My husband and I have been buy and hold investors for the last 10 years. It was not our primary focus, which is why we only own two investment properties. However, we have paid off both mortgages and now make $5000 a month in rental income which is great, but I know we could be doing so much more with these two investments. Our equity in both properties is significant. My husband is debt adverse so the idea of pulling the equity out of the homes to purchase more homes is a hard battle to win. My focus this year is to grow our real estate portfolio. If you were in this position what would you do to capitalize on the situation?
Amanda, my wife is very debt adverse too. We have a couple of properties that are not paid off. Don't worry too much about the fact that you own these outright - that's really the goal right? And an awsome achievement. I've done well by doing my research, then explaining the deal to my wife, taking her criticism seriously, and working to mitigate risk. It's slower growth, but also less risk, so it's a good thing in my mind, to make everyone happy and comfortable.
With that said, you might consider getting HELOC's on both properties. This gives you some money to invest elsewhere (essentially, you can be your own hard money lender on a BRRRR). If your husband is worried about the risk, talk about doing a smaller project initially, and keep the books and communication open during the process. My wife is not super interested in the minutiae, so I generally show her yearly that our net worth is growing, and talk frequently about the cash flow on properties, both good and bad.
You might also discuss how much of your net worth you are willing to invest. For example, it's much easier to swallow if you are talking about investing 5% or 10% of your net worth into a deal, and that you can show that the maximum downside would be say 1% of your net worth, and the upside can add 20% to your net worth.
I don't think appealing to logic helps in these cases - the worry about debt is more emotional. You have to recognize this concern and show you care about it. In my case, I've been married long enough that my wife trusts me, but it's because I listen to her concerns and work to mitigate them.
Great feedback @David Sisson ! A home equity line is always a good option, but once again it is still debt. However, we have a very low-interest rate. I think presenting in a way of looking at our net worth is a great way to get his head around the idea. Where have you invested in RI? Our properties are in MA and we are currenting looking in Providence, East Bay area and a couple of other areas in RI. The prices are SO much better here in comparison to where we were in MA. But I also recognize you can't charge the same in rent.
Account Closed I like your analogy! Yes, prices are not what they were 10 years ago. We are more interested in buy and hold. Even it is not much cash flow, but the appreciation is there we are interested. I think Providence is a great city with so much potential, but it needs industry! There are not many deals these days, but I am hopeful and spring is coming! :)
I definitely don't blame your husband for not wanting to pull equity out of your home. If that isn't something your husband is trying to do, then I would recommend financing through a lender. If there might be an issue getting approved going conventional or a lack of liquidity for a 20% downpayment, then look into hard money. If you are able to find flip with a decent enough margin, I know hard money guys that will finance up to 95% of the purchase price and 100% of the rehab. Obviously, there is risk involved in this and it can get expensive if your rehab goes a lot slower than expected. But if he doesn't want to do a HELOC then it might be the second-best option.
@Amanda Bruneau first, congratulations, that's an amazing achievement! And you picked an incredible 10 years to do it, too 😊
On growing your portfolio, if your husband is averse to putting any new debt on your current properties, then it seems like the only solution would be to put aside money from your cash flow to fund the downpayment on new properties.
An equity line on one or both properties, as David mentioned, is definitely a good idea since you can manage it and pay it down. I know that you replied he's averse to that too, but as a possible counterargument you could point out to him that rates really are at historic lows and this probably won't last too long (see Time to Wake Up To The New Mortgage Rate Reality)
You could also try to get seller financing on any new properties, which might reduce your downpayment requirements and let you expand faster/earlier. If that's something your husband might have feelings about too, then it might be a good conversation to have with him now rather than when you find a deal and start talking about it with a seller.
@Klint Ruud thank you for your input. I have not explored hard money. Do you have any idea what the interest rate is with hard money lenders? I am working on saving the 20% too, it just takes longer! :)
@Anthony Thompson great to hear from you! We spoke a while back when I first moved to RI. I believe it was right before the world turned upside down. I am starting the good old fashion way of saving from our cash flow, which will eventually pan out. And I do think once I have more experience under my belt it will be build confidence in my husband's risk tolerance. How have things been for you in the last year? Have you bought any new properties? I got my license and am now working with Residential Properties out of Barrington. It is going very well, I just wish there was more inventory! :)
Sure thing! There are a bunch of lenders out there. The lender I have used is lending 9.99% and 2.5 points.
Money from the bank will always be cheaper than hard money. Equity loans are cheaper than hard money. The advantage to hard money is to finance when the bank won't do it, or faster than the bank will do it. If your husband is risk-averse, he really won't like the idea of hard money. I don't like it myself, mainly because I don't trust myself to complete my projects fast enough.
@Amanda Bruneau I believe most investors here would access a HELOC or refinance a rental property or both to get cheap access to financing to expand. Most of your options have already been answered above.
One that was missed was the sell option. Selling 1 rental would allow you to access a pile of cash that could be used for a future purchase. I am assuming being an agent you would sell for top dollar. On the flip side you would buy the next place for under market creating a spread with no debt used buying all cash. Being an agent you are not going to get hurt so bad on transaction fees entering in and out of the market.
This allows your husband to sleep well at night as you are not taking on any more debt and you get to keep growing your cash holdings.Win Win.
