my money and it is making a return for me. I max my 401k, have a diversified stock portfolio, and wish to further diversify with scaling my property investments. The only other place I know of to put my money away is a savings account which can’t even match inflation rate. I would be losing money by putting it there.
We could pay the property off now but then we put another 30k of investable money into something that is not appreciating at the rate of return you can get while building a real estate portfolio properly. I also don’t feel we would be properly leveraging our money when I can take the equity out, buy a property, avoid the tax as it isn’t income, and have someone else paying the mortgage down while I build my portfolio.
If you have a recommendation to house the money and yield a solid return vs growing my real estate portfolio, I am all ears. I just can’t see me growing by sitting on money for several years. It seems counter intuitive. That being said, I am the newbie asking for advice so I don’t want to sound argumentative or unappreciative.
I definitely value this conversation as it gives me another perspective to consider. Thank you for that!
@James Partsch Jr you missed my point Jimmy. By paying off the duplex, which sounds like you only have $42,000 invested, you increase your cash flow which allows you to buy more property and handle expenses. I'm not talking about parking your money for years. You can do what you want, but I have a lot of paid for rentals and it doesn't matter what the economy does, if jobs increase or decrease, or who the President is. I cannot be foreclosed on and that is peace of mind. Once you have several properties, you will have enough equity to leverage into a bigger investment, like an apartment building or mobile home park. One duplex will not change your life, but 20 -30 units will.
I must have missed your point because what you mention is what I’m looking to accomplish. Your advice was wait and pay it off. That is one school of investing. I’d love to hear from the other side where people prefer to leverage their money while paying down.
I would like for you to elaborate on that recommendation so I can better understand the numbers. I just feel missing out on compounding is leaving an entire wealth building stream on the table. The buy and pay off is much safer but a bit slower as well.
Is your approach to avoid risk? Or to make sure that the asset is owned outright and not use leverage against the object but instead use the cash flow? Even paid off l, would you still recommend not using that equity as leverage? If the house isn’t appreciating isn’t that equity then sitting stagnant when it could be working?
I am assuming your recommendation comes from experience so I really want to learn what is driving you to recommend against what I have read so many times. I know there is no right answer or secret formula and we all invest differently.
In a growing market waiting is not ideal. I owe 30k and will bring in 1400 a month. I have 30k worth of leverage if I wish to pursue that. If I wait, the short term opportunity cost is now 60 k as I have to pay the 30 down and am not leveraging what is in it, not to mention the interest I am losing by not leveraging my money now. This will increase cash flow by 400 per month with an roi in the 15 year range in my opportunity cost not considering present/future value of money.
Also, the “jimmy” is unnecessary. Let’s remain professional, you don’t need to use a name twice in one sentence. I am looking for advice not a spanking.
I am interested in any other advice from the community. Those who may be in Anthony’s camp or anyone who may have a different perspective.
Thank you all!
@James Partsch Jr You don't need to wait until Jan/Feb to refi and pull your money out of a house that you paid cash for. The Fannie Mae Deferred Finance program allow you to refinance within 6 months. In fact it requires you to do it within 6 months or else you have to wait 12 months. That would free up your cash quicker and allow you to build a portfolio much faster.
@Mike D'Arrigo , thank you for that information. I was unaware of this information and what you shared is exactly why I love the BiggerPockets community.
@James Partsch Jr I'm in the leverage camp. If you have an opportunity in your market, grab it now. Don't forget that taking out money will increase your monthly payment so account for that. Assuming you want to maximize your money, turnkey is not the way to go for you. If you can show a few profitable deals then raising some money to scale up shouldn't be a problem.
Thank you @Gary Lipsky . Good catch on my miss of that fact. The payment will go up. We will not refinance the home as we have six more years (originally a 15 year). Going to go the HELOC route if a deal warrants. I do have this in my math but failed to even mention it above which is a HUGE miss.
@James Partsch Jr Get the HELOC now. Don't wait for a deal so when one presents itself you are ready to go and potentially beat out the person that has to work on their financing. Good luck and keep us in the loop in what you do.
@James Partsch Jr You are in a great position to get started. I recommend finding a house a house that needs some rehab, and add value to it. Following the BRRRR method is a great way to keep up momentum and making deals happen. This will give you tons of experience and build up the empire you are looking for. Use a small bank for investment loans as they will give you better mortgage options (they could let you refinance immediately after rehab, use equity as a HELOC, use multiple properties equities combined for the next deal, ect). Keep on learning and taking action. You are on the right path.