Long Term Buy & Hold Portfolio Strategies

Buying & Selling Real Estate
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Long Term Buy & Hold Portfolio Strategies

Mike Van Arsdale
Louisville, KY · Member since 2013 · 11 posts · 1 vote

Hello all - I've been a long term reader of the Bigger Pockets forums but never posted.  

I'm writing today to see if anyone in the space has any alternate ideas for how I could be treating my portfolio.  

Current Portfolio:

1. Single Family Home (East End Louisville)

- Originally my primary residence ($209k)

- Property is in our personal names (not in LLC)

- Comps in the neighborhood are $285k

- Built in 2002

- In well established  neighborhood w/ middle income families

- On 15 year 2.99% mortgage w/ 8 years remaining and $115k principal balance

- Currently rents for $2,185 month/$26,200 annually

- NOI $16,320

- Cashflow $4,500/annually 

- $12k principal pay-down annual (current year)

- Currently getting less than 3% return on our equity

Original goal was to not cash flow but pay off property, allow appreciation, sell property at end of loan and use capital for additional projects.  Our current tenant is moving out at the end of this month (Oct 2018), we have interested tenants to fill the vacancy early in November, but are considering putting on the market to sell, 1031 into new projects.

2.  Single Family Home (Shelby Park)

- Purchased for $48,500 in February

- Property is in an LLC

- Renovated for $13,500

- Rented May 2018 for $850/month

- 30 year loan w/ 20% down @ 5%

- NOI $7,400 annually

- Cashflow $5k/annually

- Getting roughly 20% cash-on-cash return

3. Single Family Home (Shelby Park)

- Purchased for $21,500 in April (cash)

- Property is in an LLC (same one as above)

- 100% renovation for $70k (cash)

- Rented October 2018 for $1,145/month

- No current mortgage 

- NOI $12,500 annually

- Cashflow $12,500/annually

- Getting roughly 13.5% cash-on-cash return

Looking at getting a 30 year mortgage at 5.65%, pulling out 80% of the value (today comps are in the $130k to $165k range) to use for purchase of new projects.  

Goal:  Build a larger portfolio of better-than-average properties for their respective areas over the next 5-10 years, reinvesting as much if not all funding into the portfolio to grow to a point that it can replace our income.  

Questions for the group:

1. What would you do with the first house with regard to selling/re-renting/refinancing?

2. What suggestions do you have on whether to get a mortgage on the third house or keep as is?

Thanks everyone!  Looking forward to discussing.  

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Costin I.
Rental Property Investor · Round Rock, TX · Member since 2016 · 1k+ posts · 971 votes
8y

@Mike Van Arsdale I would keep them all and look to get a HELOC and/or LOC (portfolio or asset based LOC) to have funds for more purchases.

A LOC will allow you to use the funds when needed (when you identify a property worth acquiring) vs. a loan that will need to be paid regardless if you use the funds or not.

Also a loan is a one-time deal, while with a LOC you can pay the balance down (refinance your acquisition once rehabbed and leased into a fix long term product) and reuse.

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    8y

    @Mike Van Arsdale, I saw a very interesting chart the other day comparing 25 year returns of real estate over all to the stock market to real estate 50% or less leveraged.  The data showed real estate less than 50% leveraged the winner in returns by almost 10%/year.  There's a lot to unpack in that data but as a general start for your thinking...

    I think you're on a good track to dump the underperforming rental and 1031 if you can exchange it into more properties like your other 2 properties.  

    Did you move out in the last 2-3 years?  That sale might qualify for tax free treatment with no 1031 needed which would make the decision a no brainer.

    The 1031 Investor5137 Reviews
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    1Reply
  • Costin I.
    Rental Property Investor · Round Rock, TX · Member since 2016 · 1k+ posts · 971 votes
    8y

    @Mike Van Arsdale I would keep them all and look to get a HELOC and/or LOC (portfolio or asset based LOC) to have funds for more purchases.

