Hello BP,

I am debating what I should do to maximize my real estate investments and need some help. Here is the situation:

My girlfriend and I currently own 2 single family rentals in Vancouver WA. The 1st house cash flows $700/mo and has $150k in equity. The 2nd house cash flows $250/mo and has $100k in equity. We both separately lived in them for 2 out of the last 5 years so we could potentially sell them w/o paying cap gains and walk away with around $250k.

Here are the options I am considering:

A. Keep them and enjoy the $950/mo cash flow and let them appreciate in the awesome market of Portland/Vancouver.

B. Sell them, take our $250k and use it as 20% down on $1.25M worth of SFH, Duplexes and triplexes in a cash flow market in the Midwest or South.

C. Refinance the 1st house and use another $60-70k to buy another house in my back yard?

D. Find a partner to join with and buy a bigger apartment building.

I would love and appreciate any input!

Thanks,

Carter

Hi @Carter Thomas , some good options there. So long as properties are cash flowing my preference is always to get cash out via a refinance to avoid the significant transaction fees of selling real estate. That way you can also continue to enjoy any appreciation on the asset and the cash that you get is tax free. 

As for what to do with the cash it really depends on your preferences. Buying more assets locally means that you will likely be more involved in managing them. Investing out of state allows you to select markets with the best fundamentals for real estate investing but you have to get good at vetting and managing a remote team. 

Good luck, all of your options are good ones!

Ronan

@Carter Thomas

Hey, I'm a 16 year old so maybe don't take my word extremely seriously as I do not have any experience and I'm still learning like all of us.

However, I must say that your options are very good!

I'd problably keep one of them for the cashflow, selling the other and doing a 1031 & investing in something bigger, perhaps with a partner or alone.

Just do what is best for you, everything is win&win as all of the options are great!

Regards,

Rickard

@Carter Thomas Hi, you do have a lot of options in your investment. In my personal opinion, why not try using the cash flow to buy another assets? That way, you may keep your monthly cashflow and increase even more passive income.

But this only works if you are having positive cashflow after deducting all the expenses of maintaining the houses.

@Carter Thomas

Let's look at your "Options" one at a time:

A. Keep them and enjoy the $950/mo cash flow and let them appreciate in the awesome market of Portland/Vancouver.

Appreciation is never guaranteed. (It's a risk.) What if the properties depreciate? And remember: appreciation is never realized until you sell. So you need a plan, and you need to stick to it. 

B. Sell them, take our $250k and use it as 20% down on $1.25M worth of SFH, Duplexes and triplexes in a cash flow market in the Midwest or South.

You're thinking small. Why would you buy $1.25m worth of SFH? Instead, buy a large complex with fewer roofs, fewer walls, consolidated bills, and centralized management. Did you do the math on this option? You are making $950 per month now. If you sold your current properties and put down $250k on a $1.25m complex, could you cash flow more than $950 per month? 

C. Refinance the 1st house and use another $60-70k to buy another house in my back yard?

It is always a good idea to use leverage, but what would your LTV be after the refi? And what happens in the market cools? Also, never limit yourself to your "back yard" unless you plan on self-managing. The best deals are never in your back yard. This is a common mistake made by small investors.

D. Find a partner to join with and buy a bigger apartment building.

Partnering is always a great idea (if structured properly). You are already in a partnership with your girlfriend. If you both sold the properties and you each threw in your combined 250k, and you found another partner to put in $250k - you could now buy a $2.5m complex which could support it's own full time property manager!

______________________________________________________________________________________

Other things to consider:

Your rentals are probably in your personal names. This is bad. You should never own anything in your name. Given that you can utilize section 121 and not have to pay capital gains, I would recommend that you both sell your properties before you lose that benefit. When you purchase your new apartment complex, you will each form an LLC, and then each of your LLC's will become partners in the new property.

The 1st house cash flows $700/mo and has $150k in equity. The 2nd house cash flows $250/mo and has $100k in equity.

All good points above -- I think @Steve Hall said it best asking you what your goal was.

