Cash Out Roughly $170k Equity in SFR to Purchase Multi-Family in OOS or Other?

[Dalton Thornsberry]

I purchased a SFR (condo) in 2017 for around $130,000. I currently still owe around $111,000 on this property. Rents are $1475 per month and it cash flows about $250 per month after all management expenses, HOA, maintenance, etc.

My return on equity looks pretty bad (roughly 3.7% per my calculation). Current value on the high end would put this SFR at around $280,000. Worst case I sell for closer to $250,000. There are plenty of opportunities out there it looks like to deploy the roughly $120,000 capital (worst case) that I would see from selling in an OOS market. At the very least I could roll this into a duplex or triplex in the same market (Bakersfield, CA) and probably cash flow quite a bit more than I currently am. However, appreciation would likely not be as high on said duplex or triplex.

This feels like a no-brainer even with sky high rates. It feels like I should take that equity and put it into a Multi-Family property as I am only 30 years old and have plenty of time to continue to acquire and build my portfolio. At the very least that capital would allow me to control $400,000+ in Real Estate value v. the current $280,000 or so. If I took said cash from the sell and put it into a $200,000 property out of state I feel I could even cash flow WAY more than the current $250 monthly. 

What are the drawbacks? What am I missing? Need some help navigating this idea. Cash out re-fi would eat all cash flow and I'm not sure it would give me enough capital to tackle a quality property with current rates (I'm locked in at 4.25%).  

Thanks!

Dalton

[Eric Fernwood]

Hello @Dalton Thornsberry,

Instead of pre-determining the type of property to buy, I recommend focusing on your financial goals. Let's assume that your goal is to have a reliable passive income. A reliable passive income must meet the following requirements:

• Inflation compensating: Rental income keeps pace with inflation, compensating for rising prices.
• Persistent income: Your income will last, ensuring you and your spouse won't outlive the income.

The above is dependent on the investment city.

In order to have a reliable income, your property must be continuously occupied by what I call a "reliable tenant." A reliable tenant stays many years, always pays the rent on schedule, and takes care of the property. You will hold the property for many years you you will need multiple reliable tenants over the years.

How do you have the highest probability of always having a reliable tenant? There are two key success factors:

• A property manager who is skilled at selecting reliable tenants. I know many property managers in Las Vegas, but only two of them are skilled in selecting reliable tenants.
• Selecting a tenant segment with a high concentration of reliable tenants. This is what I did when I set up our investor services business in 2005.

How do you identify a tenant segment with a high concentration of reliable tenants? Multiple property manager interviews. Once you identify this segment, determine what and where they rent today. Then buy similar properties.

Summarizing

I see investing as a three-step process.

1. Choose a location where rents keep up with inflation. Maintaining long-term financial independence is only possible if rents keep pace with inflation.
2. After selecting a location, interview property managers to identify a tenant segment with a high concentration of reliable tenants.
3. Buy what your selected segment is willing and able to rent.

We’ve delivered close to 500 investment properties and I did not decide on any of the properties :

• Where to buy
• What to buy
• The property type
• The property configuration
• The renovation components

Everything was defined by the tenant segment we want to occupy our properties.

If you make decisions based on your financial goal and not other people’s opinions, you should do well.

DM me if you have questions.