    A LOC will allow you to use the funds when needed (when you identify a property worth acquiring) vs. a loan that will need to be paid regardless if you use the funds or not.

    Also a loan is a one-time deal, while with a LOC you can pay the balance down (refinance your acquisition once rehabbed and leased into a fix long term product) and reuse.

    3Reply
  • Mike Van Arsdale
    OP
    Louisville, KY · Member since 2013 · 11 posts · 1 vote
    8y
    @Dave Foster Hi Dave - Thanks for taking the time to offer your thoughts. I’d love to see the article you mentioned. Do you recall where you saw it? On the SFH we own with the high equity and low return, unfortunately we moved out in 2014 but that’s a great idea for future reference. The challenge we’re running into here in Louisville, as I’m sure others are experiencing throughout the country, is the lack of inventory. Prices are so over inflated most deals don’t make sense that are on MLS. Most of the investor options are from legacy portfolios that are reaching the point of needing LOTS of investment, which is why we were really considering refinancing the larger home that has so much equity in it to lower the payment and try to cash flow more to build our reserves but maybe the better strategy is simply to sell it while the market is high and rates are relatively low. We just wouldn’t have many “good” deals to 1031 into...
    0Reply
  • Mike Van Arsdale
    OP
    Louisville, KY · Member since 2013 · 11 posts · 1 vote
    8y
    @Costin I. Years ago we spoke with a lender about several types of lines of credit. Since the rentals weren’t our primary resIdence the HELOC didn’t apply and in order to do a commercial line of credIt they wanted to hold the primary note against our existing rental properties. To do that they wanted to refinance them and roll them into a single loan. Wasn’t something we were interested in. My primary concern is that I’m losing valuable time building my portfolio. I’m 37 and my wife is 43. The house in question is in a very desirable and stable neighborhood and rents fairly easily. It’s newer with nice amenities that middle income families desire. We wIll have capital expenditures in the form of HVAC and water heater coming in the next few years, but everything else is in great shape. Because of the way we structured our loan (15 year) we pay down a TON in principal annually ($11k+) and capture decent cash ($4.5k) but when compared to the equity it’s a super small return which is why we’re considering selling or refinancing the $115k balance to get our payments lower so we cashflow more TODAY. On the flip side if we keep it until the loan matures (8 years) we’ll have a nice nest egg to fall back on assuming the housing market stays in good shape, and it’ll likely continue to appreciate but our cash flow as a percentage of the equity won’t be great. All that said, perhaps the best thing for us is to keep the property with the goal of having a free and clear nest egg of around $300k but pursue options for leveraging the equity in the meantime.
    0Reply
  • Costin I.
    Rental Property Investor · Round Rock, TX · Member since 2016 · 1k+ posts · 971 votes
    8y

    @Mike Van Arsdale 

    So, the problem is that you can't get a LOC from a commercial lender unless they are in the first position?

    Meaning you can't add an LOC on the first house...but that loan is too good to discard, especially now, when you are probably paying 80%+ to principal and little in interest. Whatever investment you'll buy, the rate is going to be closer to 6%, almost double to the 2.99% you have. Is that rate differential, and the 8% selling costs worth to you? Is your new investment making enough to cover these loses and still be making you a good ammount of return?

    I would just get a LOC on the 3rd property and use that as downpayments on new deals. Eventually, find value-add deals (even if you might need to supplement with HML money) that you can rehab and place a tenant, then refinance, allowing you to recover all the money back, and repeat. If the deal is not allowing for that, maybe is not a good deal anyway.

    And/Or pile up all the cashflow into paying down Property One (12K + 4.5K + 5K + 12.5K = 34K) and you'll get it done after 3 years, and be able to get LOC on P1 and P3.

    Or in year 3, get a line of credit on P1 and P3 together, use a bit of balance to pay off the remainder of loan on P1, allowing the bank to move into first position.

