Green behind the ears but already building portfolio... questions

16 Replies

My wife and I have been slowly but surely acquiring some properties over the past several years. And I'll be the first to tell you we have next to no real education on the matter. We just kind of picked up the places here and there either through knowing the right person or just being in the right place at the right time.

It's been just recently that I decided that I wanted this to be a major source of income for us and so I've dedicated myself to getting a proper education on the topic (any advice for further reading is greatly appreciated. Already been through Rich dad..., Brandon's book, and a few others.) So bear with me and please excuse any questions or lack of knowledge that seem like I should know the answers to already.

We currently have about 7 properties.  Two commercial (four tenants total) and 5 res (5 tenants total) with a total value around $1M. Plus our house we live in. Our monthly cash flow after expenses and maintenance (and there are a lot of those) is around $5-6k. That all goes straight in to savings and toward whatever next prop we want to buy. We currently have no loans outstanding on any of the props.

What I think we should do next is consolidate these props and use the money we could get from selling them all as a down payment for a much larger, perhaps multi unit apartment complex. That way, we'd be turning 7 or 8 doors in to potentially 15-20-30 doors we are collecting rent from.

What I would like to ask of the experts of the forums is... what am I not thinking of? What else do I need to consider? Am I even in the right ballpark with what I think we should do next? Please remember, I am mostly a complete newbie when it comes to terminology and strategy, so if you could break down any advice accordingly, I would much appreciate it. Thank you in advance!

@Evan Oxenhandler Congratulations and welcome to BP; you are going to love it here! I would suggest you evaluate the return on your current assets before you think about selling. 

If they are positive performers you might consider keeping them and using them as collateral to raise capital for your future properties. 

Selling is of course an alternative; selling costs money and why sell winners. In this market don't use too much leverage and keep some cash available as reserves. All the best!

@Evan Oxenhandler since you mentioned you lack education in multifamily, I would educate myself with books and courses. There are plenty of free resources available, but Michael Blank's "Financial Freedom with Real Estate Investing" gets you multifamily investing basics. Once you have some basic information and you are able to audit multifamily properties, you'll figure out quickly how the financing will work, what returns to expect and whether you can be in better position (financially) with upgrading to 30+ doors than just keeping your paid off rental portfolio. Another alternative is to not sell your current portfolio, refinance it and use cash out proceeds as downpayment for larger units.

For not having any RE education I congratulate you and your wife for acquiring the portfolio you currently have. Well done!

I'd be curious to know what your return is at $5-6k per month.  Obviously, you don't have $1M into the property.  You wrote that you have no loans on your portfolio. I'm guessing here; if you've invested $500k then you're getting between 12-14% (at $6k cashflow), which is good.

My advice would be not to consolidate, primarily because you have a lot of equity in your portfolio which you can easily use for leverage to purchase additional properties.  Best route would be to pursue the cash-out REFI option as @Jerry Padilla wrote. 

I'd recommend that you study up on healthy LTV (loan to value) and come up with a percentage that you feel comfortable at. You're currently at zero. Most RE investors are happy at 80%. Personally, I'm between 30-50% with my properties. Also, since you're worth $1M, I'd advise that you study up on Asset Protection and make sure you're protected.

I may consider pulling some equity out of the houses if you have a specific deal in mind, but would leave the commercial free and clear.  Commercial loans have calls and adjustable rates and make you submit your financials to them every year like you're back in HS or something. 

I have a low leverage portfolio as well.  My average and acceptable ROE is 7%, which looks to be about where you're at.  At this stage of my market cycle I've been selling off a headache house or 2 each year by owner as they become vacant.  Evaluate case by case and know how the sale will impact your tax situation.  So far I haven't had to do a 1031 selling smalls slowly.  

I'd sit tight unless a specific awesome opportunity presents itself, there is something specifically negative pending or going on in your market or if those high maintenance/repair properties are causing indigestion and missed naps.

@Evan Oxenhandler

It's been just recently that I decided that I wanted this to be a major
source of income for us and so I've dedicated myself to getting a proper
education on the topic (any advice for further reading is greatly
appreciated. Already been through Rich dad..., Brandon's book, and a few
others.)  (There's a ton of material out there. What's your main focus multifamily or single family?)

