Hi all,
Recently I just realized one of my rental properties had a ridiculous appreciation in just 2 years. I purchased the property "A" in 2015 and in two years my current property has appreciated 100%! The current rent is also 2.5x what I'm paying in P&I. I'm currently don't know what I should do!
I do understand that cash flow is king and appreciation is queen. I'm currently working full time and just bought another a rental property "B" this month and planning to renovate the property "B" this weekend (July 4th). I don't know if I sell the property "A" what's the possibility of me hitting/ finding a property like that again.
If I do sell property "A" I don't know if my DTI will let me buy another property for investment. Buying property "B" this month they used my rental "A" as a source of income as well.
What would you guys do if you guys are in my shoes. I do greatly appreciate all your input.
Thanks,
Jimmy
Hi all,
Personally, I have 1031 exchanged in 2015 and 2016 all my pricey San Diego single family properties that have also doubled in value. I too believe the party can only last so long.
However, more importantly I have traded in approximately $5,000-$6,000 a year cash flow for apartment complex path to financial freedom. I have gone from $60,000 cash flow per year to our current $120,000 cash flow and rapidly rising every year. I expect to be earning over $200,000 cash flow in the next 12 months. I still have a pricey condo left here in San Diego that I purchased with about $34,000 down in 2011 for $116,000 and am putting up for sale for $270,000-$290,000. I will trade that $5000.00 cash flow for about $20,000-$24,000 cash flow per year for a 24 unit apartment complex in Ohio.
I started with 10 condos purchased in 2011 and 2012 in San Diego for the true Multifamily Apartment complex business model. Since 2015 I have forced appreciation on 6 apartment complexes and increased the value of the apartment complexes approximately $400,000 in the last 18 months. Those pricey condos in San Diego all had HOA fees that I had zero control of. I would advise all that have incredible appreciation to read Multifamily Millions by David Lindahl, Loopholes of Real Estate by Garrett Sutton, and listen religiously to a podcast called Lifestyles Unlimited Inc. based in Houston Texas. The founder Del Walmsley has been doing the Multifamily business model for over 25 years and listening to his podcasts and going to his 2 day workshop in Houston was life altering for me, when combined with that amazing Multifamily Millions Book and Loopholes of RE book too.
I love how apartment complexes are valued primarily by the Net Operating Income and is not at the mercy of comps. I have the ability to manage my property manager to spend wisely and increase the money coming in by providing the best product, best service at a great competitive price for my tenants.
Now I presently provide value for 86 residents and realize that soon it will be 109 residents on my way to over 1000 residents. I also know the rule that you are paid based on the value you provide. By having 1000 front doors in the future I will be providing value to over 1000 residents and by providing value to more people, I get greater tax deferred cash flow on my way from current cash flow $120,000 to $750,000-$1,000,000 cash flow per year.
The single family business model won't get me there. Plus, could you imagine having over 100 single family. That would be 100 roofs, furnaces, hot water heaters, plumbing, AC, garage, driveway, insurance, etc.... There comes a point where the natural progression is to move to true Multifamily (5 units or more in one complex) and eventually have two or three 300 or greater unit complexes.
Swanny
I along with many others feel that there is likely to be a downturn in the market. I would guess within the next two years. I have zero basis for this aside from a gut feeling. I am currently trying to gain liquidity in hopes of snagging the post recession deals. I believe the question you need to ask yourself is "will this deal still makes sense in a bear market?"
@Jimmy Ho Cash Flow is a Knave - not King. There is far more to be made by leverage and less tax on Appreciation. Take a course in Economics and learn the math on compound interest and leverage!
If there is more upside in the property keep it for awhile and borrow out the equity to invest again. There is little reason to have capital tied up not working for you.
If you believe the property will not continue to go up significantly then cash out!
@Jimmy Ho I would consult an agent and see if your numbers are correct and if they are I would sell.
A bird in the hand is worth two in the bush as they say. I'd be looking to sell and use the liquid assets to purchase more property. House value appreciation doesn't mean much until you capitalize on it. As @Rocky Griffin said, I too have a gut feeling there will be a pullback in the housing market in the next few years so I'd get as much cash as possible ready to buy low if that day comes soon.
