$1 million in equity and "only" making 56-64k a year.

Multi-Family and Apartment Investing
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$1 million in equity and "only" making 56-64k a year.

Casey Miles
Investor · Mesa, AZ · Member since 2014 · 176 posts · 54 votes

Hello Everyone,

I think it's time for a change.

I really want to keep my post on topic. If you have questions or want to debate CAP rates, cash on cash, etc. please shoot me a message and we can go from there.

A little history. I started investing in RE in roughly 2009 in the Phoenix market as that's where I'm from. I bought property that according to me was a "deal" at the time. I literally have property spread out all over the Phoenix market.  I didn't give much thought into capitalizing on my resources by keeping investments to one area. I have roughly 10 properties equating to 18 residential doors and 4 commercial office spaces. I've always had the goal of buying more and building my wealth via RE. Keep in mind that wealth can be $ or wealth in time. I don't need to be "rich" in $ but I want to have enough to support my current life style which I think is modest for my wife and I AND not have to work for The Man any longer (I still work a 9-5)

As my post indicates, conservatively after commission, etc. I think I have +/- $1mm in equity not including my personal residence. I make roughly, after PITI, maintenance, vacancy and CAPEX roughly 56-64k a year and that's with me managing everything. If I had a management company take $20k away from that. Now I know I'm gaining in equity every year due to growth so obviously my IRR is better than what I'm portraying. However, for right now, my money isn't working hard enough for me. I currently still work full time AND manage all my RE. When I started investing CAP rates were @ 9-10% and COC was 20-25%. I know I'm not going to see that now but this 3-5% is for the birds.

Time for a change! I think what I want to do is sell everything and 1031 the equity into 1-2 Class B/C apartment buildings. I want to stick to apartments, especially B/C properties, because I feel it's a safer investment during economical downturns. This seems really tricky because of the timing of selling everything. I guess I can make all the contracts 1031 contingent so they all close fairly close to one another? My goal is make a cash on cash of 12% AND have at least 3% year over year growth in property value (20 year average) AND not terribly risk my initial investment. Am I trying to find a unicorn? Syndication makes me uneasy just because it seems like you could lose everything? At least if I buy the property myself (or JV) I still always have the property if things go south. Plus I'm told I can't 1031 into a syndication.

I'm open to suggestions and brainstorming. I learned a lot from this forum and here I am coming back to the well. 

Thanks in advance!

Casey

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Salvatore Lentini
Rental Property Investor · Doylestown, PA · Member since 2008 · 1k+ posts · 1k+ votes
9y

@Casey Miles Not sure how much equity you have but what about a cash out refi on your portfolio?  That way you keep what you have an add to it with a large multi family?

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  • Christie Gahan
    Investor · Hillsboro, OR · Member since 2016 · 310 posts · 153 votes
    9y

    Do you have a really great accountant that can brainstorm with you ? Time to find one or more. This sounds like it might be a 2 -5 year plan. Have you considered being a HML ? Or, selling with owner financing ?

    0Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    9y

    @Drew Shirley, the entity he currently owns the properties in is not the problem. As a matter of fact if he wanted get them all into one LLC he would need to do that well in advance (a year or so) prior to sale so the IRS doesn't challenge the exchange on intent.

    The real issue is on the replacement side. The LLC is still a taxpaying entity selling real estate. So it would also have to purchase investment real estate interest to complete the 1031. Hence again the LP syndication issue. His LLC would sell real estate but would be buying an interest in a partnership.

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  • Ben Zimmerman
    Rental Property Investor · Raleigh, NC · Member since 2016 · 396 posts · 995 votes
    9y

    Everyone has different goals, and ways to accomplish them.  After reading your post a few times, things such as "I don't need to be rich, but..., I don't wan to work for the Man, I currently work full time AND manage RE, I want to support my current modest lifestyle."  really started to stick out to me.  Not everyone in life wants to be Trump, some people just want a solid passive lifestyle that allows them to enjoy life instead of stress over it.

    Phoenix doesn't have great rent to value ratios, so you will always be asset heavy, and light on cashflow.  Consolidating into more cashflow friendly multiunit commercial buildings is certainly one way to go about increasing your cashflow, but as you have noticed that comes with it's own set of difficulties. 

    A second possible solution, and one that isn't often touted on these forums, is to simply consolidate and pay off what you currently have.  The amount of leverage used is inversely proportional to the amount of cashflow you will receive.  Therefor selling some of your non performing assets, or places that are geographically far from your residence (you mentioned they are scattered all over the valley) and paying off the loans on a few of your existing properties, thereby decreasing your leverage could help you in two ways. 

    First, you will be able to relax a little.  Instead of managing 18 doors and 4 commercial spaces, if you could consolidate into 10ish fully paid off units it would reduce the amount of time and effort put into managing your properties, allowing you to spend more time with the family.  It would also reduce your management costs when you do decide to fully retire as you now only have a handful of properties for them to watch over.

