Time to get serious - How should I use cash and equity to invest?

Question

I currently own 4 properties - three SFHs and a duplex which I recently closed on and am currently moving into.  Up until recently, I had purchased each of my properties with the intention of living in them for a couple+ years, then renting them out when I found another home.  However, after being on bigger pockets, reading books and listening to podcasts, I want to start investing in a more serious fashion.  So my question is how best to use money and equity to that end.

A little synopsis of my current standing, for context.  The rent from the other half of the duplex just about covers my mortgage on it.  The SFRs do not cash flow but two of them have built up a bit of equity.  The one I'm moving out of is conservatively valued at $152k and I have $64k remaining on the loan. I plan to rent it out and it should fetch $1050 if not $1100.  Also, I recently opened a $55k HELOC on it but have not used it.  The property other, my very first home, is conservatively valued at $185k with $75k remaining on the loan and is currently rented at $1100.  Market rent for this one is between $1200 and $1300 but I have excellent tenants and don't want to raise rents just yet.

Because I work a well paying job and I'm somewhat frugal, I wasn't concerned about having cash flow so much as having the properties pay themselves off by retirement, which is about 7 years away. I had therefore put these on a 15 year mortgage, which meant lower interest (one at 2.875% and the other at 3.57%) but higher monthly payment. After mortgage, insurance, and taxes, I'm left with only about $120 a month.

As far as the 3rd SFR, I don't know whether to count it as an investment, since I bought it at the request of my parents. I put this one on a 30 year loan so the payments would be lower for them. They give me just enough to cover the mortgage, with a bit left over, which I use to pay down the principle. However, it has appreciated about $30k since I bought it in 2017.

All four properties are newer (2004, 2006, 2013, and 2017), so there haven't been major expenses, though I'm sure some are due.

So, to summarize, I have available a $55k HELOC and, taking into account the 75% LTV rule, a combined $90k in usable equity in the other two properties.  I also currently sit on about $50k in cash, and I have about $23k un-leveraged debt and a $17k loan from my IRA (yes, I know, I know) which I had used to buy my previous home.

My question then, how can I best make use of this?  I assume most will say to use the liquid cash to pay off the debt, but I'm also particularly interested in hearing what I should do with the homes with equity.  Would it be prudent to:

A) refinance for cash flow and use it to...?

B) cash out refi to reinvest in cash flowing properties (I'm interested in quads)?

C) pay them off sooner by paying of my debts, using the remainder to pay down the principle, while also contributing what would have gone towards monthly debt payments?

Or, D) - Z) ?

Thanks in advance and sorry for the long-windedness!

Anthony Dooley · Answer

A paid off property cash flows better than a property with a mortgage. A paid off property cannot be foreclosed on. A paid off property is not subject to market downturns or recessions like a leveraged property. It's better to own 5 properties free and clear than 10 properties with a mortgage. Same cash flow, less headaches.

Hai Loc · Answer

Love that theory on leveraging..

When you own 5 free and clear nobody can touch you during recession.. where as you can potentially have 10 properties under water

Craig Jeppesen · Answer

It sounds like you don’t need the cash flow currently and are more concerned with retirement in 7 years. If I was in your shoes, I would come up with a plan to snowball the properties so they are all paid off in 7 years. 4 paid off rentals and no personal mortgage will create quite a bit of cash flow  to help subsidize retirement.

Mary M. · Answer

I would leave it be as is for now....  you need cash reserves and low dtv for your retirement years....

Ben Rodriguez · Answer

I'm not quite ready to jump into large deals and partnerships just yet, though I will likely do so in the future.

Ben Rodriguez · Answer

That was initially the plan, a passive investment for retirement. However, I now want to be an active investor. Any extra money, whether from equity or cash flow after paying the mortgages off, will be reinvested.

John Wright · Answer

@Ben Rodriguez have you looked into buying into a larger property or deal? If your goal is to subsidize the cost of living for retirement you may want to look into it. Maybe using a self-directed IRA to deploy your equity into a larger deal that makes sense for you. You could find a partner and do a 24 unit deal or look at a 200 plus unit syndicated deal?

Ben Rodriguez · Answer

I'd 100 % redeploy it when I come into a good deal.

Ben Rodriguez · Answer

Agreed. However, a straight refi (no cash out) on the current balance of two of the homes would yield approximately approximately $300 to $400 each in monthly cash flow while remaining relatively safe against a downturn, given the mortgage would be about 40 or 45% LTV.  Would this be a better option or do you still prefer paying them off completely? As I mentioned, I'm pretty frugal so the money would be used to save, pay off debt, and fund other investments (index funds or rentals) and not on gold plated wheels.

I should also mention that I no longer see a house as a home, so I intend to keep on buying and moving until I decide to call it quits.

JD Martin · Answer

There's no good answer to this question because it depends on your goals and your tolerance for risk.

The safest but lowest return strategy is owning properties for cash. You get the worst return on your cash but have the greatest protection against market turndowns in terms of the asset protection. The riskiest but highest return strategy is 100% leverage on all properties. You may get infinite cash on cash returns but are at greatest risk of losing the asset in a down economy.

What would you do with the money? If you would burn it on fast cars and killer vacations, you would be better off (financially) paying off what you have. If you would redeploy that cash into more cash-flowing hard assets, you would probably be better off doing that than paying off low interest loans.

Most successful investors that I known use a combination of the two: low levels of leverage on some properties with others unencumbered. That is my strategy. I own a bunch of paid off properties with a few that are partially leveraged.

Time to get serious - How should I use cash and equity to invest?

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