I would consider two options. Sell and reinvest or pull out the equity to reinvest. Doing nothing is going to come back to haunt you when the market turns. Every day you wait you are losing hundreds, possibly thousands of dollars in lost income, depending on the amount of appreciation. Dead equity is a liability today that you could potentially lose.
The present equity is killing your cash flow and turning the property from a asset into a liability. If you can not use the equity you have it is a high risk liability sitting dead in the property. You need to force it to earn it's keep.Investors that are hording cash in real estate are going to face a major loss at some point in the future.
Thanks for your input Rocky. I purchased this property at a discount and I do believe in the down market i would still have enough skin in the game and enough the cash flow to pay the mortgage and all other expenses (finger cross)
@Account Closed
Thanks for your input Thomas. I'm currently have more than enough cash flow not to sell it at the moment. I don't fell comfortable to over leverage on the property that has already giving me lots of cash flow. I do have some cash reserve on a down market, if I do sell I'm thinking about selling it next year.
First, crack a beer open and Salud! I would then hold off on doing anything as there is usually a 10 year adjustment in real estate, some say its a bubble, crash, whatever you determine to define it as. I'd hold and collect on what you have going for you since the rents have increased as well, take that extra cash and hold onto it for a year or so...see what develops.
@Jimmy Ho The mistake that 99% of Real Estate Investors make is not being over leveraged - even zeroed leveraged properties will go down in worth when markets correct - which means they can not avoid losses.
Following the GFC the smart share investors learned their lesson and now protect their portfolios with option protection. Property Investors can do the same - but maybe they prefer to be thrill seekers? Or do they think there is a way to defy gravity.
The BHP with no protection will see their properties rise and fall with the tides.
Warren Buffet on record as saying Only when the tide goes out can you tell who was swimming naked
@Jimmy Ho Cash Flow is a Knave - not King. There is far more to be made by leverage and less tax on Appreciation. Take a course in Economics and learn the math on compound interest and leverage!
If there is more upside in the property keep it for awhile and borrow out the equity to invest again. There is little reason to have capital tied up not working for you.
If you believe the property will not continue to go up significantly then cash out!
Cash Faux is not a Knave or a King ... it is a drag queen masquerading around as profit, and those that get with her without realizing this may be in for a big surprise :)
@Jimmy Ho I love to hear of people getting great deals in the Bay Area since it seems to be so uncommon, so congrats! I'd say if you don't need the cash immediately, then I'd do nothing and continue bringing in that great cash flow.
Do you have true cash flow or only perceived cash flow that in reality is only feeding your dead equity.
@Jimmy Ho so let me get this straight... you have a property in the SF Bay Area that has doubled in "value" in 2 years AND you are getting good cash flow. Assuming you are doing your cash flow calculations correctly, and also understanding that you got the property at a discount to market, I would suggest 2 steps:
1) Grab a favorite beverage and congratulates yourself on making this happen
2) Slap yourself on the side of the head for thinking about selling a building that has BOTH high appreciation and cash flow
3) Grab another beverage and congratulate yourself from saving yourself from the "grass is always greener" trap.
You are already starting to understand that DTI is going to be a huge barrier for you moving forward. If you are going to do buy and hold in the Bay Area, this will be a difficult mountain to get over. Don't hobble yourself by giving up "A". Address the issue of "trapped" equity by pulling cash out after you stabilize unit "B". Take those funds and put them into a bank account to season it. As long as you can do that and stay cash flow positive, then you will be in good shape when you decide to go after another property.
Just my $.02
-Arlen
Hi all,
Personally, I have 1031 exchanged in 2015 and 2016 all my pricey San Diego single family properties that have also doubled in value. I too believe the party can only last so long.
