Hello everyone! Happy thanksgiving!

Like the title says I am a new investor (one year into it). On my first property, we moved out earlier this year and have been renting it out. I refinanced and will dive into the numbers for you guys.

Initial down payment: $0

House value: $420,000

Mortgage: 318,000 @ 2.25 fixed

Mortgage payment $1,648

HOA: $350

Cash flow: $300

We don’t save extra money for expenses every month because we just have $5,000 sitting in a savings account for rainy days.

So, currently we have $100k in equity (25% growth per year of ownership) and a low cash flow. My question to you guys is: is this a bad investment since it only brings in 1%? Obviously the insane property value hike is nice. But what if that wasn’t the case? Should I keep it or sell it, cash in the equity and reinvest elsewhere?

Edit to post: meant to say about 10% increase per year for three years not 25%

This is where the 1% rule, and percentages in general, are misleading at best...and lie to you.  Who cares what the 1% rule says?  You are making $300/month in cash flow.  If you didn't know anything about any 1% rule, would you be happy with 300/month in CF?

The day I start spending percentages, is the day I care about them.

@Joe Villeneuve

Joe, I do not mean to mislead you by saying 1%. I do not care about the 1% rule particularly. I was moreso quoting my actual annual net income ($3,600) out of the 318k mortgage.

I am posting in concern for potential opportunity loss.

Originally posted by @Riley Way :

@Joe Villeneuve

Joe, I do not mean to mislead you by saying 1%. I do not care about the 1% rule particularly. I was moreso quoting my actual annual net income ($3,600) out of the 318k mortgage.

I am posting in concern for potential opportunity loss.

Great.  You don't have as many options as you might think.  Many would say to refi, but you wouldn't be able to get enough cash out in the loan to pay off the existing mortgage.

Selling, if you could sell it at full price, after closing costs, commissions, fees, taxes, etc..., would allow you to buy the same property you have now...and that's about it.

I'm a big fan of freeing up the dead cash (equity) and putting it to better use, but I don't think you are there yet with this property.  Keep an eye on your equity though.  Once it gets over 40% plus closing costs (in other words double the DP on the same property), then I would sell it and double your property value, cash flow and appreciation base.

Hi Riley,

Some things to consider...

- No downpayment and only a $318K mortgage? So where'd the rest of the cash come from to cover the rest of the 420K value? Technically there is a "downpayment" here somewhere unless you paid for it with a loan in which case you could just add that to expenses.

- $5K for a house does not sound like enough for a rainy day fund alone, I'd put away $100/mo of that cash flow to cover things like new appliances, roof, hot water tanks, etc.

Your mind is in the right place thinking about opportunity cost... before selling you should always have a plan in mind of where you can take that capital to generate a higher return

Originally posted by @James Ma :

Hi Riley,

Some things to consider...

- No downpayment and only a $318K mortgage? So where'd the rest of the cash come from to cover the rest of the 420K value? Technically there is a "downpayment" here somewhere unless you paid for it with a loan in which case you could just add that to expenses.

- $5K for a house does not sound like enough for a rainy day fund alone, I'd put away $100/mo of that cash flow to cover things like new appliances, roof, hot water tanks, etc.

Your mind is in the right place thinking about opportunity cost... before selling you should always have a plan in mind of where you can take that capital to generate a higher return

 Since he was living in the house before putting it up for rent (see his initial post), I'm assuming the current mortgage was a refi at some point, so there would be no DP in that case.

$5k is fine for this house. You're right when you mention all those potential CAPEX costs, but he can cover all of those by having a HELOC on the ready when needed. No need to take CF and stockpile it. Besides, $100/month isn't going to cover those CAPEX items anyway.

Having a plan in mind I do agree with 100%. By thinking now about selling once his equity grows enough (see my initial post), he can start planning what to do when that time comes to sell. In reality, all REI should have their plan in place before they start buying their first property. Every decision they make on which property to buy and how to by it (strategy used), should be based on what they plan on doing when they "exit" each deal with their equity and move that equity into the next deal.

Originally posted by @Riley Way :

Edit to post: meant to say about 10% increase per year for three years not 25%

Seems like a store of value for the appreciation waterfall play. 

