Hello, I hope everyone is doing well.
I'm at a crossroads in my investing path and would love the advice or views from other investors.
I currently own 3 properties in Chicago:
1. Duplex in a C- neighborhood south Chicago
2. SFH in a c neighborhood south Chicago
3. A fixer future flip/ or long term hold in emerging neighborhood Avondale
I work a regular 9 to 5 and most of my money is currently being funneled into the Avondale fixer. So basically I'm not able to save a significant amount to put down a down payment on my next place. My other properties are rented out and covering their mortgages ( all 3 purchased with conventional financing).
I'd like to start buying in more established neighborhoods like Avondale for example. I am not opposed to selling my 2 properties in C class neighborhood's to achieve this however if I could hold them that be great. The goal is to start snowballing these properties into larger chunks of wealth sprinkled with some appreciation?
Curious, what you would do? Open to all strategiesThanks!
I would take a hard look at the numbers for each property to see what's worth keeping and how much you should continue putting into the fixer upper.
You mention that the rent covers the mortgages, but does it cover your other expenses and budgets as well? You should budget 6-10% for property management, even if you're doing that work yourself, plus vacancy, maintenance, and capex. I use a back-of-the-napkin number of 25% of the rent for those four expenses. Do you get any cash flow after your mortgage (assuming your payment covers taxes and insurance in escrow) and that additional 25%? If so, that a good start and they may very well be worth holding onto.
For the fixer upper, you should look at those same numbers, but also look at the cash on cash return of putting in additional money. Basically, take your annual cash flow divided by all the money you've put into it, including down payment, closing costs, loan fees, and the costs of fixing it up. Where does that number stand today without fixing anything else? If it's over 10% and you're almost done, it's probably a good investment. If you're at 7% or under, it's verging on being a bad investment, especially if you have additional fixes to make. You can also use this number to figure out how much more to invest before your returns start dipping too low. You could calculate this on your other properties as well, but it's generally used in due diligence prior to purchase, and since you already own them, I wouldn't worry about it too much personally if they're cash flowing well.
@Tomas Saenz long before anyone had heard of the BRRRR acronym that was invented here on BP, I read a book called "The Complete Guide to Buying and Selling Apartment Buildings" by Steve Berges. It wasn't a perfect book by any means, but it had one core principle that has always stuck with me. The author showed the difference between buy and hold versus what he called laddering. If you sell your early properties and trade them into bigger and better properties, then you will grow exponentially.
If I were in your shoes, I would look carefully at these properties and think through when the best time to sell would be. I definitely agree that trading your C class stuff for a B is worth it all day long.
Think in terms of how much equity you have in your current rentals first, and then figure out what kind of return you are getting now on your equity. Compare that with new properties you are thinking about buying and see which one gives you more cash flow per equity. That's one way to look at your situation.
@Tomas Saenz - Sounds to me like you kinda answered your own question haha. Which is a good thing because you have a vision of where you want to If there is a good time to sell the two properties it is now. Maybe you could even sell both of them and 1031 exchange into a large unit on the Northside like you alluded to.
Personally, I prefer investing in appreciating markets because cash flow was a little less important to me and I also preferred the tenant class better. I wanted to be able to self-manage and not worry about vacancies, my tenants not paying their rent, or the condition of the property after they moved out.