What I would like to ask of the experts of the forums is... what am I
not thinking of? (You're headed in the right direction. The larger you go the less risk you because it's spread out over many doors)

What else do I need to consider? (Getting a valuable education before making that next move up to larger purchases. It's different ball game at that point)

Am I even in the right ballpark with what I think we should do next? (You're totally in the right ball park. Now what you need is a solid foundation, which will be your education. There are many books, podcasts and seminars/bootcamps you can attend to gain a better understanding of what it is you're looking to focus on)

@Evan Oxenhandler

Hi keep reading and listening

to them on YouTube I'm trying to expand my self and right now I'm pretty much living and breathing realestate one of many reason why I joined biggerpockets because people around me that are not intrested don't wanna talk about lol

@Evan Oxenhandler - congratulations on building a solid portfolio... without outstanding debt!

Now is the time in the cycle to "harvest the equity" from your properties. Personally, if I were in your shoes, my first thought would be to refi, since rates are so strong right now. If the properties are located in strong markets and pencil out as performing rentals for the forseeable future, I would hold on to them. Pull the cash out of those properties with refi's, build a warchest for investment once the impacts of the next correction take hold.

@Evan Oxenhandler , I would likely keep the properties you currently have and leverage them as the down payment on as large of unit apartment building/complex as it would allow.

The exception would be to sell any of the “less desirable “ units now (after identifying the prospective new apartment), at the peak of the market, and 1031 exchange that/those into the new property.

Best of luck!

Originally posted by @Gina Cardarella :

@Evan Oxenhandler

Hi keep reading and listening

to them on YouTube I'm trying to expand my self and right now I'm pretty much living and breathing realestate one of many reason why I joined biggerpockets because people around me that are not intrested don't wanna talk about lol

 Not necessarily a bad thing that they don't want to talk about it. It's best to keep business and pleasure separate, especially in a volatile business like real estate.

@EvanOxenhandler

Great job in accumulating the cash flowing properties you already have. You're definitely on the right track in seeking more education. I'd recommend Ken McElroy's book "The ABC's of Real Estate Investing" as a good place to start. There are some great tools and tips for moving into larger properties. While you learn and build a team to help you succeed at the next level you might want to think about value add opportunities for your current properties that would increase long term cash flow or improve your cash-out/sell position later.

@Bjorn Ahlblad @Amir Khan @Jerry Padilla @Matthew McNeil @Spencer Hilligoss @Brett Lee

Thank you all so much for your input and advice. A lot seem to be suggesting using cash-out refinancing as a way to leverage the equity we have in our properties to help pay for new ones.

So if I have a property worth $100k (regardless of what I spent for it, lets say $80k for the sake of example), and no loans on the place, my understanding is that I could go to a bank and get a loan for about 80% of what it's worth (that way I'd get back all of what I put into it. But it may not always work that nicely). Then use that $80k to put as a down payment on a new place, and use the rental income from the new place to pay down the $80k loan. Do I have this basically right so far?

I could either use the $80k loan to pay cash for a place and own the whole thing, or use the $80k as a down payment for a place worth $400k (assuming $80k is a 20% down payment). Which is better? Do I want to turn 0 loans in to 2 loans? Won't my interest rates be much higher on loans like this as opposed to a traditional mortgage? Do I need to be concerned about that?

If the original property is just sitting there completely paid off, am I wasting the equity I have in it by not using the cash-out refi method, or doing something with it, and just pocketing 100% of the rental income (minus expenses)? What are some benefits or drawbacks to having a completely paid off portfolio? Do some investors do that? Or does everyone get to a point where they need to roll equity in to loan in to equity in to loan in order to grow?

Thanks for all your expertise and taking the time to answer my newbie questions!

@Evan Oxenhandler

For conventional, you can do a cash out refinance on investment properties up to 75% LTV for an investment property and up to 70% LTV on a multi-family property, based on appraised value.

Cash out refinances do have higher rates than purchases. 

I see many clients/investors using the cash out method to purchase more properties....... Although, I won’t see the ones that aren’t cashing out or that are using just cash to purchase. 

@James Wise

I know what you mean James but my friends are older and they're not doing well with working 12 hour days and yet they're not trying to better themselves which means I'm going to have to leave them behind lol I'm not going to support them in their seventies and they have a chance to do exactly what I'm doing trying and they do nothing