I am an intermediate investor. I feel stuck. What do I do next?
Investor · Cedar Rapids, IA · Member since 2014 · 77 posts · 21 votes
I have been investing for just over 10 years. I started with a duplex where I lived in one side and rented out the other. I now have 13 properties. I feel like I know what I am doing, but whenever I look at my numbers I don't feel like I am making the progress that I would have expected. So I am going to lay it all out there. These are the numbers for all the properties I own.
Some notes: The duplex is a 15 year note, the 2nd mortgage goes to 3/1 House D.
I feel like I am not getting the money out that I should. Did I buy some of these wrong? What should my next steps be? Sell something? Refinance something? Buy more? Pay down aggressively?
@Anthony Gayden ...
@Jeff B. The major reason that the duplex is running so negative is that it is on a 15 year mortgage with about 9 years left. Should I refinance that one back to a 30 year mortgage?
As an investor, we typically try to hoard cash and use OPM. Paying down a mortgage is not a normal strategy for an investor - - you're creating dead equity which kills the opportunity for more acquisitions. There are those who are debt adverse but that's a difference kind of choice.
You want to 'feel better' about your investments? Manage the expenses; drive them to zero wherever possible (metaphorically). I put a lot of time and effort into my units and I didn't do that to earn $1.95. I read of numbers here on BP at earning as low as $100/door - - I wouldn't work for that myself. My units were returning over $500/door and I felt that was well worth my time. Pick any number you will feel good with and manage to that number - - you will feel better and more satisfied with your REI.
Look at all your negative cashflows and solve them or liquidate!
I can't make out the numbers on my phone screen but you mentioned 15 year notes. Are they all 15s? Are you wanting cash flow or equity accumulation? As for me (several properties behind where you are) I choose cash flow at this stage so I do 30 year mortgages. The 15 is awesome if you have all you want and want to pay them down. If you do want cash flow, could you refinance the 15 to a 30? Maybe pull some cash for another deal while you are at it?
I comsider myself to be in a growth stage and plan to start payoffs way down the road - if ever. This cheap debt is an asset in itself as far as I am concerned. Check out Jason Hartman's podcast for some interesting ideas about debt. May have to listen to a few episodes to get the gist. Or maybe find it on his website.
My two cents without being able to read your numbers but way to go getting to the point you are at! I hope to be there one day.
@Will Pritchett Only the duplex is on a 15 year note.
Does this make it easier to read?
| Address | Rent | Purchase Price | Purchase Date | Value | Piti | Balance | Annual Cash Flow (Rent - PITI - Management(6.5%) - Maintenance(10%) - Vacancy(1month)) | Approximate Annual Loan Paydown |
| Condo A | $695 | $53,000 | 4/13/2009 | $60,000 | $416.66 | $41,870 | $138 | $874 |
| 3/2 House | $995 | $95,000 | 1/19/2010 | $133,000 | $775.00 | $74,945 | -$260 | $1,680 |
| Duplex Unit A | $675 | $147,000 | 9/29/2006 | $152,000 | $1,330.00 | $81,900 | -$3,514 | $7,524 |
| Duplex Unit B | $695 | |||||||
| 3/1 House | $825 | $38,795 | 8/5/2011 | $70,000 | $0 | $7,495 | ||
| Zero Lot Line A | $760 | $65,529.5 | 4/14/2012 | $92,000 | $580.00 | $60,825 | -$55 | $1,860 |
| Zero Lot Line B | $645 | $65,529.5 | 4/15/2012 | $81,000 | $550.14 | $59,635 | -$742 | $1,824 |
| 3/1 House B | $845 | $60,607 | 10/30/2012 | $63,000 | $451.00 | $29,705 | $2,265 | $888 |
| 4/2 House | $1,095 | $88,827 | 3/14/2013 | $118,000 | $837.78 | $87,183 | -$105 | $2,544 |
| 3/1 House C | $650 | $32,000 | 11/26/2014 | $45,000 | $338.15 | $36,557 | $1,847 | $708 |
| 3/1 House D | $795 | $30,000 | 8/18/2015 | $53,700 | $347.94 | $33,977 | $3,047 | $823 |
| 2nd Mortgage | $169.49 | $6,988 | -$2,033.88 | $1,673 | ||||
| 3/3 House | $1,195 | $125,327 | 6/17/2016 | $150,000 | $961.10 | $99,097 | -$677 | $2,268 |
