Refinance rental property for stocks

15 Replies

Hey guys, first post here. Today I was speaking with a friend about maximizing cash flow on my rental properties and he came up with a BRRR method minus the last R and I thought it seemed like a good idea.

I currently have 2 rental properties and both are paid for.

One is a small house that I have about 15k into and it cashflows about 500 per month.

The other is a quadplex that I have about 70k into and it cash flows between 800 and 1500 per month (one room is an airbnb).

Would it make sense to take a loan against each house for max value (assuming I could get 120k total) and invest it in something like S&P500? Basic math with a 10% return and keeping dividends seems like it would increase cash flow by a few hundred dollars per month just to get a mortgage on them. Am I missing anything here or would this be a good option? Thanks in advance for your opinions/ideas!

One last thing, I'm looking to increase my cash flow more passively than buying another property. I know I would make more with real estate but I would like to get my feet wet with some stocks and could use some guidance.

The S&P500, on average, will pay out around 2.5% in dividends year over year. Say you got pre-approved for the mortgage and you are able to take out the $140,000. Say you invest it into the S&P500. On average you will make $3,500 yearly... Yikes! Now let's say you chose to invest that lump sum into Vanguard High Dividend Yield ETF. Vanguard High Dividend Yield ETF on average will pay out around 4.53% in dividends year over year... Almost double... But still not the best for cash flow. In my opinion, you should refinance out depending on your market, buy a few single-family homes, if your DTI allows, and run them as STR's. You already know how to make money in real estate... Now it's time to scale.


Also, I don't know if you factored this in but getting a mortgage on your homes will significantly decrease your cash flow, not to say you shouldn't do it.

@Chase Lowry thanks for the reply!

Pardon my ignorance when it comes to stocks and dividends. People talk about a 10% return on stocks like that and I always related that it dividends. So the value of the stock increases by 10% on average but your dividend return is much less?

No, no and NO. You're completely missing the main reason REI is the best investment vehicle...leverage. The fact that you have two properties paid off tells me you don't understand this. You have $120k in total Property Value, and the same in equity...which means you're losing money. Why? Here's how:

1 - When you buy all cash, your equity is equal to the PV..as in a 1 to 1 ratio.  In other words, your cash got you a PV equal to what you paid for it.  When you buy using leverage, you can take that same cash ($120k) and buy a property worth 5 times that amount (in this case = $600k).  If your CF were to be cut in half on the original properties, you would most likely be able to increase your total CF by 5 times that of the new reduced CF.  This means the total new CF should be 2.5 times that of what you have now.

2 - Percentages lie when you are comparing the SM to REI. See #1 above. If the SM had a multiplier of 10%/year, and the RE had only 5%, if you did #1 above, you would end up with a return the first year of the following:

     A - SM:  $120k x 10% = $12k;  New total = $132K
B - REI: $600K x 5% = $30k; New total = $630k
...and, thanks to the power of compounding, every year after year 1, the spread between the two gets wider....in favor of REI.

Definitely refinance it out especially if you can handle the higher mortgage and it won't put a strain on your finances, make sure you have lots of reserves, it is risky to some but I think a great idea

@Trent M.

99% of all REI investors want to be where you are. Two deals under your belt. You have gotten past the Big One, jumping off the cliff and getting in.

Thus something is wrong. You have gotten past the hardest part of REI. Financial Independence doesn't seem to be a target for you. Plus your investments are fully paid off, as noted above, that doesn't fit with REI, which is about leverage.

You might be a Med student who is just starting their Internship, and wants to dedicate themselves to their career. Could be a MLB player who just got called up. Who knows. Not going to try to convince you to stay in REI.

So lets do Stocks.  You want a 10% return.  Although you said the S&P500, lets use the Dow since more people have a historical sense of it.

34,000 Today.

37,400  10% year from now

41,140  10% 2 years from now

45,254  10% 3 years from now

You got to love compounding on a spreadsheet.  This assumes you don't take any out and don't pay taxes "yet".

But lets go back to the S&P500 and lets reference it since you mentioned investing in it. Currently the P/E for the S&P500 is say 37. That means the Price is $37 versus an earnings of $1 before tax. Used dollars as a reference point. Lets tax affect it, whereas for REI, I would try not to pay taxes (1031, Die, Refi- cash out). Tax affected P/E ratio is 37/.75= 49, we will call it 50 to make the following math easy.

