Thought experiment. What would you do in my situation?

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Thought experiment. What would you do in my situation?

Joseph Hennis
Fairfield, CA · Member since 2017 · 98 posts · 84 votes

I'm new to bigger pockets and would like advice on what steps I should take next. I am a new engineer making 76k/yr start. My wife is a psych tech making 45k/yr. Credit score 800.

We started out with our first purchase in April of 2009, buying a home for 150k now valued at 362k. In 2012 that property became a rental. Later, I got a HELOC on that property, and used it as down payment for the other four properties we own. I guess I was doing BRRR without knowing what that was.

So, what I want to know is, what would you do in my situation? What strategy would you use? How would you employ that strategy specific to my scenario?

Any answer is fine; from taking the money out and hiding it in gold bars to selling everything and flipping MF/SFR to wholesaling, etc. Whatever is your specialty.

Would you sell properties, refinance them? If you would refinance, what type of loan would you use and what interest rate would you shoot for?

Assume current market conditions. I am hoping that this thread can be fun, while spawning some new and interesting ideas, as well as help to inform me of the array of investment strategies out there. I have been considering whether I should mention my experience, skills, and training, as it is relevant to what "I" would do... but this discussion is "What YOU would do". So I will leave that out. The following is my actual situation...

property 1 (SFR, CA) rent: 1850 value: 362k loan: 113k payment: 850 rate: 4.375% 30yr fixed HELOC: 73k payment: 500 rate: 4.75%

property 2 (SFR, Utah) rent: 975 value: 150k loan: 58k payment: 450 rate: 4.8% 30yr fixed

property 3 (duplex, Utah) rent: 1050 value: 150k loan: 67.5k payment: 500 rate: 4.875% 30yr fixed

property 4 (duplex, Utah) rent: 1050 value: 150k loan: 67.5k payment: 500 rate: 4.875% 30yr fixed

property 5 (SFR, CA, Primary residence, parents renting) rent: 2200 value: 395k loan: 301k payment: 1900 rate: 4.5% 7/1 arm

total assets: 1.207 million total liabilities: 680k net worth: 527k

total rent: 7125 total payments: 4700 difference: 2425

total cash: 30k

own cars cash. no other rent/mort payment, credit cards paid to 0 balance every month... So, no consumer debt.

THANKS AND HAVE FUN WITH THIS!

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Ryan E.
Investor · Salt Lake City, UT · Member since 2016 · 287 posts · 270 votes
9y

Of course it all depends on what the end goal is. In your situation I don't think I would sell anything off... unless you have a problem child in your portfolio then now may be a perfect time to sell since the market is so hot. 

I know in UT there are credit unions that will give HELOC's on rental properties up to 80% of the appraised value. I would pull HELOC's on as many as I could to at least have access to that money. Or possibly even a business line if credit. Then I'd look at wholesaling/flipping...start marketing for properties and turn the HELOC money fast on flips. This way I could build as much capital as possible to then reinvest in rentals. In this scenario I may even consider switching to a purely capital building mode as many if not most think we are at or close to the top of the market.

Perfect opportunity to expand knowledge and skills into other areas of real estate investing! One of my goals is to learn and implement the creative real estate strategies like owner financing which I think can help anyone be a better wholesaler/flipper/buy and holder. 

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  • Brandon Hicks
    Investor · Avilla, IN · Member since 2013 · 796 posts · 769 votes
    9y
    Joseph Hennis A good question to ask yourself is this..."Would I buy my current properties for 75-80% of their retail value and be happy with them as rentals?" I'm guessing you would not. Since the rent to value is already out of whack and the cash flow is thin, I don't feel putting more debt on them is the answer. It's actually pretty risky and I'm a "no money down" guy so I'm all for maximum leverage when it makes sense. I'd probably 1031 them into an apartment complex if possible or at least some smaller multi's that cash flow better. The risk you face now is that the market could go down and you'd be sitting on properties that have lost value and still don't cash flow well.
    0Reply
  • Joseph Hennis
    OP
    Fairfield, CA · Member since 2017 · 98 posts · 84 votes
    9y

    @Rodney Sums You guessed it. Planning to sell property 5 before rate adjusts. I don't want to live in this house forever. It's in the suburbs. I am more of a rural type person. I need more money to be able to afford some acreage. I currently live in this house with my parents, wife and two kids. There are two master bedrooms. My parents pay me rent, but just until they retire. They have a few more years. I wouldn't want to burden them with that forever. Hopefully I can buy a property with two houses on it. I might even build the two houses or go the manufactured home route, though the resale value of those isn't great. Still, if it's my dream property, why not?

