Two Hundred Thousand Dollar Question

33 Replies

12 months ago, I paid off my first rental SFH property in Boise/Meridian, Idaho. Net cashflow is $1060/month. Comps say the current market value is $230,000. I paid $172,000.

Two options I’m looking at;

  1. Sell and invest in two separate SFH rentals. Move-in ready SFH start at $215,000 in my current market. Net cash flow with 20% down puts me around $360/month.
  2. Not sell and take out a HELOC to buy another house. My lender is offering 7.85% for investment property.

SEEKING ADVICE; what would BP members advise if they owned such an asset?  BTW – buying a few $80,000 houses in Memphis (for example) is way outside my comfort zone.

@Matthew McNeil great scenario to share. My recommendation is not to sell what you have. Think of your first property as an asset that is performing.

Although it is worth a specific dollar amount it is also worth the cash flow as long as you keep it.

My recommendation would be to keep the property since you put in work and energy to find it and get it performing. If you sell it, you give that up.

Then you can use the HELOC as a tool to get another property and create the second property as an asset. I assume your goal is to have as many assets as possible to leverage and grow your wealth.

Also keep in mind there may be other options besides a HELOC. You may be able to get a cash-out refi mortgage at the price of the next house at a lower interest rate.

Originally posted by @David G. :

Matthew McNeil great scenario to share. My recommendation is not to sell what you have. Think of your first property as an asset that is performing.

Although it is worth a specific dollar amount it is also worth the cash flow as long as you keep it.

My recommendation would be to keep the property since you put in work and energy to find it and get it performing. If you sell it, you give that up.

Comment:  Not if you can double the return by getting more than one property from it.

Then you can use the HELOC as a tool to get another property and create the second property as an asset. I assume your goal is to have as many assets as possible to leverage and grow your wealth.

Comment:  This is what I would do.  As you infer, leaving all the equity in the first property isn't letting it work for you.  It is dead money for you.  Put it to work.  As long as the cost of "putting it to work" is less than the return on that work, you are ahead...and your equity/cash/money is no longer dead.

Money is not a noun...it's a verb...or it should be in order to win.

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@Mike Dymski this is a good point. You may be lower rates if you do this vs. the HELOC. Also look into credit unions that have a business department, you may be able to get a lower rate than you mentioned.

Originally posted by @Account Closed :
Originally posted by @Joe Villeneuve:
Originally posted by @Matthew McNeil:
Originally posted by @Joe Villeneuve:

Money is not a noun...it's a verb...or it should be in order to win.

  And your pragmatically applicable interpretation would be...? 

 Keep your money moving

 This is fine if you buying sound deals with good numbers. Assuming markets only go up. 

Otherwise it's very dangerous. 

 How?

To maximise your investment returns on income properties it is mandatory that you leverage using OPM. Your best option is to refinance by pulling out the maximum your bank will allow with a 30 year mortgage. 

Use that money to purchase similar positive cash flow positive properties using minimum DPs.

Any equity in a income property is not performing to it's maximum and is a very expensive form of buying cash flow. Obviously banks require you to have some skin in the game but ideally maximum returns will be achieved with as close to 100% financing as possible.

A income property that can not produce positive cash flow with 100% financing will always require that the investor buy their cash flow with their own money. This will hypothetically cost the investor $2 for every $1 returned based on the opportunity value of cash. 

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Market is irrelevant assuming he is investing for long term hold and properties have positive cash flow.

The actual value of a property is only relevant when refinancing or selling otherwise it is moot.

Originally posted by @Thomas S. :

Market is irrelevant assuming he is investing for long term hold and properties have positive cash flow.

The actual value of a property is only relevant when refinancing or selling otherwise it is moot.

 ...and we have a winner!!!  Can I vote for this more than once?

Let me add, before anyone says, "what happens down the road when you want to sell or refi?", that down the road is down the road.  If the property is cash flowing now, and you didn't use any of  your own money to buy it, and down the road you can sell it for at least enough to cover the debt, you win.  Cash flow is also profit, but tangible profit.

...and, it the property didn't recover, which profile would you rather be in:

A)  Financed with only 20% down (own money), and only have to recover the down payment to break even (since the tenant(s) are paying the mortgage for you)

B)  All 100 % cash/equity, and have to recover ALL of your "purchased" equity before you start making a profit.

Originally posted by @Thomas S. :

Market is irrelevant assuming he is investing for long term hold and properties have positive cash flow.

The actual value of a property is only relevant when refinancing or selling otherwise it is moot.

 One more thing.  The cost of a rental is ONLY the cash you put into it.  The idea is to "control" the property, to get the income (positive cash flow).  If you pay 100%, 20%, or 0% down, that's what it cost you to "take control" of the property...and, what you must first recover through the positive CF before you start making a profit.