| 3/1 House E | $895 | $72,327 | 7/12/2016 | $96,000 | $648.00 | $71,283 | $355 | $1,509 |
| 2/1 House | $695 | $34,327 | 10/11/2016 | $65,000 | $351.68 | $36,808 | $2,094 | $744 |
| Totals | $11,460 | $908,269 | $1,178,700 | $7,756.94 | $720,773 | $9,855 | $24,919 |
What is your average DCR ? (lenders typically require 1.25 ) but in my experience/opinion if not closer to 2.0 it is hard to maintain good cash flow considering all costs. Just my 5c
I guess it all depends on what you are measuring your progress against. You are positive cash flow overall and are accounting for all of the costs(property management, Taxes, insurance, vacancy). If you are in a long play, it does not look as bad as you may think. When the loans start to pay off, you will be sitting pretty. You may want to start applying the cash flow to some of the higher interest loans and pay those off first. You have a million in real estate that is turning
The thing that seems to be eating a lot of your cash flow is that second mortgage. Also your duplex seems to be losing money. Reevaluating those things could help you become a better cash flowing business.
Also I should add that your more expensive properties all seem to have negative cash flow annually. the 4/2, 3/3, and 3/2 houses. The less expensive homes seem to offer the best cash flow for the money. The more expensive houses you own have all appreciated in value over $30,000 since purchase.
The question then is do you want cash flow or appreciation?
You are running cashflow negative <7386> per month while positive 9845. If you could control your expenses and reverse the losses you have the potential of 17,241/mo.
So why the heavy losses? The duplex alone is -3514.
Give you a tool:
I've run mine at ~30%, but some approach 45-50%. The bigger this gets, the worse the property is to keep; aka you're putting in more than your getting out. Find means to control expenses or liquidate.
@Anthony Gayden Most of the appreciation is forced appreciation just after I bought it. Almost all of these were foreclosures that I bought and fixed up prior to renting out. I wouldn't expect to see much appreciation going forward since these are in Iowa. I am definitely trying to get some cash flow.
@Bill Florence Let me figure that out and get back to you
@Richard Allen I guess I am measuring myself against the perception that I have been doing this for 10 years and still dont have much cash flow to speak of and I compare that to some of the folks on the podcast who are quitting their jobs after 2-3 years. I am no where close to that. Maybe I need to be more positive.
@Jeff B. The major reason that the duplex is running so negative is that it is on a 15 year mortgage with about 9 years left. Should I refinance that one back to a 30 year mortgage?
You have a 70K equity position in a duplex that is losing 3500 per month. If your stockbroker charged you $3500 (5%!) per month to manage a 70K portfolio, wouldn't you want out?
I would sell that particular property--even if you have to take less than what you think it's worth--and put the proceeds toward a new property or to pay off one of your other properties to improve its cash flow.
@Anthony Gayden ...
@Jeff B. The major reason that the duplex is running so negative is that it is on a 15 year mortgage with about 9 years left. Should I refinance that one back to a 30 year mortgage?
As an investor, we typically try to hoard cash and use OPM. Paying down a mortgage is not a normal strategy for an investor - - you're creating dead equity which kills the opportunity for more acquisitions. There are those who are debt adverse but that's a difference kind of choice.
You want to 'feel better' about your investments? Manage the expenses; drive them to zero wherever possible (metaphorically). I put a lot of time and effort into my units and I didn't do that to earn $1.95. I read of numbers here on BP at earning as low as $100/door - - I wouldn't work for that myself. My units were returning over $500/door and I felt that was well worth my time. Pick any number you will feel good with and manage to that number - - you will feel better and more satisfied with your REI.