I think appreciation is great and I half agree with Steve -- appreciation is realized when you sell but the rents on these units, ostensibly, go up as the unit accumulates value.

With that kind of cash flow, you want to consider a few things. Can you manage more on your own, do you want to manage more on your own? If the answer is no, you might want to consider selling and moving into a larger investment with management.

Point being, if you're not sure what you want to do here, maybe your goal(s) isn't totally in focus. I wouldn't want to make a decision that didn't align with the direction/end-point I wanted, personally.

Now, if you're cash flowing nearly ~$1000 a month (and this means you have money set aside before your cash flows for maintenance, CAPEX, etc.), and you make $250,000 on the sale of these properties, you would be making almost 21 years of cash flow in a single transaction. That's hard to argue with, but a little misleading. Look at your rate of return on these properties and what it could be investing the $250,000 elsewhere. If you rate of return is better, your cash flow is better, and your reaching your real estate goals...then its a no-brainer.

Personally, I'm a bit more conservative, I don't want to mess with cash flowing properties. I'd rather cash out refi or continue to save for the next one, and the next one, and the next one..

If you tap the equity, your loan payments will increase, do they still cash flow ?, if not, sell. Take advantage of the capitol gains, do a 1031 exchange for an Apartment building.

Originally posted by @Ronan Donnelly :

Hi @Carter Thomas , some good options there. So long as properties are cash flowing my preference is always to get cash out via a refinance to avoid the significant transaction fees of selling real estate. That way you can also continue to enjoy any appreciation on the asset and the cash that you get is tax free. 

As for what to do with the cash it really depends on your preferences. Buying more assets locally means that you will likely be more involved in managing them. Investing out of state allows you to select markets with the best fundamentals for real estate investing but you have to get good at vetting and managing a remote team. 

Good luck, all of your options are good ones!

Ronan

keep in mind the refi proceeds are TAX Differed NOT tax free.. the only tax free is the owner exemption that you described above.. I would look at that before refi personally.. were else can you make 250k large with NOT ONE bit of tax bite.. IE recapture cap gain etc. 

the new Opportunity zones will have some pretty nice tax benefits.. so get your tax free from those.. and invest in Opp zone wo in 10 years you wont have any tax on those..  that's a thought right?

Also keep in mind grass is not always greener.. you can go out of state but buy high quality.. low quality and you will wonder why you sold easy to manage Couv props for hard to manage low value or quality property 2 miles away..  if you buy on the top end of those markets they will perform tenant wise pretty much like your Couv..  but if you buy low end high yield it will be a roller coaster. and you could potential lose money..  

@Carter Thomas I’d keep them and get a heloc on them instead of refinancing. That way you can access the equity, then pay it back and access it again.

Hi Carter,

I like option A. Keep them and do nothing.  You got a pretty good setup here.  You are local to your investments which is priceless.  

Sometimes people get ahead of themselves and want to maximize their returns and start looking for higher yields.  The problem with that is they put themselves into a bigger risk position because they start investing in markets they don't know or buy a project too big.  

Option B 20% at 1.25m.  You really have the time to do this?  After all the time and effort, your yield won't be that much. 

Option C This could work the cash out refi doesn't seem that much at 60-70k out.  

Option D. Do you really want to bring another partner in or join syndication? Pick the wrong one and have all your hard work and equity gain disappear.  You don't want to lose control of your money and never be in a position where you have no control.  Way too much money for this. 

You seem to be on the right path. Keep doing what you are doing. 

@Steve Hall

Great points Steve, thanks for chiming in! I agree that, as @Brandonturner says, appreciation is speculation. In Vancouver it’s hard now to even buy a house with 20% down and cash flow even $200, let alone account for cap ex, vacancy and other expenses. I’d like to start scaling out and wondering if larger apartments would be the way to go, but I’d like a partner who can show me the ropes. Or is it to risky to take $250k and find someone AND do it OOS Thoughts?