@Matthew McNeil It completely depends on your goals and risk tolerance level. If your goal is to just keep low risk cash flow then just stay where you are. If your goal is to create the most net worth and cash flow as possible as @Thomas S.  then leveraging the most as possible will more likely help you meet that goal. 

So I would agree with what @Mike Dymski mentioned about getting a long term loan on the investment property. Right now those rates seem to be around 5.5% for an investment property with 25% down. I’m not sure if your cash flow would cover all of the loan servicing costs and expenses, so you will need to ask yourself which classification of properties I want. That price point seems more like a B-class property which may not give you as high cash flow as a C-class but it may require less oversight.

If I were in the position you are in, the first thing I would do would be to reach out to other investors in the area who are doing buy and hold investments and I would take them out to lunch and ask them which local banks work with investors the best. Then I would start reaching out to those bankers and start building relationships. 

I would then get an investment loan for as much as possible on the property you own to where the property would still cash flow a few hundred dollars a month and then I would sell it on a 4-year lease option to an end buyer for 5-7% higher than current market value and I would collect a premium rent of $50 - $100 higher than current rents. I would also have the tenant take care of all of the maintenance for the property during that time. I would also get as high of a HELOC that I could possibly get.

Then, I would invest the cash from both loans in 3-4 C-class properties with a hard money lender over a year's time where I could rehab them and have my all in (purchase and rehab) be less than 140k and I could sell the property for 180k on 4-year lease options. Then I would refinance with that same bank at 75% of the ARV (if the bank will do that) otherwise 75% of the purchase plus rehab.

This model is scaleable and can help increase net worth fairly quickly.

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Originally posted by @Thomas S. :

A income property that can not produce positive cash flow with 100% financing will always require that the investor buy their cash flow with their own money. This will hypothetically cost the investor $2 for every $1 returned based on the opportunity value of cash. 

 Thanks for this nugget Thomas. Very insighful!

Originally posted by @Shiloh Lundahl :

@Matthew McNeil It completely depends on your goals and risk tolerance level. If your goal is to just keep low risk cash flow then just stay where you are.

 Shiloh, I'm going to go with your adivce because you mentioned "risk tolerance."  And here's why.  

After I posted my question asking what other BP members would do with a similarly owned asset, my wife chimed in and said, "We're not touching that house and we're not taking out a HELOC."

Let me explain.  I tend to believe that “emotion” and “risk-assessment” can’t be quantified in a spread sheet, yet they are very much significant factors in every investment decision.  I forgot to consider the risk factor as it relates to my wife's internal spreadsheet.  My wife grew up without running water or electricity in a make-shift cabin situated on a logging deck in western Montana. Locals refer to the place as “poverty with a view.”  The emotional value she has knowing that we own a rental property free and clear (cash flowing $1000/month) with no debt owed to anyone (aside from county taxes) trumps leveraging that asset to acquire additional properties.

Thankfully, the cashflow from that asset and our other properties will enable us to save the 20% down payment on another SFH by the end of the year when the local market cools down a bit.

@Matthew McNeil that sounds a lot like my wife’s story. She grew up in an impoverished circumstance with her father moving them around a lot. They lived in a shop, a barn, a garage, and a fifth wheel during her growing up years. She wanted me to have a stable job and a stable income and when I told her I was going to open up my own business, that was hard for her. With time and success though she relaxed a little. But when we started to invest in real estate, those same feelings came back. The thing that brought us together was going through a year-long training program. She saw how people were able to use real estate to build wealth and then she relaxed again. Have you ever brought your wife with you to a real estate training?

12 months ago when you paid this house off, how did you do it?  Scrimp and save and take a 3rd job? Get an inheritance?  The method wiill speak to what type of investor you are and we can better advise. 

12 months ago when you paid this house off, why did you do it?  It's usually not by accident. We can fall into debt, but not fall out.

I paid off a bunch of higher rate and higher risk loans last year for specific reasons.   I still have dry powder and reserves and finding a better than 6+% hassle free, risk free and tax free return was more effort than it was worth in my market.

When our why is clear, decisions are easy. Why did you pay it off?   Oh and congrats!  We are a small club with clear goals (usually:).

@Matthew McNeil I listened to a BP podcast recently about this very topic of leverage and risk (although I forget which episode). The guest talked about how he and his wife preferred buying in cash. People say it is dead equity, but to them it was more cash flow to buy the next, not dead equity. At first they had to scrape and save for the first one or two from their jobs and cash flow for a year or two, but after 6 or 7 free and clear properties, they were cash flowing enough to buy another one every 6 months or so with each property adding significantly to their monthly "snowball" with no mortgage. The snowball of more and more paid off properties can cash flow enough to buy more. Sure, it likely doesn't have the rate of return of leverage, but not every investor has maximum returns as their one and only goal. it would be a growing a portfolio without debt. Your investment strategy is for you to decide. Just because you don't mortgage or sell your paid off property doesn't somehow end your growth. Maybe if your wife is comfortable with it, you could save up a down payment for the next and get a mortgage on just the new property. Then pause from buying more and use cash flow from both houses to pay that off. then take cash flow from both paid off to build a down payment for the third or complete purchase price. No amount of money is worth making your wife feel more stressed with risk when you've already reached a point of stability she enjoys.
Originally posted by @Steve Vaughan :

12 months ago when you paid this house off, how did you do it?  Scrimp and save and take a 3rd job? Get an inheritance?  The method wiill speak to what type of investor you are and we can better advise.