    Second, this will increase your cash flow significantly.  I don't know what price points you currently rent at, but if you had 10 doors free and clear at 1250 a month, that would bring in 150k, which should be at your yearly goal of 100-120k once you deduct expected capex, vacancies, and property taxes ect.

    While this does obviously slow down future growth rates, if ~100k is your magical number to be able to live a happy and content life then this is probably the easiest way to get there.  Although you can likely find a better balancing ratio then simply having ALL of your properties free and clear, between having a few homes fully paid for and a few that are leveraged that will give you essentially the financial returns you are looking for and still have room for future growth.

    6Reply
  • Mike Dymski
    Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
    9y

    Hey Casey. Nice post...great condor and an important decision. And nice work on not ignoring your current ROE by focusing on your past ROI.

    It sounds as if your strategy has been successful and that you have reached the intended exit point (either that or your strategy has changed).  Appreciation plays do that and you're either in it for the very long term (predictable) appreciation or you have to exit in an appreciated market...it's part of the strategy from day one.

    I have been re-allocating capital from some appreciation plays to assets with more cash flow including both a small C+/B- apartment community and passive syndications in MHPs and dollar stores (and looking at self-storage).  I will buy a larger value add apartment community if I can find one that meets my criteria but that may not happen and won't happen if I deploy more capital passively.

    It also does not have to be an all or none re-allocation.  Strategy shifts can take some time to think though and to execute.  Good luck and keep us posted.

    0Reply
  • Eric Bilderback
    Real Estate Agent · Sisters, OR · Member since 2014 · 1k+ posts · 1k+ votes
    9y

    @Joel Owens

    Would you suggest holding off on refinancing a property to pull your equity out?  In order to reinvest it.  

    I am just not seeing much that is worth getting more leveraged for and I think you are saying the same thing.  Correct?

    0Reply
  • Taylor Chiu
    Real Estate Agent · Salt Lake City, UT · Member since 2014 · 473 posts · 230 votes
    9y

    I agree with @Ben Zimmerman, have you considered snowballing payments on your existing properties to get them free and clear? You'll accomplish both goals of higher cash flow and less risk. And you can even do lines of credit if you want to throw some money back into the ring of higher returns through larger multifamilies.

    0Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    9y

    Eric it depends on what investment opportunities are available to you and asset class.

    Some clients in Oregon are getting 3 or 4 percent. Easy to beat that in other states for commercial. 

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  • Paul B.
    Rental Property Investor · Dallas, TX · Member since 2015 · 503 posts · 504 votes
    9y
    Originally posted by @Ryan Fortier:

    Also, for that 4M commercial building with a 3M commercial loan, your net worth has to equal or exceed the loan amount.

    Also, my understanding is that you usually need "post-closing liquidity" of something like 10% of the loan amount, or maybe nine months debt service. That means you can't put your entire savings into the deal. You've got to have something left over. 

    Disclaimer: I don't have first-hand experience with commercial loans. I only know anything because I have invested with people who do.

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  • Matt R.
    Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
    9y

    What is the YOY equity gain from appreciation? This number should be added to your ROE minus sale cost and taxes as if you were going to sell.

    I don't know if it makes sense to do anything yet. It hardly makes sense to exchange good investments as is for perhaps lessor investments that only account for cash flow vs real life equity growth + cash flow growth.  

    If every investor exchanged when cash flow did not grow as fast as equity growth immediately the entire state of California would be for sale. 

    REI wealth is also created by holding appreciating assets long term/multiple cycles.

    Good luck!

    0Reply
  • Jarrod Kohl
    Boston, MA · Member since 2017 · 209 posts · 126 votes
    9y
    Originally posted by @Taylor Chiu:

    I agree with @Ben Zimmerman, have you considered snowballing payments on your existing properties to get them free and clear? You'll accomplish both goals of higher cash flow and less risk. And you can even do lines of credit if you want to throw some money back into the ring of higher returns through larger multifamilies.

     I would look at this as an option.  If you do have X properties and a few of them are farther away.  Perhaps mix it up a little.  Sell one or two that are either under-performing, or just a long ways away. Pay off some of your favorite properties. I would also say rather than trying to get 1-2 big buildings, perhaps look at trading in for slightly larger but more central multis.  See if there are any deals in the 8-20 unit building ranges, sometimes those can be great, too small for the big players and too big for the small guys.

    Also (and I am Biased) you should totally get a (great) property manager, it would make your life a lot easier.

    1Reply
  • Michael Swan
    Rental Property Investor · San Diego, CA · Member since 2014 · 1k+ posts · 2k+ votes
    9y

    Hi @Casey Miles

    It is problematic trying to mix 1031 money into deals with others.  This is especially the case with programs out their that syndicate etc...  Since Multifamily is SOOOOOOOOOOO different in almost every aspect than 1-4 units, I really wanted to learn and invest with programs or people that I trusted and had an excellent track record that have already learned and don't make rookie mistakes any longer. 