@Jay Hinrichs

Thanks for the input and expertise from the NW! I also enjoyed your podcast on BP. Without finding distressed homes in the NW it’s hard to find cash flowing properties w/o putting 30-40% down. Is it worth it to start looking OOS and for a better cash flow market or like you said, am I just imagining the grass is greener?

I like the idea of big apartment complex but I also want to find my niche and be good at that. Would I be trying too much too soon with the apartment idea? Or just become good at SFH that are OOS?

I’m young and have time on my side, trying to set up the long term game.

Thoughts?

@Joe

Great thoughts Joe, thanks for the input. I agree that I should probably focus my goals more, however I'm 23 and I don't want to confine myself too early, I'd like to explore my options with bigger deals. Or am I thinking wrong? Should I continue with SFH and become good at that and let it become my specialty.

I also don’t have a huge desire to manage a ton of properties down the road. I’m okay with a few but I know it can get time consuming after I accumulate more. I’m led to OOS because in Vancouver, it is hard to get a cash flowing property without putting 30-40% down. Let alone accounting for vacancy, cap ex and other expenses and still have cash flow. Am I looking at it wrong or does places like Memphis or Alabama seem to be a no brainer for cash flow and cheaper markets?

Dude @Carter Thomas , you're 23 and you're cash flowing almost a grand a month scot free? Live your life, bro. :)

Do you and your girlfriend work full time? Not to be rude, but is there a long term future there? Do you want to retire early?

You're asking us what area to focus in in real estate but you're missing the big picture. Your LIFE goals should define your REAL ESTATE goals, not the other way around.

If your goal is to retire by the time you're 30, then what do you need to make that happen? Cash flows, reserves, etc...how do you meet that goal? Do you want to keep working the 9-5 and use real estate as a side investment? Then invest accordingly.

You've got to figure out how/what you want out of life (in a perfect world), and then work like hell to get it. Invest smartly, realize the risks, plan for as much as you can, and feel good about it. Then you'll know if its SFH, MFH, syndication, REITs, etc. Those are the investment VEHICLES to get you to the DESTINATION. Get it?

Originally posted by @Carter Thomas :

@Jay Hinrichs

Thanks for the input and expertise from the NW! I also enjoyed your podcast on BP. Without finding distressed homes in the NW it’s hard to find cash flowing properties w/o putting 30-40% down. Is it worth it to start looking OOS and for a better cash flow market or like you said, am I just imagining the grass is greener?

I like the idea of big apartment complex but I also want to find my niche and be good at that. Would I be trying too much too soon with the apartment idea? Or just become good at SFH that are OOS?

I’m young and have time on my side, trying to set up the long term game.

Thoughts?

the answer like all these answers on BP is it just depends..  but generally where we see out of area West coast investors get hurt in the mid west or deep south.. is chasing yield.. without understanding that rental props in those areas price for Risk..

in the Couv you have pretty much 2 risk profiles.. you have some lower class type rentals say in Fruit valley area.. but that's about as bad as it gets.. U cannot understand the risk in some of the mid west deep south north east without going there and seeing for yourself.

but if you simply want SFR's every city has a median price point.. we have one here in our area for SFR which is closer to 350 to 400k but like say INday for instance its 130k.. you buy at the median and your buying were homeowners are buying and some investors. you buy at 75k and your in an area that ONLY investors buy in.. and your values will ONLY be worth what the cash flow is.

its all about balance.. risk reward.. and of course I don't subscribe to the cash flow is the only thing and appreciation is gambling NOT at all.  Other wise you would not have 250k in equity. you know how long it could take to get that amount of equity in areas of the mid west that you can buy properties for under 100k.. well you will be dead before that happens..  LOL.. so the only reason to buy those is cash flow.. so the next step is buying quality cash flow  not trashflow..  and hard to manage.. plus you have to out source all that.. I suspect now your not paying anything to manage or place tenants in our homes.. once U out source you will lose 20% of your income right there.. placement fees , management fee's and mark up on services..