Lets compare it against REI. For magnitude several options for REI investments.

$50,000 investment and annual return of $1,000  Appreciation and cash flow

$100,000 investment and annual return of $2,000

$200,000 investment and annual return of $4,000

$300,000 investment and annual return of $6,000.

Summary:

If you expect the Dow to reach 45,000 from 34,000 then you should invest in the Stock Market.  Please note the S&P 500 has been three times higher than it is right.  Make sure you understand what caused that home run.

If your rental properties, both Appreciation and Cash flow are making less than $6,000 on a $300,000 investment, then you should divest into the stock market, disregarding the tax implications.

Realize you want a less Passive investment and a lot of the BP team could point you to solutions on your current investments.  But that doesn't seem to be your objective.  

If it was me and I wanted to get out of REI, I would go totally to cash immediately. Do you have the strength to "Sit" on it for about 3 years? Then pick up the pieces after a financial downturn.

Options:

1. The economy was already hot. Now throw $3 Trillion of gas on it with Transportation, Covid, Shipping and Labor issues, we will go into hyper inflation. Great time to buy long term bonds at 18% interest. My worst financial decision ever was not dropping out of college and doing $2,000 per year IRA's at 18% fixed. Problem, your sitting on Cash, which will devalue.

2.  Go to silver when it hits $14 again and then sell at $25, 1 year later.  Not Gold.  This play only occurs about every 10 years, thus you need a job so you don't get bored.

3.  Invest in ?????, but that takes a totally different skill set than any of the above options.

Thanks for all of the information everybody!

It appears by far my best option would be to use my equity to purchase more real estate which is what I'm going to do when I find another deal

@Trent M. Good choice, with leverage it is a much better option, glad you saw the majority view, I have had a few people ask me the same question and they usually wanted to be super passive and realized RE wasn’t as passive as they thought, only reason I said stocks wouldn’t be bad. Either way you are doing great 👍

Originally posted by @Henry Clark :

@Trent M.

99% of all REI investors want to be where you are. Two deals under your belt. You have gotten past the Big One, jumping off the cliff and getting in.

Thus something is wrong. You have gotten past the hardest part of REI. Financial Independence doesn't seem to be a target for you. Plus your investments are fully paid off, as noted above, that doesn't fit with REI, which is about leverage.

You might be a Med student who is just starting their Internship, and wants to dedicate themselves to their career. Could be a MLB player who just got called up. Who knows. Not going to try to convince you to stay in REI.

So lets do Stocks.  You want a 10% return.  Although you said the S&P500, lets use the Dow since more people have a historical sense of it.

34,000 Today.

37,400  10% year from now

41,140  10% 2 years from now

45,254  10% 3 years from now

You got to love compounding on a spreadsheet.  This assumes you don't take any out and don't pay taxes "yet".

But lets go back to the S&P500 and lets reference it since you mentioned investing in it. Currently the P/E for the S&P500 is say 37. That means the Price is $37 versus an earnings of $1 before tax. Used dollars as a reference point. Lets tax affect it, whereas for REI, I would try not to pay taxes (1031, Die, Refi- cash out). Tax affected P/E ratio is 37/.75= 49, we will call it 50 to make the following math easy.

Lets compare it against REI. For magnitude several options for REI investments.

$50,000 investment and annual return of $1,000  Appreciation and cash flow

$100,000 investment and annual return of $2,000

$200,000 investment and annual return of $4,000

$300,000 investment and annual return of $6,000.

Summary:

If you expect the Dow to reach 45,000 from 34,000 then you should invest in the Stock Market.  Please note the S&P 500 has been three times higher than it is right.  Make sure you understand what caused that home run.

If your rental properties, both Appreciation and Cash flow are making less than $6,000 on a $300,000 investment, then you should divest into the stock market, disregarding the tax implications.

Realize you want a less Passive investment and a lot of the BP team could point you to solutions on your current investments.  But that doesn't seem to be your objective.  

If it was me and I wanted to get out of REI, I would go totally to cash immediately. Do you have the strength to "Sit" on it for about 3 years? Then pick up the pieces after a financial downturn.

