Sell out and go big?

Question

So I own two 3 family properties that i currently have about 200k and 150k in equity in and I'm trying to decide what is the best step to take next.  I have a few ideas...

1. Sell both properties to yank out the equity and put down on a 30 unit in the 1.2 to 1.6M range (my credit isn't perfect, have a discharged ch.13 bankruptcy)

2. Sell property A to capture the 200,000 in equity and pay off the remaining balance on property B (current balance on property B is 207,000)  Then set up a HELOC on property B to access up to 80% of the approximate 350,000 current valuation.  This HELOC could then be used to purchase additional property

3. Another wrinkle in the mix is that I need to purchase a single family for personal use.  By using sale proceeds from A to pay off B, I have been told I could then qualify now for an FHA loan as opposed to having to wait 2-4 years past bankruptcy discharge for a conventional mortgage.  Given the whole Ch.13 BK situation I don't know if I could get a million dollar commercial apartment loan yet or not either.

Thanks in advance for your thoughts and ideas

Tom Shelby · Answer

Thanks guys, I appreciate all the input.  Points well made.  I think ultimately the goal has always been to accumulate as many units as possible, and going big sooner may yield a greater number in the end.  Time to see if that's a possibility.

Thomas S. · Answer

Option 1 or 2 work, In the end each will probably free up about the same amount of cash. Do your numbers and choose the max cash freed up.

I do not like the idea of sinking good money into a personal home. I would not do that till you have reached all your investment goals.

Joseph Gozlan · Answer

@Tom Shelby both strategies are valid and have their own pros/cons

you need to pick the one that fits your long term goal.

My experience taught me that numbers lie. On paper things looks much better than reality and internet forums and HGTV makes everything looks easy. However, life happens and when time comes to deal with the reality of being a landlord, do you want 10 properties scatters across town or 1 property in one place?

When you sell a 3 units, do you have control over the price? Nope, it will still be subjected to CMA and whatever other owner decided (or needed) to sell for.

just my .02

Tom Shelby · Answer

Thanks guys, I appreciate the replies.  I agree talking to a commercial broker is definitely the next step to realize what is actually possible.  My current cashflow situation is positive on both properties.  $700/mo on A and $1800/mo on B.  Property A has more equity but lower CF due to CH.13 Bankruptcy with "cramdown".  Remaining balance is approximately 120,000 and is still amortizing on a 30 year schedule.  This property would be payed off in 8-9 years as a result.  Yes I agree the returns on the smaller multis in general do seem to be higher, depending on the property of course.  The bigger 30 unit complexes I've been looking at in the 1.5m range mostly have cap rates in the 10% range, whereas some 6 unit properties in my area go in the 250,000 range and have cap rates in the 15-20% range.  Obviously from a pure ROI perspective these make more sense and this had been the direction I was heading, but reading a lot on these forums you seem to see a lot of people saying "Go big early, or as soon as you can" for various reasons.  I also like the idea of having as many units under one roof as possible.  Which has led me to question if I am looking at this the right way or not.  Thanks

Sam LLoyd · Answer

The information we don't have is what your cash-flow situation is now, and what returns would be expected on the large multi.  In some markets, the triplexes will give you a better return on your equity than the multi, in which case there's no reason to go after the large multi unless you can use other people's money.... Maybe you should pull the equity out of A and get another triplex?

@Joseph Gozlan is correct though, the first step is to get your options on the table.  For example, I have a great credit score and cash-flow situation, but I can't get a HELOC because of how the banks I've talked with play with my debt to income.... so verify if that's even an option.  Good luck.

Joseph Gozlan · Answer

@Tom Shelby I'd start with finding a local community bank or credit union and get friendly with the commercial banker there.

He/she can help you understand if you would even qualify for a loan and if you would then what'd be the best strategy to go about it.

Some local bank will also agree to do cross-collateral loans and in that case you won't even have to go through the refi process.