I have a few of these, too.  Good asset in a good neighborhood in a good market.  Breaking even or cashflowing a little monthly is great, especially with so little invested. 

Sell it when you have reason to believe it will be worth less the following year.  Stay up on employment and migration trends as leading indicators affecting that market. 

@James Ma

I used a zero down payment VA Lon initially which therefore did roll the down payment into the loan three years ago. This is a interest rate reduction refinance with truly zero closing costs.
the property value has come from the 10% appreciation per year. The refinance came with a free appraisal which estimated value between 410-430k. 
I keep reading everyone cash flowing $300 with a $150k property which made me believe my property may be underperforming. 

Originally posted by @Riley Way :

@James Ma

I used a zero down payment VA Lon initially which therefore did roll the down payment into the loan three years ago. This is a interest rate reduction refinance with truly zero closing costs.
the property value has come from the 10% appreciation per year. The refinance came with a free appraisal which estimated value between 410-430k. 
I keep reading everyone cash flowing $300 with a $150k property which made me believe my property may be underperforming. 

 Except you didn't pay $150k for this property.  As long as you are cash flowing positive, all you paid was what came out of pocket since the tenant is paying the rest for you.  That means, if you have a zero DP, your cost on this property was...nothing.  So your are getting $300/month for free.

Total cost and actual cost to the REI are not the same thing. If the are equal, then the REI is actually losing money. The true measure of a rental property is how fast you are getting your cash (your cost) back. By the way, how fast are you getting your cost back here?

@Joe Villeneuve

Well, the cost was zero so ROI would be infinite I suppose.

This all spawns from my will to grow and get more properties. I saw a pile of equity and thought I could split it into two down payments. How would you suggest that I get my second property? What do you think about turnkeys? Would you suggest a BRRR and hold to a newbie like me? I wouldn't pull the trigger until I dive into learning a bit more so I don't mismanage the finances.

I don't like BRRRR starting out. I like it at the end of a string of properties though. The BRRRR method is misleading. It's sold on the premise you are re-using your own money over and over...you're not. If you were using your own money, you wouldn't have to pay for it each time you REFI. Your money is still in the property and being used as collateral for the money the lender is now "selling" to you as new money.

I don't know what market you would invest in, but if you were able to pull out $100k in my market, you could probably triple (at least double) your current CF...maybe even more.  If you split the $100k 4 times, and bought 4 properties worth $125k each, you should be able to get at least $400/month in CF from each.  Plus, if you appreciated only 5% on all of them, that would get you $50k in appreciation.  So you would end up with $550k in PV.  If you got another 10% on your current property, that would only get you another $42k.  So you would end up with $462 in PV.

If you gained 10% the following year on the current property you'd be at $508, and if you gained 5% on the 4 properties, you'd be at $575, and the CF for these years would be much higher for you too.

@Joe Villeneuve

Hi Joe, where 125k/400 cashflow, in Michigan?

Thanks

Originally posted by @Amedeo M. :

@Joe Villeneuve

Hi Joe, where 125k/400 cashflow, in Michigan?

Thanks

 Many places.

@Joe Villeneuve . Well said.

@Riley Way You should get out of this deal simply because of the number of doors you have. In real estate everyone agrees it's about cash on cash, everyone agrees it's about Creating infinite cash flow tax free for generations. The only way you can accomplish this is through the number of doors.

@Riley Way A little off topic but why is HOA so high for a 400k home? Is this quarterly?

@Marcel C.

It’s a condo located in San Diego.

@Riley Way nice job! You may have some options but I personally would NOT consider cashing out and taking that equity OOS for more cashflow. Imagine how long it would take you to get 100k in cashflow in markets with great initial cashflow but not so great appreciation. You have done well in your area, continue to learn from it and do another deal...maybe house hack and use a low down payment loan, as an example.

@Riley Way

Keep it. Use it as a piggy bank when the time comes. $5k reserve is great. It's a condo so you need less, and if the HOA is well managed there are reserves there for systems that the HOA covers (I'm thinking roof and other external aspects of the property).

@Riley Way you're doing fine. Keep as is and just increase your rainy day fund. I wish my 1st property did so well!!

Did you refi into another VA loan?

Hopefully, you refi'd into a conventional loan, freeing you up to buy another property 0% down, so you can repeat this process.