What would you do-Asset advice

Question

Hello,

Just discovered bigger pockets and excited about investing and looking for financial advice.

-purchased home 2016 $0 down 3.75%

-with mortgage plus monthly costs, it currently rents with a cash flow of $850 monthly (low maintenance, strong rental market)

-I could sell the home today and have $325,000 liquid, $0 debt

Should I be doing something better with my money?

I own raw land that I am interested in building a small rental on, but besides that, I don't know what the best move to make would be.

Also, I love to travel and currently live in my RV.  So I don't need a home to live in.  I'm more interested in investing than comfort.

Please let me know what you think, and if you have any recommendations for advisors.

Thank you,

Stephanie

John Underwood · Answer

The 16% Solution

Dave Foster · Answer

@Stephanie Harley,  I like how @Alex Olson is thinking.  A passive vehicle such as a dst  coupled with a 1031 exchange would leave you with no debt, no tax to pay, and a monthly cash flow easily double what you're getting now.  And while still getting the writeoff of depreciation, and amortization of the loan and depreciation.

Alex Olson · Answer

What are your time plans and goals? If you want passive investing you could upgrade via a tax deferred 1031 exchange to maximize your leverage and buying power. Or you could refinance and use cash to buy another property but would have to manage more property. Can talk further if you like?

Greg Henderson · Answer

It depends on what you're comfortable with. The right path depends on you and your goals. I pulled a HELOC on my primary for the down payment on several homes that needed work. I've been able to recycle that seed money because after the rehab and refinance, I'm left with more. With equity growth, its 5x what I started with. Its a ton of work though. Don't listen to some podcasts and think its free money. If you're not interested in a lot of work while facing daily problems you've never dealt with, I'd advise against it. It's high stress but high reward. I average $478 a unit, but I self manage and do my own maintenance. Read about return on equity (ROE). It appears you're making a lot in cashflow, but its very little considering its paid for. Selling your house would be a better option than just keeping it as a paid for rental from a strictly number point of view if your goal is growth. If you've lived in it as your primary 2 of the last 5 years, the sale is tax free. If not, look into a 1031 exchange to defer taxes. You can then leverage the 300k to buy a small portfolio.

If you want to keep the house and grow aggressively, another option is you pull 150k equity on a HELOC @ 6.5%. Interest only It's $812 a month. You could use the 150k as 20% down on 750k in real estate. In my market, you could buy 6 houses that are cash flowing 200-350 each after capex, maint, and vacancy. That number drops if you're not interested in self managing of course and goes up if you value add. After everything is stabilized, I would then leverage the house to 90% through the HELOC and take another 150k. It sounds risky to leverage your paid for home, but you're actually spreading the risk across multiple properties. If 1 of 1 of your properties is trashed by a bad tenant, you lose all 850 a month cash flow + pay out the rehab + PITI. If 1 of 13 units gets trashed, the other 12 are still churning dollars. As the market appreciates, your equity is increasing 2-3% a year in 13 properties vs 1. Your tenants are paying down the principle in 13 houses vs 1. While buying and growing, you will pay nothing in taxes from all of the depreciation. It all boils down to your goals and whether you want to invest "passively" at lower returns or hustle to increase returns. Figure out how much work you want and how quickly you're looking to grow, if at all. The answer will be different for everyone at different stages of their journey.

John Underwood · Answer

Keep the house and cash flow.

Get an equity line to buy tax liens. This increase your chance of getting a house for cheap. I got 3 from last year's sale. 1 Sold one for a 50k profit. Fixed up the other 2 and rented them. Combined rent is 2500 per month.

Stephanie Harley · Answer

Gosh, I love this!!!!

so smart

Thank you!!!

Patrick Lyons · Answer

You're paying down your loan and building equity so the "profit" is more than just the cash flow. I like John's idea of an equity line as well. That is very smart.

Scott Wolf · Answer

Any resources or books you'd recommend to learn about tax lien investing?

Stephanie Harley · Answer

Thank you.  I agree 3.75% loan with $850 cash flow is amazing.  Math is not my strong suit, so here's my confusion.  $850 cash flow X12 months is $10,200 annual profit.  If I invested my $300,000 in just tax liens, that would earn me 9 percent interest on my money.  $300,000 X 9 percent is $27,000 per year? Not sure if I'm doing that correctly, but it seems like it's more profitable than my current situation.  But again, I am just learning about all this, so I don't know what I am not considering:)

When you are giving advise about the small rental, this is a house I have yet to build.  Were you suggesting creative financing to fund the build?

Thank you so much!!!

Patrick Lyons · Answer

With a 3.75% rate, I would not recommend selling. The $850 a month is solid cash flow. For the small rental, looking into creative financing with low money down may be a good option. You could use the cash flow from your current rental to cover the expenses until your new rental begins to cash flow as well. When the market hopefully settles and rates drop eventually, you could refinance out of the loan on the small rental at a better rate and increase cash flow even more.

What would you do-Asset advice

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