However, more importantly I have traded in approximately $5,000-$6,000 a year cash flow for apartment complex path to financial freedom. I have gone from $60,000 cash flow per year to our current $120,000 cash flow and rapidly rising every year. I expect to be earning over $200,000 cash flow in the next 12 months. I still have a pricey condo left here in San Diego that I purchased with about $34,000 down in 2011 for $116,000 and am putting up for sale for $270,000-$290,000. I will trade that $5000.00 cash flow for about $20,000-$24,000 cash flow per year for a 24 unit apartment complex in Ohio.
I started with 10 condos purchased in 2011 and 2012 in San Diego for the true Multifamily Apartment complex business model. Since 2015 I have forced appreciation on 6 apartment complexes and increased the value of the apartment complexes approximately $400,000 in the last 18 months. Those pricey condos in San Diego all had HOA fees that I had zero control of. I would advise all that have incredible appreciation to read Multifamily Millions by David Lindahl, Loopholes of Real Estate by Garrett Sutton, and listen religiously to a podcast called Lifestyles Unlimited Inc. based in Houston Texas. The founder Del Walmsley has been doing the Multifamily business model for over 25 years and listening to his podcasts and going to his 2 day workshop in Houston was life altering for me, when combined with that amazing Multifamily Millions Book and Loopholes of RE book too.
I love how apartment complexes are valued primarily by the Net Operating Income and is not at the mercy of comps. I have the ability to manage my property manager to spend wisely and increase the money coming in by providing the best product, best service at a great competitive price for my tenants.
Now I presently provide value for 86 residents and realize that soon it will be 109 residents on my way to over 1000 residents. I also know the rule that you are paid based on the value you provide. By having 1000 front doors in the future I will be providing value to over 1000 residents and by providing value to more people, I get greater tax deferred cash flow on my way from current cash flow $120,000 to $750,000-$1,000,000 cash flow per year.
The single family business model won't get me there. Plus, could you imagine having over 100 single family. That would be 100 roofs, furnaces, hot water heaters, plumbing, AC, garage, driveway, insurance, etc.... There comes a point where the natural progression is to move to true Multifamily (5 units or more in one complex) and eventually have two or three 300 or greater unit complexes.
Swanny
Thank you for your input Jeff. I think that's a great plan can't wait to be home and crack a beer :) I'm thinking the same thing because I also agreed that roughly 10yrs cycle as well. I'm planning to hold off on selling the property and just collect my cash flow for now. I'll play by ear and reserve my cash and hopefully when the market hit the downturn that's our time to buy even more :)
@Account Closed
Thank you for your kind input Arlen. Unfortunately my property is not in the Bay Area :( it's in Central and it does have excellent cash flow (see picture above). I would love to own a property in the Bay Area some day (finger cross). I hope I'm doing my calculation correct because I use a very conservative property operating expenses on my rental properties.
1) DONE!!!! White Russian and Mojitos :)
2)OOOuch!!!
3) I'm getting a bit drunk already so I'll pass on this LOL
That's what I've been doing for the past 2 years saving up using my W2 as well as rental cash flow and was able to purchased another rental property. This new property I just purchased is going to need a bit of "elbow grease" LOL.
Sell and put the equity into TWO more houses as long as each cash flows....That's what I'm doing with each house I sell. Although I had to put 38K out of savings on top of my last deal because there wasn't enough equity to support buying close to another mil in real estate.
Hi all,
Recently I just realized one of my rental properties had a ridiculous appreciation in just 2 years. I purchased the property "A" in 2015 and in two years my current property has appreciated 100%! The current rent is also 2.5x what I'm paying in P&I. I'm currently don't know what I should do!
I do understand that cash flow is king and appreciation is queen. I'm currently working full time and just bought another a rental property "B" this month and planning to renovate the property "B" this weekend (July 4th). I don't know if I sell the property "A" what's the possibility of me hitting/ finding a property like that again.
If I do sell property "A" I don't know if my DTI will let me buy another property for investment. Buying property "B" this month they used my rental "A" as a source of income as well.
What would you guys do if you guys are in my shoes. I do greatly appreciate all your input.
