I already posted this once, but I wanted to refresh the thread to get some more feedback. Thanks again!
I've been contemplating this idea in my head for a few weeks now so I figured I'd take it to you guys.
I bought my first property this past August; a 3-unit in Massachusetts. I've been collecting rent on 2 units while renovating the third unit up until this point and I'm approaching the finish line. I bought it with the intention to hold long term, but I'm now contemplating selling.
Let me give a bit of context first. My goal is to own cash flowing real estate, enough to eventually reach financial independence and beyond (original, I know). I don't particularly care how I arrive there in regards to my distribution of units. Whether I have a bunch of 3-unit buildings or one 24 unit building is not a limiting concern. I just want to get there as efficiently as I can.
So, here I am with this 3-unit that I just bought. To better help with the discussion, here are my options in a nutshell:
A) Keep It
If I decide to keep it, I will rent out all three units an implement property management. After accounting for expenses and reserves I will net cash flow between $300-$400. Not a screaming deal, but I am into the property fairly light so my cash on cash is decent.
B) Sell it
Based on comps, if I were to sell I the near future I could make an initial gain of $60-75K. Not bad for a first flip if I go that route. Any profit from a sale would then be parlayed into another investment, ideally a larger building with greater cash flow potential. (via 1031 exchange)
An investor friend of mine opened me up to the idea that I could either hold it for 3-4K a year, or sell it and make 15 years of cash flow in one fell sweep. Obviously this doesn't consider equity gain or tax benefits, but it is an interesting perspective that I hadn't considered prior. It's like time travel!
I could refinance and lower my mortgage payment slightly, getting rid of PMI. However, since my LTV is around 80%, I wouldn't be able to pull any cash out to use towards another deal. I would simply gain about a 100 bucks of monthly cash flow.
So, I come to you, asking for insight and guidance. What would you guys do? Should I take the profit and grow my portfolio by finding something bigger and better? Or should I stick it out and wait until I have the funds to buy another one?
Thanks for any feedback!
@Aaron Araujo - You have a good problem! Congrats for putting yourself in that position.
It sounds like you are in between steps 3 and 4 of the BRRRR strategy (Buy, Rent, Rehab, [ you are here] Refinance, Repeat). If you're using this strategy, naturally I would say to finish it off and refinance and take the additional $100 in cash flow! $400-$500 is very good cash flow for a 3plex.
There are a lot of unknowns here. The two largest that I would like to know is what your monthly savings rate is and what is your living situation like? Do you have a family/kids? If you have a monthly savings rate of $1,500+ and do not have a family to support, I would suggest keeping the refinanced house and purchasing a house hack while living in it. You can't beat the cash on cash returns of house hacking.
If you do not plan to live there and you were to do the 1031 exchange, I can't imagine you will find anything better than what you have. With a non-owner occupied loan, you typically need to put 20%-25% down so you will just end up purchasing a property of similar value. Lots of work for not much of a difference in return. This assumes that you are purchasing in a similar location of course.
@Jennifer Jacobs Thanks for the input! I do not have the capital to move on to the next deal currently, as I have been solely focused on this one. This leans me towards selling. As far as your grandmother's house, I would open up a HELOC to use towards your next deal! Most banks will give you a line of credit (with great introductory rates) for 75-80% of LTV minus your debt service. So if you have a decent amount of equity then this is a great tool to use.
Also, I know they say to never let emotion drive a deal, and this is true almost always, but there has to be a line drawn somewhere. And you're free to draw that line wherever you want! So if that house is important to you and you don't want to sell it, then don't. And just find a alternative way to tap into that equity.
Thanks again for your insight!
@Craig Curelop Thanks for your response!
My monthly savings rate when I bought the property was actually right around $1,500+. This was what put me in the position to make that first purchase. Since then it has dropped, mainly due to the additional operating and renovation expenses. My situation is fairly ideal however. I am a single, young guy with no kids/pets and minimal liabilities. I've been able to live at home with my parents throughout this process which has played a huge role in putting this first deal together.
My dilemma is starting all over again to gain the capital to complete the final R, "Repeat". I may not be able to take advantage of another first time home buyer, low down payment loan. Which would force me to need a much larger chunk of capital upfront. I do want to move on to a house hack for my next deal though.
I'm likely going to list it and see what happens. If I get the offer I'm looking for then I'll. If not, then I have a solid cashflowing asset to hold on to. Not a bad deal.
@Aaron Araujo - you are in the best possible scenario! If you can get that property to cash flow, buckle down, and live a frugal life for the next ~12 months or so, you should be able to do a house hack.
There are lots of low down payment options for owner-occupied properties. You have 3.5% down FHA, 5% down conventional, and I've even heard of 3% down conventional. You can use the 3.5% down FHA on a 2-4 unit, but to use the conventional options, you would need to purchase a single family residence. You can still house hack with a single family by renting out the rooms.
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