    Hmm.. No I didn't share cash flows, so no, the cash flows don't reflect property management fees. That's why I just left it as Difference:. I didn't want to seem like that is a cash flow number. Honestly cash flow fluctuates so much month to month, it's hard to pin an exact figure on it. Last month it was down $1k. This month it was up $4k. The account fluctuates $5k/mo up and down every month. Depending on how I chose to estimate my cash flow numbers, could be anywhere from -$1k to +$2k /mo. Generally though, what I have seen is around +5k/yr for every year except last year. -5k last year. For some reason, it seems to grow very fast in the winter. Less moves and repairs. Then during the summer I tend to have cash go out to pay for repairs and cover move outs. I think this year will be better than last year though. Finally took care of that roof in Ogden...

    0Reply
  • Joseph Hennis
    OP
    Fairfield, CA · Member since 2017 · 98 posts · 84 votes
    9y

    @Andy D. I definitely need to put my equity to use. Something I was thinking... You know, even if I refinance and have a larger loan payment, the rents from the new property I buy should cover that (considering I buy appropriately of course).

    For example $500k/mo more in debt service due to refi, but buy a property at $1k/mo more in rent with no loan.

    In this scenario, overall the portfolio grows and overall cash flow could grow.

    0Reply
  • Account Closed
    Greensboro, NC · Member since 2016 · 45 posts · 20 votes
    9y
    Joseph Hennis It definitely appears you need a CPA that can serve you better. @Brandon Hall and @Amanda Han are both contributors on BP with good articles/books. Your CPA should be delivering value to you that well exceeds the fees you pay them. Finding a CPA with real estate experience, particularly one that invests themselves, should yield a much better business partner for you. I would echo Brandon Hicks comments regarding your path forward on future investments, dispositions or refinances.
    1Reply
  • Joseph Hennis
    OP
    Fairfield, CA · Member since 2017 · 98 posts · 84 votes
    9y

    @Brandon Hicks This is the question that plagues me, LOL. I keep thinking that too... and try to explain that to my wife, only to be rebuffed. I would not be happy with them as rentals with their current value. A 1031 does make good sense.

    An opposing thought: the more properties I own, when the market goes up, the more appreciation I take part in. In that way, more seems better... But maybe I am not looking at that right. I have 1.2mil in value now, if I 1031 into 1.5mil in value, that's more value to be effected by the appreciation. The downside to that maybe is that the value is all in one property, as opposed to spread out over multiple (all eggs in one basket kind of situation).

    A possible solution to this is trading up each property individually. Maybe to four plexes.

    0Reply
  • Joseph Hennis
    OP
    Fairfield, CA · Member since 2017 · 98 posts · 84 votes
    9y

    Thanks everyone for your help so far! This has been great! I wish I had found BP sooner!

    0Reply
  • Ellis San Jose
    Specialist · Westlake Village, CA · Member since 2010 · 1k+ posts · 781 votes
    9y

    Thank you for your transparency.  I analyze situations like these by asking the question, do I need cash flow, or net worth? (or income statement vs. balance sheet)

    If the goal is to be financially free, priority is cash flow to exceed living expenses (income statement).  Once that is reached, then you can work on the balance sheet.

    Increase cash flow by:

    1) acquiring passive income producing assets ( My priority would be to improve your acquisition skills to get better positive cash flow)

    2) paying off debt or reducing interest rate ( I wouldn't pay off low interest debt but I would certainly consider refinancing to long term fixed debt vs. short term ARM's)

    Good luck

    2Reply
  • Brandon Hicks
    Investor · Avilla, IN · Member since 2013 · 796 posts · 769 votes
    9y

    @Joseph Hennis

    While it's true that rolling all four into one apartment complex leaves all the equity in one property, if the end goal is cash flow then you may still be better protected for the downside. 