Thanks,
Jimmy
Jimmy, congrats you got a unicorn, they exist and now you pose the right question ... whats the trade off, can you buy something else and return the same amount of cash-flow, while dipping into the fruits of the appreciation ? Next question, when you sell property "A" what is your legal tax obligation, will you need to 1031 Exchange it? Have you considered a hybrid case, just take a few dollars towards the appreciation value not the whole shebang (HELOC) - and buy a rental property "C" ? Beyond the 2.5x DSCR (debt service coverage ratio based on P&L) , the cash flow is king this is accurate, but when you get a Queen do you cash in ? Again, returning to replacement, how do you replace, you will not be able to likely replace for another appreciation play, your next plays are cash flow, if you take your win, expand your portfolio perhaps with property "C,D,E" you have now also expanded your risk tolerance as you have become more diverse.... Congrats! Thanks for offering a great subject matter to contribute in ... as this is my 700th post, I get excited when I pass every 100 contributions.... wishing you great success in your endeavors...
Also checkout -A Simple Guide for Buying Out of State Turnkey Investment Property
Thanks for your humor comment David :))
And the funniest thing is that you think I'm joking ... no worries, though, I'm pretty sure you currently have flow and not faux, there is a difference (hint: how does inflation adjusted total return net out in the long haul and what factors affect that) :)
I never realized I was in the company of such a poetic group!
There is no one right answers and is some tells you there is, don't listen. The market is constantly changing and you may need to adjust accordingly. There are places that will not cashflow today, there are places that will not appreciate today. Should you jump in or out, it depends. What are YOUR goals, I need cash to live on, I want to someday sell out my property for a lump sum. I will not sleep at night if I don't reduce my risk as low as possible.
The second questions is what will you do with the money? Do you have a better alternative use? In many cases it is just better to keep an asset than cash out, since there is not a better alternative. The transaction costs may be to high. People regularly say, just do a 1031. They are not easy, especially in a strong market. There are transaction costs associated with it and many people have been burned by it. You must identify a property and then close on it in a defined period. Finding something as solid s what you have in SF is going to be tough. You will have to go out of state.
You should look long and hard at the whole picture and not focus on one aspect.
You repurchased it for it's current value again today.
Another way to look at it:
If you had cash in the bank instead of the equity, would you buy this property today?
If the answer is no, what would you buy?
Make offers to trade your equity for what you would rather have.
Increase the benefits of owning real estate by exchanging.
I didn't read all replies but didn't see the actual $'s. If you are cash flowing $500/month but could only pull out $50k reasonably, it might not be that big of a deal. However, if it went from $300k to $600k, then you have options. If you sell, you will owe a LOT of taxes. I'd recommend doing a refinance and pulling out money tax-free. You reduce your cash flow on that one property but if you're talking about major $'s here, you can use that to buy several more properties and overall cash flow would go up, and then you have multiple properties appreciating all from the same cash.
Again, it really all depends on your goals, but based on my goals, that's what I'd do. Keep in mind my advice is based on limited knowledge of your situation, but if you have the opportunity to pull out cash tax-free and increase the number of properties you own + increase cash flow, it's a no-brainer in my opinion.
Your cap expense number is way too low based on my calculations. In San Diego a rental (small) kitchen alone has a cap expense of >$50/month according to my calculations.
I would refinance and remove some equity while the interest rates are still low. This would provide options including possibly leveraging it to another RE purchase. There are typically refinance options at 70% LTV and 60% LTV. 60% LTV typically have slightly better rates because there is less risk to the lenders. If you want to be conservative in your refinance then refi at 60% LTV but I would refinance the property at 70% LTV. Do not be surprised if the appraisal comes in lower than you expect.
Good luck
I never trust a investors guestimates on cash flow.
@Thomas S. so true. I'm guilty of the paper cash flow vs real cash flow. I was projecting a net cash flow of $2000 on our latest triplex once we stabilized. I couldn't believe the money I would be making....well capex, vacancy, repairs, management etc etc cut that number in half! I'm still happy with my returns at $1000, but I'm just lucky I didn't even buy those deals I thought would churn out $1000 a month when in reality they would be break even at best.