What's my next move?

Question

I currently own 2 properties:

1. Single family 3br 2b, no mortgage, $400k equity, generates $2,000 income monthly (long term tenants)

2. Duplex 2br 1b (each unit), $270k mortgage, $15k equity, generates $1,800 income monthly (long term tenants)

I also have unearned income of around $24,000, no W2 income, and about $20k cash for a down payment + closing costs. My credit is excellent, no debt besides the mortgage. However, I know I'm not going to be approved for another mortgage by traditional lenders because I've only been a landlord less than a year so I don't think they'll count the rental income towards my DTI. Nevertheless, I want to leverage the equity of my SF property. What's my next move? As it stands my plan is to hold until rates come down and I've established myself to lenders, but that's years away at the soonest, and I want to be proactive.

Jacob St. Martin · Answer

Hello Noah! Congrats on having a couple of properties that seem to be doing well. If you are a new landlord but have a fully paid off property I am going to assume that you inherited this house.

Here is your best course of action to leverage the house if you definitely want to keep it: Get a DSCR loan for as much as they will give you and deploy that cash into other deals. They will probably only let you pull out $150k- $180k because of the income the property is generating.

If you are open to the idea of selling, I would sell for these reasons:

1. The return on equity is terrible. Right now you are getting ~5% annual return on your equity in the property. If you refinanced into a DSCR pulling out as much equity as possible, your cash flow would drop to almost 0 but you would still have ~$250,000 in equity stuck in the property so your return on equity is still bad.

2. You can deploy that new capital to buy several other properties that should cash flow stronger and have a better return.

3. You can take some of that capital for a big cash reserves account. You are a new investor and you have very little income which means you don't have any money to lean on when things go south. I would want to see you take at least $40,000 of this money on sale and keep it as cash reserves, more if you are going to try to flip or BRRRR.

4. I am actually from upstate NY and although there are a couple areas that are doing well I can pretty much guarantee you that you will get better returns in a different market.

My only hesitation to tell you to %100 sell is that you are a new investor and normally that means that you don't have consistent deal flow. If you struggle to find a deal when you sell and end up buying then you are in a worse position than you are in now. If you are not confident in your ability to find a deal then maybe keep this one for now, build your skills, see what the market does, and sell it when you are ready to dive in. If you are confident then take that next step and sell now.

I hope this was helpful! Let me know if you want to talk more in depth about your situation. I also partner with other investors who have capital but maybe not experience or time so I'd be happy to share about that too

Peter W. · Answer

Where upstate are you? If you are between (inclusive) Rochester and (exclusive) Syracuse, give James Allison at Lyons National Bank a call they will let you count your current rents as well as future rents towards your income for qualifying. If you are somewhere else go to a local rei and find out who the most flexible banks are.  You are probably going to want someone who holds their own mortgages as they will be most flexible, but the local investors know who to talk to.

Hard thing though is only having 20k for a down payment. I’m not really the creative guy so I’ll let other chime in.