Options:

1. The economy was already hot. Now throw $3 Trillion of gas on it with Transportation, Covid, Shipping and Labor issues, we will go into hyper inflation. Great time to buy long term bonds at 18% interest. My worst financial decision ever was not dropping out of college and doing $2,000 per year IRA's at 18% fixed. Problem, your sitting on Cash, which will devalue.

2.  Go to silver when it hits $14 again and then sell at $25, 1 year later.  Not Gold.  This play only occurs about every 10 years, thus you need a job so you don't get bored.

3.  Invest in ?????, but that takes a totally different skill set than any of the above options.

One problem with your analysis comparison with REI...and it's a big one,...make that a huge one. You're buying RE at 20% of the actual value, and you never considered that in your comparison. The return you are giving RE is only 2% per year..including CF and appreciation. On what planet would any self respecting REI ever accept that as an annual return? It should be at least 5%. Besides, even if that was the case, you're basing the return on the cash spent, not the property value when spent. It you spent $50k, you would be buying a property worth $250k, and that ridiculous 2% return would end up being $5k, NOT $1k in that first year. 10% return on that same $50k invested in the SM (your number) would get you the same $5k.

@Joe Villeneuve

Your totally correct.

But in this instance as you noted, @Trent M. has his properties fully paid off.  He plans to take it out 100%. The math you note, is not "his" situation or values.

My point to him is to stay invested in REI.

Sidenote,  I greatly appreciate all of your BP insights. 

Originally posted by @Henry Clark :

@Joe Villeneuve

Your totally correct.

But in this instance as you noted, @Trent M. has his properties fully paid off.  He plans to take it out 100%. The math you note, is not "his" situation or values.

My point to him is to stay invested in REI.

Sidenote,  I greatly appreciate all of your BP insights. 

 As you stated in your original post, isn't "compounding a wonderful thing".

Always fun reading threads here on BP to see different perspectives. 

Your question is really "Should I borrow money against my real estate investments and invest it into the stock market instead?"   As this is a real estate forum, one would naturally expect the majority of responses to be more pro-RE and stock market averse.  Funny thing is, the same question posed on stock market forums in inverse form would elicit a strong response where people would not touch real estate with a ten foot pole.  Google "stock market vs real estate" if you want to see people compare the pros/cons.  

I would suggest that if you want to give the stock market a try, open a brokerage account funded with a small amount to get your feet wet.  Then start reading and learning, and decide if trading is for you.  I finally did, in January of this year, and have been enjoying it immensely.  You might even find that you gravitate more towards one investment vehicle vs the other.  

You might be surprised to find you can buy reasonably priced shares of a covered call ETF which pay you a near 1% monthly dividend (QYLD).  Or if you want to be more hands on, you can sell/trade options, and earn 1-2% weekly (cash secured put/covered call strategy).  All without having to scour for deals, deal with tenants, appraisals, closing costs, screenings, evictions, repairs, and the like.  And if you decided it's not for you, you could have your capital liquidated within minutes versus dealing with repairs, paying realtor, escrow, title fees, and waiting for a buyer.  

And, the leverage you use for RE deals can be similarly found in the stock market. It's called margin, and should be used wisely.

I am not recommending one vs the other, as I am now invested in both, and I think there is money to be made both ways.  Just a few thoughts from someone who has also spent hours reading/comparing.

Originally posted by @Bogdan V. :

Always fun reading threads here on BP to see different perspectives. 

Your question is really "Should I borrow money against my real estate investments and invest it into the stock market instead?"   As this is a real estate forum, one would naturally expect the majority of responses to be more pro-RE and stock market averse.  Funny thing is, the same question posed on stock market forums in inverse form would elicit a strong response where people would not touch real estate with a ten foot pole.  Google "stock market vs real estate" if you want to see people compare the pros/cons.  

I would suggest that if you want to give the stock market a try, open a brokerage account funded with a small amount to get your feet wet.  Then start reading and learning, and decide if trading is for you.  I finally did, in January of this year, and have been enjoying it immensely.  You might even find that you gravitate more towards one investment vehicle vs the other.  