Look at all your negative cashflows and solve them or liquidate!
@Pearce G. I had been letting that slide since it was on a 15 year mortgage and the loan was being paid down about $7500 a year. Am I thinking about that wrong?
@Ryan Parnow,
just keep in mind that there's nothing in a 15-year mortgage, that you can't do with a 30 year one. If you want to pay off quicker, then you just make extra monthly payments to your 30 year mortgage. But it gives you flexibility when you have a month, where you need that extra money and aren't forced to make a higher payment.
@Richard Allen I guess I am measuring myself against the perception that I have been doing this for 10 years and still dont have much cash flow to speak of and I compare that to some of the folks on the podcast who are quitting their jobs after 2-3 years. I am no where close to that. Maybe I need to be more positive.
NEVER measure yourself against someone else and certainly NOT a diverse group like BP. Numbers are all over the block(aka not applicable to you) and there's lots of hype and as we have been hearing all month, there's 'alternative facts' everywhere.
You have a portfolio, but was it chosen wisely? The goal when acquiring properties is to make money by a good transaction (great discount purchase followed by FMV sale) or to get a working cash flow from the rents. Never buy just because you can - - that can lead to white elephants.
@Ryan Parnow to put it bluntly; why are you holding on to anything that is cash flow negative in a non-appreciation market?
You appear to have some limited upside in the negative buildings. You should sell those off and 1031 exchange into something that will actually cash flow. Even if you did not go buy another property, you would be making more money without those boat anchors and doing less work. If there are some building that you are emotionally attached to, then sell off the ones that you are not in love with and dump the money into the units that are negative and refinance a smaller loan so your PITI will go down and get you to a positive flow.
This part of REI is the easy part... get rid of the boat anchors before they drag you down.
-Arlen
You have a number of properties that don't have good returns for their value. A refi to a 30 years won't change that. You have equity that isn't really working for you. You could take that cash and buy some more properties that have better return.
For example: 3/2 house with rent $ 995 and worth 133K. You owe 75K. I would look at that as a flip and sell it.
Same with the duplex. Looks like you bought at FMV and have negative cashflor, but +70K in equity.
Zero lot line A is worth 92K and gets 760 rent. You owe 61K.
Zero lot line B is worth 81K, you get 645 rent and owe almost 60K
3/3 house woth 150K with 1195 rents and you owe 99K
I would sell all of them.Not with tenants in them, but once the lease runs out, sell them to owner/occupants. You could have +200K in cash and turn around and get some nicer deals.
Right now I see you having a lot of equity, that isn't benefiting you. You say that you don't expect much of an appreciation in your area, so, I'd take the profit you've built up and translate it into something bigger and more profitable, instead of just having it sit there.
The minute I see a negative cashflow I run. I don't care if I'm paying off the equity quicker or anything. As many have said before...you'll make more in acquiring more properties with better cashflow that dead equity in a property.
One of the calcs I have started doing (didn't initially do it) is the return on equity calculation, using just cashflows plus appreciation (excluding mortgage paydown). @Pearce G. hinted at it in his post above. Basically you are looking at your equity in the property that currently exists, and you have a choice to either reinvest that equity in the property that you already own and get the returns you predict in the next year, or take that equity and invest in a different property with a different return. Choosing to continue to own the property or keep it at it's current level of equity is an active choice to receive a certain level of return. For example, in my own investing, I had a house that was our former personal residence. Even though it was cashflowing $400/ mo, there was $85k of equity, so the pre-tax ROE was only 5.6%. In this case I chose to sell and invest the proceeds at a higher return.
One other thing to look at, and it is a shot in the dark since we don't know if you already did this- if you've owned some of these places 10 years and the rent hasn't gone up, would it make a difference to your cashflow to raise the rent to market rates?
It depends on your objectives in the long term. You systematically liquidate some properties and rollover to either new properties with 1031 Exchange or if you don't like day to day headaches of managing, you may buy fractional ownership in DST Multi-family projects nationwide.