Oh and congrats!  We are a small club with clear goals (usually:).

Thanks for the "congrats" Steve! It does feel good to own a rental property debt free. Actually, it was an inheritance that we used to pay it off and buy another SFH (not outright though - still has a mortgage). You made a good point by addressing the question of how we paid it off speaking to the type of investor we are.  Insightful question you've proposed, but I'm not so sure its indicative of the type of investor I am for the following reason.  You know the terms BC and AD?  Well, I tend to approach my knowledge as a real estate investor divided between BBP (Before Bigger Pockets) and ABP (After Bigger Pockets).  I think there's a lot of newer BP members in the same club!

My learning curve really accelerated after joining BP.  In hindsight, while looking into the rearview mirror at what's behind me, I realize I could or should have done things differently.  I paid off the house before understanding the value of leveraging.  Subsequently, after reading countless posts and watching several videos I feel that my goals are evolving as I learn. The good thing is that I'm able to buy another property in about six months - and my wife is elated that we own this particular one outright, out of the 5 we've bought over the past few years. I'm 55 and we're on track to buy a SFH every 2-3 years from the cashflow we're earning from our current portfolio. I'm a buy and hold person with the hope that growth equity will benefit me 15 years from now. But I'm well diversifed in the market as well, which has been good to me.

Originally posted by @Shiloh Lundahl :

@Matthew McNeil that sounds a lot like my wife’s story. She grew up in an impoverished circumstance with her father moving them around a lot. They lived in a shop, a barn, a garage, and a fifth wheel during her growing up years. She wanted me to have a stable job and a stable income and when I told her I was going to open up my own business, that was hard for her. With time and success though she relaxed a little. But when we started to invest in real estate, those same feelings came back. The thing that brought us together was going through a year-long training program. She saw how people were able to use real estate to build wealth and then she relaxed again. Have you ever brought your wife with you to a real estate training?


Shiloh, lots of similarities in our respective stories regarding our wives.  Actually, it was my wife who initiated the idea to invest in rental properties and her impoverished childhood keeps us anchored on the conservative lower risk side of the equation, which is OK for me.  Many BP members are quite aggressive and proactive regarding risk and I remain intrigued at what they do.  Ultimately, though, I need to understand that my wife and I are in this together as joint partners.  I have found, however, if I take the time to gently move her towards more risk and show her the numbers then she is more willing to embrace the risk - aside from risking anything regarding this one house we paid off.

Originally posted by @Russell Holmes :
@Matthew McNeil I listened to a BP podcast recently about this very topic of leverage and risk (although I forget which episode). The guest talked about how he and his wife preferred buying in cash. People say it is dead equity, but to them it was more cash flow to buy the next, not dead equity. At first they had to scrape and save for the first one or two from their jobs and cash flow for a year or two, but after 6 or 7 free and clear properties, they were cash flowing enough to buy another one every 6 months or so with each property adding significantly to their monthly "snowball" with no mortgage. The snowball of more and more paid off properties can cash flow enough to buy more. Sure, it likely doesn't have the rate of return of leverage, but not every investor has maximum returns as their one and only goal. it would be a growing a portfolio without debt. Your investment strategy is for you to decide. Just because you don't mortgage or sell your paid off property doesn't somehow end your growth. Maybe if your wife is comfortable with it, you could save up a down payment for the next and get a mortgage on just the new property. Then pause from buying more and use cash flow from both houses to pay that off. then take cash flow from both paid off to build a down payment for the third or complete purchase price. No amount of money is worth making your wife feel more stressed with risk when you've already reached a point of stability she enjoys.

 Thanks Russel.  You basically provided a written narrative of our personal investment goals.  

I will add this comment; after several years of netting only a few hundred dollars/month cashflow from our SFH portfolio we did enjoy significant equity growth. We netted $145K on one property and 1031 Exchanged that money into two other SFHs. Then, we did a Recast on another property based on advice a mortgage broker suggested, then we paid off another property. AT THAT POINT SOMETHING HAPPENED - the cashflow started rolling in. I went from netting a few hundred dollars/month to netting $2200/month, and when I get my bank statements each month I just scratch my head show my wife the increasing bank account balances.

We plan to let that increased money gather and combined with other income we hope to buy 1 SFH every 2-3 years. I may also walk my wife into additional risk at some point in the future to accelerate our portfolio. But, I don't need to get ahead of myself.

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