I am super green, well mostly I have owned a home for, 22 years, used some of the equity but not much, it has been a rental for about half of the 22 years. I am in Denver, CO where the market is on fire!!! I have 250k to 300k in potential equity in this house. Do I put it on the market and see what the current bidding wars will beget me? (I cash flow 1300 per month currently.) I have very little income, if I add the rental income I make about 20k per year. Getting a traditional loan would be tricky or would it? Good credit score but not quite 800. How can I do the BRRRR method if I do not have enough income to do the first loan and then a cash out refi? I could sell and reinvest in a smaller market but is that smart if I can't increase my cash flow? (Perhaps I can increase my cash flow) (A lot of realtors are suggesting I sell and reinvest in a smaller market and and they see a trend with more seasoned investors doing just that.). My bank is offering me a 12 month 1.9% heloc settling in at 3.64%. If they will give me 200k on HELOC should that be my loan for a second property? or at least my entrance. What I do see clearly is that I have equity sitting in a property that I should be able to translate into more money/cashflow shouldn't I? I hope I have painted this picture succinctly enough. New to BP and loving it. Thank you everyone!
You have a great problem here with lots of (good) options.
First of all, not many people recognize what you seem to be intuitively finding here. The property has appreciated so much that your current returns, well.... suck.
Huh? Isn't $1,300 per month great?
Sure cash flow is great but $1,300 per month on $300,000 in equity is a 5.2% annual return on your equity. The appreciation you have experienced over the years has ruined this deal. Not only is your ROE low, you are likely paying taxes on it now because your depreciation no longer offsets the income. By being successful, this property has become a poor investment.
You should be able to achieve at least 10% tax free on a real estate investment if you buy it right. What I'm saying is if you do it right, you should be able to DOUBLE your cash flow and REDUCE your taxes at the same time.
You talked about buying in a "smaller" market, but consider going even further afield. For many years I bought SF rentals in Dallas (from Detroit) that typically yielded 20%+ returns. I don't see those kinds of returns in Dallas any more but still see great deals in San Antonio and Houston. Imagine QUADRUPLING your cash on cash returns and REDUCING your taxes at the same time!
And, not only is right now a great time to sell given the state of the market, it is also a good time to take advantage of 1031 exchanges that may be going away.
It sounds like you already know the best way forward...
@Cherie Tormey are you currently unemployed, and do you plan to remain so? I think you're correct that you will have a difficult time executing the BRRRR strategy, because you don't have enough income for a traditional refinance. I'm surprised your bank will provide the HELOC you mentioned, but that may be your best bet for buying your next property.There are asset based lending options for the refinance, but you'll pay significantly higher rates for those. If you don't plan on increasing your income at any point in the near future, then you'll need to spend some time researching lenders with a product that ignores your personal income.
There are other ways you could make money with the HELOC funds, like flipping, private lending, and investing in other peoples' deals. None of those require you to have sufficient income for a refinance.
@Cherie Tormey , Accessing that equity is important in order to grow your portfolio and your return on investment. 1300/mo on $300K of equity is good in terms of pure numbers. But its not so good as a % return on equity.
This comes down to two calculations
1. Your return as it stands right now - $15,600/ $300K is a lot different number than $15600/$200K. Factor in all expenses and allowances and get an accurate picture of what your property's doing.
2. Opportunity cost - what can you do with the money if you access it. And even more importantly what does accessing that money do to the return on your current property.
And then that begs another question - Project your actual cost of financing as they will be. A 1.9% teaser rate is nice but at 12 months there could be a lot of opportunity for bad things to happen to that rate. Ya wanna look at long term possibilities and consequences at this point in the market. Positioning for a few months assuming continued growth and low inflation is opening yourself up to bad possibilities.
@gregscott Thank you so much Greg. Worthy advice for sure. When you said "further afield," I am guessing you meant any market that offers a return? Not that Albuqeurque is booming huge but is a market I am looking at. Either a Triplex or single family home. Hopefully I can keep my current rental and pull out the equity and buy something in a market where my dollars go faster.
@Chris Freeburg, since on paper this property looks like my primary residence I think I can avoid the 1031 issue. If you can recommend any lenders. My challenge is still the lack of w2 income and turns out my modification loan on this property I did back in 2010ish has a lien associated with it. I will figure this out. Any recommendations for a banker are appreciated.
@Joseph Cacciapaglia I do plan to remain unemployed as I want to return to school, if anything a continued path of self-employment. I appreciate your thoughts and any lender ideas are welcome.