You might be surprised to find you can buy reasonably priced shares of a covered call ETF which pay you a near 1% monthly dividend (QYLD).  Or if you want to be more hands on, you can sell/trade options, and earn 1-2% weekly (cash secured put/covered call strategy).  All without having to scour for deals, deal with tenants, appraisals, closing costs, screenings, evictions, repairs, and the like.  And if you decided it's not for you, you could have your capital liquidated within minutes versus dealing with repairs, paying realtor, escrow, title fees, and waiting for a buyer.  

And, the leverage you use for RE deals can be similarly found in the stock market. It's called margin, and should be used wisely.

I am not recommending one vs the other, as I am now invested in both, and I think there is money to be made both ways.  Just a few thoughts from someone who has also spent hours reading/comparing.

 Margin and leverage are not the same thing.  Both are similar, but you can't hold a stock on margin for 30 years.

Why not ?  I was under the impression that as long as you are satisfying your broker's margin requirements and paying the necessary interest fees, I don't see why you could not?  Whether it's a good idea or not, is another question. 

I do know that there are plenty of people buying QYLD/similar on margin, paying 1-3% interest annually, and earning 10-12% annually, in dividends, while not lifting a finger.  Would you not consider that to be leverage?  Sure there is limited/no appreciation, but I believe passive income was what the OP was after ?

@Trent M.

As your last sentence says, you would like to get your feet wet on Stocks. Recommend the following. Best way to learn Stocks/Bonds or REI. Pick a dollar number that if you lose it all, you will say "Ouch"; but it does not impact your life. My number at the time was $2,000. Then start trading it. Don't recommend you do Long term hold or day trading. This is not a financial comment, but if you will research and trade on Short term plays, you will learn more about the Stock market. You might hold a stock or Bond position for a week or 3 months. This will create more of a learning moment.

How did I do?  Over a 2 year period I was the greatest Stock trader in the world.  Made profit on all of my 19 trades.  LOST it all on my 20th.  I was wanting to learn about Stocks/Bonds just like you. 

Lessons learned:  A.  Almost everybody makes money on a market going up.,  B.  Your investment can go to zero.  Mine went to 1/2, then a week later went to zero., C.  The people running these big companies aren't as smart as I thought.  I can tell you these lessons, but like what does "hot" mean, its better you touch the fire; you will learn it better.  Which I did.  

I stayed in Stocks after that. Until the last 7 years, I got into REI and have been in it ever since. Moved out of my Stock positions and even 401k. Don't recommend you do it, unless you get to that decision point on your own. REI has the benefit of Leverage (no margin calls, as long as you lock in your Debt) and Tax Avoidance.

@Bogdan V.

Please explain to Trent the math behind a Margin Call.  Use 10%/20%/30%/50% market declines as an example.  Use a beginning $100,000 investment.  Take him through a normal 20 year Stock market cycle of ups and downs.  This will be very educational for him on how much "Stomach" he will need.  It truly is Champagne for Breakfast and homeless puking the next morning.  Most people who are playing margins have huge computers and are trading in and out every day for a $.15 per share play.

He is looking for a 10% return.  Explain to him your view on the Dow going from 34,000 up to 45,000 in the next three years for a compounding 10% return.  I didn't do the math above, but explain what that takes the P/E ratio to; and is it realistic, that future potential earnings growth will support that.

He also mentioned investing in the S&P, lets call it more Tech investments.  Where is Tech on an "Overall" growth curve?  Tech will always have a "Next Gen" product which is currently focused on Consumerism (TV's, phones, PC's, entertainment).  To me the next Tech Growth curve will be on the "Weaponization" of these technologies into the "Physical" world.  This has already occurred in farming.  Planters, fertilizer wagons, harvesters, grain carts, etc are already being GPS driven by Tech.  Auto plants have gone heavily to robotics.  These are all mass repetitive "Contained" environments.

Now the next great investment will be Auto over the road trucks, Nano Cancer treatments, Nano crop pesticide reduction, Solar electric surface paint generation, Water pumping technology from the Mississippi River to California/Arizona (reverse Dam management(actually don't recommend this, will cause excess salination of the Gulf)), Certified Individualized Student learning platforms, etc.  Localized and individual applications.  But this is a Long play, and being able to pick the winners/losers; developers/adapters and followers.  But making these plays is like looking for that Great MFH deal while everyone else is looking for it.

@Trent M.

You should do Stock investments, but like I say on my Self Storage posts; "Start small and Make Your Big Mistakes Early".

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