    I like small multi's...I own 64 units...aside from a handful of SFR's it's all multi's from duplexes up to a 12 unit and a 16 unit. So I like the idea of rolling into several small multi's.

    0Reply
  • Rodney Sums
    Laveen, AZ · Member since 2016 · 584 posts · 528 votes
    9y

    @Joseph Hennis If I read correctly, it sounds like you are planning for retirement on rural acreage and these investments are to support that lifestyle...as I'm sure it'd be a challenge to do your job living rurally....in which case that makes you a cool dude because I want to do the same thing LOL.

    I didn't do the "what would you do" portion of your question so here's mine, maybe we share a common goal:

    sell property 5, so  I could have a new primary residence that I'll mention later

    Sell property 1 (unless it is in a super exclusive area that's going to explode in value even more in the near future making it a keeper).  The amount of equity  in that property.. could make a down payment on a couple of multiplexes rather than own just the one property, eliminating 2 debts in the process

    House hack. Using the aforementioned equity, acquire yet another multiplex and occupy a unit (much lower down payment and rent for owner-occupy) so I live for free/cheap s save for retirement on that acreage...and I can give retired parents a cheap unit to rent (helps them) and I have a timely and familiar tenant (helps me) and they're close by in their own space (helps everybody). Maybe that multi-unit constructed on the acreage if you really wanted and if that acreage is attractive to tourists, you could rent long term or airbnb those units. I'd avoid the mobile home, depreciates and becomes ineligible for financing after long enough....and they suck, they break down I've lived in a few. If I did my math right, you got 180k of equity sitting in a SFR, I'd put it to work. fun topic, nice portfolio Joeseph

    0Reply
  • Joe Scaparra
    Investor · Austin, TX · Member since 2013 · 680 posts · 1k+ votes
    9y

    Joe, YOUR DOING GREAT!  I live in Texas and I was about to criticize you on not buying right.  I use the 1% rule or better.  Looking at your buys, you have done the same thing!!! Good Job!  Your issue, and mine too a certain degree, is not keeping up rents at the pace the properties are appreciating. Keep pushing your rents up, if property values are climbing, rents should follow.  I could tell you to sell and reinvest in 1% properties even if you have to come to Texas to find them.....but I won't tell you that.   However, a lot of Californians are doing exactly that.   Yes your properties appreciation now have you in more of a conservative mode, but so what. It is comfortable for you. Unless you are wanting and willing to squeeze out maximum cash flow, I would keep what you have and continue to acquire more property.  It is getting harder to find 1% in Texas, I can only guess that it is really difficult to find out west.  What you decide to do really depends on what you want to achieve.  If you want to build a 10 million dollar portfolio in the next 5 years, you need to sell and reinvest.  However, if you want to keep building at a conservative less stressful pace, keep doing what your doing.  What your doing is GREAT!

    1Reply
  • Charles Doehler
    Real Estate Agent · Ogden, UT · Member since 2016 · 20 posts · 7 votes
    9y

    Assets hold value except in a rapidly decreasing market.  The actual amount of the asset makes a world of difference from a risk and return viewpoint.  People will always need low priced homes and cars.  Simple price/qty sold chart will show you the market potential.  The more you invest per investment, the less chance for percent increase in any market.  It's a numbers game.  Without repairs, cars are a no-brainer.  Good mechanic as a partner.

    0Reply
  • Michael Lee
    Investor · Coppell, TX · Member since 2008 · 2k+ posts · 646 votes
    9y

    Hello?  I do not understand why you and the previous writer in today's daily list had no question and at most worthless advice.  Your writing was a little good to me but I do not understand why you and your presenter "asked" the same, exact question and did not ask anything.  Both of did not ask a question and I do not understand why you both were on the daily list I got.  At least there was a little bit to learn from yours but only gave advice.  This is not a space for salespeople.  Bye.

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