Need advice on buying or selling, how to expand my portfolio!

Buying & Selling Real Estate
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Need advice on buying or selling, how to expand my portfolio!

Sharon Miller
Member since 2019 · 24 posts · 6 votes

Hi Everyone, thank you for your time, I am a newbie so please be nice! :)

I have following Assets:

Rental property - Purchase price 120K (Current Value 200K) - fully paid - bringing $1450 a month

Primary Residence - Purchase price 320K(Current Value 380K) - 150K due in mortgages (1140 only principal and interest monthly)

I am going to finish my mortgage payments for my primary residence as fast as I can since I am almost there. After its finished, I am not sure what would be my next step? Renting my primary residence will only bring $2500 a month, which is not much considering its value. 

Here is what I am thinking my options are:

1. Sell the primary to tap into cash, so I can purchase another Primary residence and in addition one or more rental property in 100 - 150K range

2. Keep the primary residence, and get Heloc to purchase another investment property in 150K range. Though I really want to get out of my current neighborhood, since house are too close no breathing space. 

Any other options that you see fit in my situation? 

Thank you for your help in advance. 

Sharon

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  • Greg ScottPro Member
    Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
    7y

    Using debt properly is a key aspect of growing a healthy real estate business.  

    Having no mortgage on a rent property is not a great idea for two key reasons.  1) Your return on equity is very low and 2) you become a lawsuit magnet.

    Ignoring your personal residence for now, how much more cash flow would you make if you got a 50% loan on your rent property and then bought another exactly like it? You are currently getting an 8.7% Return on Equity ($1450*12/200,000). If you had two properties just like it and each had a 50% LTV with 30 year debt at 5% interest, your total cash flow would go from $1450 to $1827 for a RoE of 10.9%. It gets better if you buy four properties with a 75% LTV.

    As a side benefit you now have four properties instead of one.  If one tenant moves out you still get 75% of your rent rather than 0%.  Also, if over a long time you get appreciation, it is better to have appreciation on FOUR houses instead of just ONE.

    Good luck.

    1Reply
  • Jeremy Johnson
    Rental Property Investor · Indianapolis, IN · Member since 2016 · 32 posts · 17 votes
    7y

    I also dont subscribe to the less debt is better for a number of reasons. If a bank is willing to give you thousands of dollars to pay off over years at an APR under 5% while someone else pays it for you, and you can use that capital to purchase or finance more investments which will bring you a better return than 5% its a win. That's not counting the tax benefits. You should be able to make a yearly profit and not be paying much in the way of taxes if done correctly. Intelligent use of leveraged buying will grow your portfolio better than most other options.

    I agree with selling your home just for the capital gains exemption.  House hacking is the single best way to make money early on IMO and I wish I had done it years ago.  

    Don't fear debt. Fear high APR, unreasonable terms or a number of other options, but cash is king and taking cash out of a home while staying cash flow positive is always my first advice. If you're truly worried about the length of payoff or interest rate try a 15yr, and you dont a high mortgage amount, but at a principle amount that works for you.

    Once you're out of the primary residence and seeking a rental. I will always advise buying a multi-plex (du/tri) and renting the other units. Better APR for the loan as its a primary residence and once you move out it will cash flow better. If you sell it no capital gains. It's the best hack out there for newbies.

    You're in great shape.  Sit down, do the math and explore your options!!

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  • Sharon Miller
    OP
    Member since 2019 · 24 posts · 6 votes
    7y

    Hi Greg, 

    To your key reasons, 1st one, you are right about low return on equity. Also I lost access to cash, paying off mortgage requires a lot of capital. 

    I don't follow you on lawsuit magnet comment, tenants are not aware the house is paid off. In this day and age, we could be sued for any reason whether house paid off or not. How is, not paid of mortgage an advantage? Would you please explain? 

    On your last point about having more properties, Don't we need to put down payment for the prospect houses? Where am I going to get that cash from? What is the percentage of down payment, %10 or %20 of market value of the house? 

    Thank you for your advice, its really useful. 

    Please be patient with me since I am very new in this field. 

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  • Sharon Miller
    OP
    Member since 2019 · 24 posts · 6 votes
    7y

    Hi Jeremy, 

    Everyone likes the comfort and safety, I know I need to break of that habit and be more adventurous. However if you look at the bigger picture, I would need a lot more houses for rent to live from positive cash flows. IN addition, I would need to have more down payments for those prospect houses, which means more cash out of pocket(or maybe use heloc). Just the thought of swimming in debt but positive cash flow part makes me worry a little. :) To get to that level requires a lot of careful planning, and putting those plans into action without hesitation. 

    I think once I sell my primary residence, I will have a lot more cash to buy more properties. 

    Thank you for your sound advice.  

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