Decision Paralysis on my Equity. Best Next Move?

Question

The problem of choice. I own one 4 unit property that I’d like to keep and use to help propel me into my next rental property. My issue: I have too many ideas running around in my head and I’m not sure what is my next best move. My goal is to build a portfolio of mid-term rentals for traveling professionals &/or find off market BRRRR deals. I’ll purchase in any growing/ upcoming areas around the country.

Here’s my current situation:

My property has an estimated equity of $220,000+. My mortgage debt is $156,000

$100-200 Monthly Cash Flow (after all expenses, mortgage, PMI, taxes, insurance, management fees)

My annual income is $110,000 with about $75,000 in savings. My wife and I haven’t purchased a house yet but plan to using my VA mortgage when the right property is found.

So, what should I do…?

1. Should I simply refinance (no-cash out) to a lower monthly payment by eliminating my PMI? This will lower my mortgage expenses by about $600 and increase my cash flow. I'll then drastically work to pay down the principal with all my available income to increase my equity. I'm not sure if increasing my total debt in a cash-out refi is a good move based on the high interest rates. I'd then just have to use our savings for the next down payment.

2. Should I pull out as much cash as possible in a cash-out refi and use that as a down payment for the then next rental? My biggest concern is the high closing costs on this, on top of starting a new 30 year mortgage which will cost tons in interest over the life of the loan. Essentially whatever I pull out now as cash will cost me twice as much in interest.

3. Should I find a lender willing to give me a line of credit (LOC) enough to use as a down payment or to pay off the current mortgage? I would then use all of my available income, on top my tenants rents, to fully pay this LOC back within 5 years. The huge benefit to this is I'd have access to a larger and larger revolving door of "cash" for the next deals, especially after I fully own this property.

4. Due to the currently low cash flow, should I just sell and 1031 tax exchange the profits into a larger or better performing rental property? I’d prefer to increase the performance of this property before actually deciding to sell it.

5. Another option that I haven’t considered?

Thanks for any input!

Mitch

Tommy Nguyen · Answer

Hi @Mitchell Messner,

I understand your dilemma! All real estate investors experience a stage of temporary "paralysis analysis". In order to combat this disease, write down your goals for real estate investing. Do you want to be financially free? Own more doors/properties? Do you like flipping houses? It's up to you!

I believe you're following the "Dave Ramsey" method and fully paying off the house for maximum cash flow. Yes, maximum cash flow is amazing! However, consider the following:

(1) How long will it take to recoup your money after the mortgage is paid off (CoC return)?

(2) Is the property in a "good" neighborhood and high performing?

Using @Dave Foster post - if the property's performance is mediocre, then it's not the best action to fully pay it off to receive decent cash flow. Decent cash flow = lower CoC return + longer to recoup your original investment.

I believe you yearn for more investment properties and cash flow! Like everyone else, we are capital strapped. Mitchell, please read BRRRR: Buy, Rehab, Rent, Refinance, and Repeat by David Greene. In this method, you're stretching the original capital to other properties.

When you are in "paralysis analysis", focus on today! Do not regret yesterday, as that creates anger. Do not worry about tomorrow, as that creates worry. Focus on today! You can only control your actions and thoughts today! One step at a time, brother!

All the best,

Tommy Nguyen

Mitchell Messner · Answer

Thanks for the input. Selling is a path I’m considering. I haven’t put much thought into improving the property for increased rents. It may take too much capital to make those improvements.

Dave Foster · Answer

@Mitchell Messner, I don't see your plan for increasing the performance of that property.  Adding debt onto a low-producing property does not increase it's performance.  And paying down debt may increase cash flow.  But it also does not truly increase performance.  It simply masks the low performance with increased cash flow.  But has an opportunity cost associated with the amount you buy your loan down by.

If you can increase rents.  If you can renovate and attract better tenants.  Then those are things to contemplate.  Otherwise, you're probably better off exploring a sale and reposition into a totally different asset.  Sometimes it's just too costly to improve a property and it's financially better to sell and redeploy.