    I did all my 1031 Exchanges since 2015, into 109 front doors presently on my own and boy that was a painful learning experience on my first two 1031 exchanges for a 10 unit and an 8 unit in Ohio.  Those went bad really fast.  I am selling those first two at a drastic discount, due to a variety of factors, primarily I at first did not know what I was doing and I could not mix my 1031 money in with proven programs.

    The ones that I followed David Lindahl's Multifamily Millions book, where he gives step by step instructions on how to reposition value plays worked out amazingly well.  I thought I would be safe with my first two 1031 exchanges and invest in what I thought were yield plays and if you are wrong and things go bad real fast, you overpay dramatically and then that snowballs really quickly.

    Maybe it would be better to refinance, take out equity, tax free and invest as a passive, where someone can teach you everything, step by step and then you can fly free on the rest.  Feel free to reach out to me.  Go to my profile and I would love to talk to you.  That goes for anyone on BP.  Many have reached out to me and I have helped quite a few BP members get a plan.  Listen to the podcast with Brandon and Scott trench 238 where I was a guest.

    Swanny

    2Reply
  • Casey Miles
    OP
    Investor · Mesa, AZ · Member since 2014 · 176 posts · 54 votes
    9y

    Hi @Matt R.,

    I haven't calculated my YOY equity gain. You'll notice in my first post that I mention this. I know that appreciation and equity gain really separate the boys from the men in RE. However my thought was that if I'm sitting on a little over 2m in real estate and have roughly 1m in equity (after fees/closing costs) and I possibly leverage that via 1031 exchange into 4m worth of property now I have 4m gaining at X growth VS 2m gaining at X growth. A lot more analyzing needs to be done but isn't that the meat and potatoes of it? I guess different asset classes appreciate at different rates so I'd have to consider that.

    So at the very least maybe I'm trading cash flow (not gaining) but my appreciation is against 4m vs 2m. What am I missing?

    Thanks Matt,

    1Reply
  • Casey Miles
    OP
    Investor · Mesa, AZ · Member since 2014 · 176 posts · 54 votes
    9y

    @Michael Swan Thanks for the info. I'm leaning towards doing HELOCs on my existing properties and buying more. It's already what I am doing I would just need to scale it. Currently I only have HELOCs on two. Boy do the appraisers play it safe when it comes refinance/HELOCs! At least around here they do. That's why I was considering selling and 1031ing into something else. I'll still have the dead equity problem (although not as much as I do now) with refinancing/HELOCs but it'll still be an issue compared to selling.

    0Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    9y

    @Casey Miles, potato potato.  Just don't call it dead equity.  Call it a recessionary cushion!  Good plan.

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  • Matt R.
    Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
    9y

    Right on. You seem like you know exactly what you are doing. At least we can understand what got you to 2 mil values and apply accordingly. IMO from afar you are not missing anything currently. Understanding, I come from LA. Folks can do redev here and make 8 figures. 

    Good luck! 

    0Reply
  • Casey Miles
    OP
    Investor · Mesa, AZ · Member since 2014 · 176 posts · 54 votes
    9y

    @Matt R.

    Thanks man. I appreciate your time, really. I wish I had the stomach for CA real estate but i'll leave that to the big fish.

    Take care,

    Casey

    0Reply
  • Paul B.
    Rental Property Investor · Dallas, TX · Member since 2015 · 503 posts · 504 votes
    9y
    Originally posted by @Dave Foster:

    @Casey Miles, potato potato.  Just don't call it dead equity.  Call it a recessionary cushion!  Good plan.

    Recessionary cushion. I like that. There is a frequent poster on this site who says you have to calculate 10% annual opportunity cost on any equity you have in a property. In other words, he would say that the OP here is "losing" between 36-44K a year because he is not even making 10% on his equity. While he does have a point, I just think that's far too aggressive.

    1Reply
  • Jeff Kehl
    Rental Property Investor · Charlottesville, VA · Member since 2012 · 1k+ posts · 726 votes
    9y

    @Casey Miles I don't think there's an easy or good way to do what you're looking to do. I have your same problem on a bigger scale because I have more properties. What I do is to evaluate all my properties periodically and look for dead equity. I take the top few properties with that problem and look to re-position them.

    I'm looking to either refinance or sell them and trade them up to something bigger. My favorite thing to do is to refinance because I get the equity out AND I get to keep the property. I use a property management company so the work doesn't matter.

    But sometimes I will just sell because if I refinance it to it's current value it wouldn't make good sense as a rental anymore because it has appreciated so much.

    Typically I am seeing this in SFRs. So, as an example, I've sold 2 SFRs recently but I'm refinancing 2 4-plexes because they still cash-flow really well after the refinance.

    When selling an SFR, I would love to 1031 into a bigger property but I'm not finding they trade up very easily into something bigger so I am just paying the tax. Sell a few per year and the tax is not a big deal and you can build up your liquid cash over time.

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