    Keep in mind..."Buy at the funeral, sell at the wedding" + "When investing, pessimism is your friend, euphoria the enemy." - Warren Buffett - and guess what, it looks more like a wedding now than a pessimistic period. Don't be "house horny".

    "The Best time to buy real estate is NOW. The Best Time to sell real estate is NEVER."

    "Never ever sell real estate. Ever. [but never say never, so...] Unless it's to buy better real estate"

    1Reply
  • Mike Van Arsdale
    OP
    Louisville, KY · Member since 2013 · 11 posts · 1 vote
    8y

    @Costin I. Absolutely LOVE those quotes.  Well said by all.  

    Replying to your points...

    Yes, we're not able to get a LOC unless the bank is in first, or at least that was the position of the bank I spoke with 2-3 years ago.

    As far as the loan on P1 goes, yes, it's great at 2.99%. I'm very hesitant to get rid of the house for numerous reasons that I stated in my last reply but also that rate. One thing I've always been a bit cautious of, however, is having a rental with lots of equity in it just in case we're sued. Since this property is currently in our personal names (not our LLC) we've been paying for a $1 million dollar umbrella policy for about 5 years now to help in any situation that may occur with the house and ourselves personally, so perhaps I shouldn't be so worried about the equity build up in that property... it's probably unfounded.

    When you say "8% selling cost" are you assuming realtor fees and taxes?  

    As far as getting the LOC on the 3rd property, I think I'm leaning that direction. It makes sense to then continue to build equity in that property with tenant's money given the low rate and close maturity date on the loan. Also, at maturity we'll be cash flowing nearly $20k a year in that one property alone.

    Give me your thought process behind paying down Property 1? It sounds like rather than keeping loans against the properties (which was my general thought process) using the bank's money as much as possible and keeping mine for new deals, you're saying, pay off the loans and then establish LOCs against the equity. In the long run I assume that would put us ahead financially given we wouldn't be paying as much in interest over the course of the loan. And if we can gain access to the equity via a LOC then it kind of serves the same purpose as what I was attempting to do by putting a 30 year on it.

    Costin, I think you've won me over!  I'm excited!  

    Well done, sir.

    0Reply
  • Mike Van Arsdale
    OP
    Louisville, KY · Member since 2013 · 11 posts · 1 vote
    8y

    @Costin I.

    Any thoughts as to whether you would or would not move P1 into our LLC?

    0Reply
  • Costin I.
    Rental Property Investor · Round Rock, TX · Member since 2016 · 1k+ posts · 971 votes
    8y

    "8% selling cost" = realtor fees and closing costs. Forgot about taxes, that's extra. Although you might be able to avoid those with a 1031 exchange or if you lived there in the past.

    Like I said, that loan is good and is positioned good (how much is principal and how much is interest?). Problem is how to utilize the equity. Like I said, I would stay put with this one - personally I sleep better with less debt.

    If it burns you so much that stale equity, then I would accelerate to max paying it down and then putting an LOC on top of P1 & P3. Might be able to do the switcheroo even before reaching zero, with a bank giving you the LOC at the same time with paying down the mortgage balance (but I wouldn't do that before reaching 40-50K balance). Is just an option/suggestion, not my first choice.

    My first choice, would be LOC on P3.

    As for moving stuff in LLC, that is a longer conversation, but I have an answer for you on that too:

    0Reply
  • Kerry BairdPro Member
    Rental Property Investor · Melbourne, FL · Member since 2011 · 3k+ posts · 2k+ votes
    8y

    Did you live in the primary residence long enough to qualify for the capital gains exclusion?  2 yrs out of 5 for most people, 2 years out of 10 for military?

    If so, gains are tax free (up to limits). We have used this to grow some equity and then sell, get the gains tax free, and multiply the money using down-payments on a couple other rentals.  And then are also baking the next owner occupied capital gains...

    0Reply
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