So if its rental game you think you want to do .. just buy at the top half not the bottom half.. that will give you the TOP half of the best tenants not the bottom half.   does that make an sense..  Unless you can scale up to lots of doors cash flow will not make your rich. but appreciation could.. I mean my home in Lake O I built for 425k  6 years ago and I could sell it today for 1.1... and I am just one of thousands of owners investors on the west coast were appreciation is the name of the game..  

Talk to your CPA first and find an easiest solution.

I think all your considerations are great ideas. You have to ask yourself what you want and where you see your business going. There are many investors who are happy with 10 smaller properties and thats all they need. Some investors such as myself love the syndications and bigger deals (along with the headaches for both). You will get a plethora of great ideas from here but they will be from what each person would do, not necessarily yourself. Especially when you have girlfriend, I would sit down and write out your life plan and build your business plan around that. Sounds like you are in a great position with those properties already, good luck. 

When your kids ask where daddy invested in real estate back in 2019, where do you think they hoped you picked? Cash flow fly over or Portlands high appreciation market?

For someone who enjoyed the awesome appreciation in the NYC area, I would say appreciation. But some people who got into it at the beginning of a market downturns can be wiped out, and I seen it happen. Since you already have equity, you won't be wiped out, but beware that your market can turn.

For the record, I invested in small multi's. I looked into cash flow investing in neighboring states that's two hours or more away in the beginning. Concluded it's too time consuming to self manage and the time and effort to build a team was too intimidating. So I went for appreciation investing locally and never looked back.

When I started in 1983, the up market still had several years to go. I bought a 3plex in 1983 for $150K, and another 3plex in 1984 for $180K. Long story, but I invested $50K in the first, and with my mother in law invested $100K in the second. By 1986, when the market peaked, they were worth $350K each. That's nearly $400K in appreciation, and you'll need years of cash flow to equal it.

The market did correct for a few years, bottoming out in 1993, when it's value dropped to $275K, still not bad for me. As I said, folks who started in 1986 got wiped out. But in 1993, I started buying at auctions. One duplex I got for $200K in 1993 is now $1.2 million.

With the exception of auction condos in MA, which my sister managed for me, I self manage the ones in NYC, all within 20 to 40 minutes. So the timing worked out well for me, and I have no need to spend countless hours driving or the time and expense of creating an out of state team.

Just to finish my story, my dad did not believe in appreciation investing, thinking it's all a gamble. He bought a small mixed use property in 1963 for $25K, which mirrors the value of 3plexes. In 1970-1972, these sold for $70K to $75K. He had capital to buy two, told him he should do it. He said no, no gambling. By 1982, these were up to $200K - $250K which is when I got in. He passed about 3 years ago, and the property he picked up for $25K in 1963 sold for $1.1 million. If he listened to me in 1972, we would had 3 of them, rather than one.

Still, his property was mortgage free since 1980, and the cash flow paid for his retirement. If you're in a high appreciation area, rents also appreciates, and over time, you'll get good cash flow as well.

@Frank Wong

I would agree with Frank on this one. I was in a similar situation a few years ago where I chose Option B and D. While I scaled up from one condo in San Francisco to several MF properties in Midwest and Arizona, I now have 20x the hassle.

As people always say, it depends on your strategy. Are you content with steady income with fewer headaches or do you want to put in the hard work for higher revenue.

What are your long term goals?  

We are heading into a recession. Focus on day one cashflow.

@Carter Thomas , 

Do you have great rates on the current mortages for these investments?  If so, you want to factor in the value of that cheap money if it is indeed cheap (vs refi or selling).  I would hang onto the Vancouver homes and see if you can replicate what you have done a third and fourth time so you can build efficiencies within your home market.  Vancouver is a market that provides cashflow and appreciation and has many appealing qualities looking forward when you compare it to Seattle, SF, and even Portland.  That tax location of Vancouver make it smart for more and more people move into the area which further supports increase cash flow and appreciation going forward.

I would look into tapping into the equity via a HELOC and using that money to continue to buy more cashflowing properties in the area since it appears you have a good handle on it. Or if you have a day job that provides cash to buy property I would continue to keep doing that and build scale locally.