This is like archery - Sometimes for an arrow to move forward we must pull it back first.
you could also become a private lender yourself after the sale, again no debt.
@Jason Shackleton great thought. And this is the time to sell, especially with the thread of 1031 being taken away.
@Amanda Bruneau I am glad you liked it. I agree great time to sell. I was not even factoring in the potential loss of the tax advantaegous 1031 exchange. That being said it appears to be even more so the correct move for you.
I was chatting with a fellow this weekend. He's a successful small businessman. He owns 3 or 4 small properties outright. He's getting very close to retirement and is very excited about the cash flow from these properties. Because he doesn't owe anything on them, the cash flow is excellent. There's nothing wrong with owning something and getting the cash flow, especially as your needs change later in life. I'm not quite that old, but I'm already looking down the road a bit, and I don't want to be heavily leveraged as I get older. If you are younger, have a longer time frame, it might be better to be a bit more leveraged. Sale or HELOC, both could free up some cash for you to get into larger or more properties. I'm a big fan of commercial properties, especially because of the flexibility of commercial zoning. They are a different animal than residential rentals, and my outlook is different than most (IE: I'm looking at weird properties that have interesting zoning, that I can rehab and get good increases in value because other people have overlooked the opportunity). In our area, I've got my eye on PVD because of the flexibility of it's zoning, but also EP because I'm such a fan of the area. I'm hoping to rightsize my portfolio in the next 5ish years, and then use that investment to fund a bunch of flexibility in life (IE: taking a step back from the grind of everyday, call it a partial early retirement). Honestly, the goal is "get the kid through college, then hit the beach except when I have to manage the properties". 1031 exchange is nice, but not mandatory, the other option is just buy and hold whatever you've got. I personally don't see it going away, Biden is very middle of the road.
@Amanda Bruneau , I'd go back to the table with your husband and take a hard look at your return on equity. I understand the aversion to leverage, but it is usually the fastest way to grow a portfolio. You don't need to do full 70 or 80% LTV, you can leverage 50% of your current portfolio value, and then leverage 50% of any purchase, and continue to use cash flow to pay down those loans at a faster rate.
Levered returns are what usually make RE a better investment, especially in the current low interest rate environment we're in.
Agree with @Scott Wolf . I know we have in our mindset that debt = bad, but RE is a different kind of debt, and can actually work for you, unlike consumer debt. There are tax benefits, equity, and more with owning RE, even if it is on a mortgage. Leverage can make you more money, which is the beauty of REI. Why have your own money work hard when you can have tenants paying down your debt for you? With these low-interest rates, it is hard to pass up. You can keep one completely paid off and use the other one for a re-fi/HELOC to obtain two properties in a good market, making cash flow even more. A compromise? ;) Ask people here what they would do with $100K and most would probably say buy more vs pay off properties!
With that built-in equity, hard money makes no sense with rates at 8% or much higher, plus it is debt!
You can wait to save for a down payment, but if you truly want to build, look at leveraging your paid-off properties, unless you are closer to retirement and don't want the take the risk.
@David Sisson help me out, what is PVD and EP?
Also, you are in the RI area. Where have you invested and had success? Everything is a deal compared to MA prices, but obviously, the rents are much lower. I am looking all over the state. Initially, I was thinking Providence, but I am expanding my search. I also like the idea of commercial real estate.
@Amanda Bruneau I'm guessing PVD=Providence and EP=East Providence. Also just wanted to point that that RE doesn't always move in just one direction.
I'm nervous about the effect on the market, if the current proposals to change/limit/eliminate evictions pass. See the recently-formed "Rhode Island Coalition of Housing Providers" group on FB.
The proposals include: Eliminating evictions whenever there is a "state of emergency", adding 90 days to the current eviction process otherwise, limiting the reasons for asking someone to leave at the end of their lease (i.e., almost mandatory lease renewals), and making refusing to rent to Section 8 a fair housing violation.
I'm told these proposals are "gaining momentum" for passing, which would be very bad for landlords IMO. There may be a lot fewer buyers who are willing to be landlords in a changed landlord-tenant environment, and you can imagine how that could affect prices.
@Anthony Thompson I am aware of the new proposals and it is concerning, particularly the evictions. Some of the proposals do exist in MA, such as landlords having to rent to section 8. However, just with any renter, if you screen tenants properly and hold everyone to the same standards: good credit, background check, good references, mandatory first, last and security you are typically going to funnel out people organically that would not be a quality tenant.
@Anthony Thompson thanks for sharing that. I didn't even know that was happening in RI. I dropped Joe Shekarshi a note, he's a great guy, but these bills look horrible for RI, both for landlords and for renters. I don't know what they expect will happen with the Section 8 thing - I mean, I have no problem accepting money from any source, but I can also reject a tenant for many reasons that have nothing to do with where they get their money from, so I'll still be refusing to rent to tenants that don't make business sense (IE: they have evictions, or lie to me, etc).
PVD = Providence
EP = East Providence
@Amanda Bruneau Obviously, you'll pick deals that make sense for your level of risk vs reward. I like being able to service my properties quickly, so having them fairly close to where I live makes sense to me. I don't know of any particular areas that are a goldrush in RI - a few years back I would have said Woonsocket, but now the prices have risen up there.