These are higher quality Institutional properties in very strong locations managed by reputed companies. If you need to discuss some of these options, I have a lot of experience help investors with these type of evaluations and also offer options to rollover your proceeds from sale of your properties in 1031 Exchange.
Dinesh Gupta
If you take the properties that I mentioned and added the 4/2 with neg 105 to that, you'd have about 250K in equity (obviously that's on paper, so might not be that much) and you'd loose $ 5353 loss. Win/win on both ends.
@Michaela G. thats a good point about the 15 year mortgage. I can always pay the 30 down quicker. Turning that equity into cash and getting rid of those cash flow losers would definitely flip things around. Thanks!
@Arlen Chou Blunt is good. If I just wanted to feel good about my decisions I would just go ask my mom how I am doing ;) I was looking into the 1031 process but have more reading to do before I feel like I would be comfortable with it.
@David Zheng A couple of the houses I bought due to the equity and then I expected to be able to rent for more than I am getting. I guess I should have flipped them when I realized I wouldnt get the higher rent.
@Daniel Hanson I was actually doing the return on equity calculation when I realized I needed to ask some advice on what I should do as some of those returns on equity are pretty small even when counting the loan pay downs.
@Dinesh Gupta I would definitely be interested in learning more about 1031 exchanges.
i am in a similar boat as you with 12 units and 2 garages. The break is (4) 2 unit town homes and (4) 3/2 rowhomes. I bought all mine cheap and fixed them up to be nice long term rentals that could be resold if i needed to bail out for some reason. i make a small amount of money on the single units but the 2 unit are cash flowing much better and i am selling all my singles. I would recommend you find properties that are already 2 units that need work and fix them up and rent. As an example i gross over $2050 on one 2 unit that is a 2/1 in each unit. One unit rented to section 8 for $1150 and the other to market tenant for $900. Could be even better if i rented both section 8. My best 3/2 is rented for $1450 to section 8 tenant. That is a $600 a month differential for what is essentially 1 more bedroom and another kitchen. In the long run the 2 units will out cashflow any single family and allow you to paydown your loans if thats what you want to do. It would be even better with 3-4 unit properties if you can buy them right.
You should also look into section 8 tenants. They arent all bad and i was a big skeptic until i dipped my toe into the pond. They need to be managed like any other tenant but i get a premium rent of $200-400 a month per unit over market tenants when i rent section 8 and to me this is worth the additional hassle.
Bottom line is ditch the ones not making money and buy something that makes sense from day 1 on a 20-30 year mtg so you can cashflow better and allow you to buy more and build your capital base. Read all the articles from Jeff Brown on this site. He explains things on another level that makes sense if your in for the long game. If you dont need the income from your rentals for 10 - 15 yrs, his plans may be for you.
@Ryan Parnow you need to determine what type of investor you want to be. Cash flow or appreciation? Pretty evident from reading the thread cash flow is your only option (and the best option imho). Knowing that, I think you should get away from the sfh's and shift your focus to mfh's man. If your goal is to quit your job, cash flow is king right now for you. I don't know your market but I can almost guarantee you you'll have a far easier time generating more cash flow with multi-unit properties. You have plenty of equity to look into 1031 exchanges and could be looking at 4 unit properties. Good luck man, don't be too hard on yourself, you're doing way better than most!
Hey @Ryan Parnow, I'm in the Quad cities and Clinton and having phenomenal returns on my investments. That doesn't mean they aren't in your area it just means I KNOW there are great deals nearby. The foreclosures and the sheriff's sales aren't a great deal. EVERYONE goes looking there. SO, you've said you have been investing for 10 years? Who is in your network who is also investing? Do you have a group you meet with? Do your friends invest? My suggestion is get out there and network. I know there is a group who meets in Iowa City. I say go sell that whole portfolio and 1031 it into larger residential real estate. You need more units beneath one roof man! But, do it quickly before all the interest rates take an even bigger leap.