I need advice on my portfolio.

Real Estate Deal Analysis & Advice
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I need advice on my portfolio.

Brent Davis
Investor · Petersburg, IL · Member since 2015 · 28 posts · 3 votes

I'm fairly new to this forum.  I poked around on here a few years ago.  I currently have over 20 units.  I'm a school teacher also.  I have been doing this for about 15+ years.  Does anyone have advice on who to talk to to look over my numbers/portfolio?  I've basically self taught myself everything.  I've kept above water for 15 years so I'm not failing.  However, it is always a sort of uncomfortable thing to share what I am doing as far as finances with people.  Basically my properties are mostly all short term notes now.  5, 10, and some 15 year notes.  They are all balloons.  They do cash flow.  However, I feel broke at the end of each month.  Lol.  I have a huge amount of equity in my properties.  THey are all in top notch shape and I have amazing tenants.  However, I constantly stress about the amount of debt I have compared to my income.  I'd love for someone to be able to look over my stuff or advice on how to do that.  I'm thinking of taking things to the next level and using some of my equity to acquire more units.  However, my amount of debt keeps me second guessing.  Any advice is appreciated..

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Gabe N.
Investor · Anchorage, AK · Member since 2015 · 29 posts · 24 votes
8y

@Thomas S. I see you always beating on the drum of "refi and reinvest" when it may not be be best option for somebody that has enough properties already and just wants to simplify their current investments. In my view paying down or completely paying off a few of the better performing properties in this portfolio may be the least stressful option and would increase cashflow.

Another thing I'm curious about is this "ghost cashflow" or "artificial cashflow" as you put it. Cashflow is cashflow no matter how you get it. Whether that is 10 properties making 10% or 1 property making 100%. It's just money in the bank account at the end of the month.

I don't mean to single you out but I just see this approach being foisted on every person and I would like some clarification as to why it's the best for every situation.

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  • Aaron K.
    Specialist · Riverside, CA · Member since 2015 · 6k+ posts · 3k+ votes
    8y

    Don't just plan on your cash flow today strategize for how you will handle balloon payments, if you can't come up with a good strategy for handling balloon payments maybe consider refinancing into more conventional loans if possible.  If you feel you have too much debt you could always offload a couple properties and use the proceeds from the sale to pay down the debt on the units you have left.  If you are not comfortable with your current debt load I doubt that acquiring more units and going into more debt will put your mind at ease at all.

    5Reply
  • Brent Davis
    OP
    Investor · Petersburg, IL · Member since 2015 · 28 posts · 3 votes
    8y

    I do understand balloon payments but what specifically do you mean by "how I will handle the balloon payments."  I've always just refinanced them when they come due.  I'd like to have conventional loans and spread amortization out further but I also like seeing how much my principal drops on the short term amortizations.  

    0Reply
  • Sam Shueh
    Real Estate Agent · Cupertino, CA · Member since 2016 · 4k+ posts · 1k+ votes
    8y

    What is your debt to income ratio? Wife has additional income?

    0Reply
  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    8y
    As you pay them off your cash flow should go up. I’m not a big believer in keeping yourself in debt forever. Pay it off as scheduled and then leave it and collect the extra cash
    2Reply
  • Sean Tarpenning
    Turnkey Investment Provider · Kansas City, MO · Member since 2015 · 1k+ posts · 116 votes
    8y

    Brent, I've been in the game for some time. I am interested in your story. It could help many others and others could help you as well. If you are comfortable, post more details so others can chime in. If not, I'm available for a private conversation to discuss your strategies and current situation.

    Cheers!

    0Reply
  • Jerry W.Pro Member
    Moderator
    Investor · Thermopolis, WY · Member since 2012 · 4k+ posts · 4k+ votes
    8y

    @Brent Davis welcome back to BP.  I absolutely understand your feelings.  I began investing in RE well over 20 years ago and have over 30 units currently of which most are self managed.  You do the same thing I do by using mostly 15 year notes.  Mine have 5 year ARMs so the interest rate can go up every 5 years, and in fact it has on all of my recent renewals.  Using 15 year notes really drops your cash flow, but you are saving a massive amount in interest, especially over the life of your loan.  Most of the deals you see advertised showing great cash flow use 30 year notes.  Take one of your mortgages and run it out as a 30 year note and you will see a huge amount of change in cash flow.  Unless it is an expensive property often even the difference for 15 to 20 year notes is not that much.  On a $100K property where you finance $80K at 5% for 15 years your payment is $633, with a 20 year note your payment is $528.  You pay off 25% of your mortgage in less than 5 year with a 15 year note and it takes over 7 years with a 20 year note.  Your same mortgage is only $430 per month with a 30 year mortgage and it takes 12 and 1/2 years to pay off 25% of your mortgage.  While there is $200 per month in cash flow difference between the 15 year and 30 notes, the speed at which you pay down massively different.  You pay almost $75K in interest alone on the 30 year note and only $34K on the 15 year note.  That is over $40K in difference.  If you don't need the cash flow to live on then keep doing what you are doing.  I struggle with cash flow and I do my own roofs and a fair amount of my own maintenance.

    Once you start paying properties off your cash flow picture will change dramatically.  If you really need better cash flow to make you sleep better at night refinance one of your high equity properties and pay off 3 or 4 of the loans that are very low.  Your payments will not change on one property, but will disappear on several others.  I would suggest you keep doing what you are doing.  Great job.  Feel free to reach out if you want to chat.

    3Reply
  • Allan Rosso
    Investor · . · Member since 2017 · 173 posts · 84 votes
    8y
    Brent Davis have you ever considered exchanging some of your current properties for a single multi family such as an apartment complex?
    0Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    8y

    @Brent Davis, you tell us a whole "tired landlord" sob story, and then end up with "I'm thinking of taking things to the next level and using some of my equity to acquire more units"? Good one!

    Seems like the only thing your "portfolio" really needs, is a good "Portfolio Lender"!

    Do any of your current Lenders seem like they they could/would help you maximize your profits (in order to help them out too, but not too greedily)?

    I reckon you need to be out of Balloons, and into longer term fixed interest amortizations.

    If your past deals have proved to be successful, there's no reason why Lenders won't want your continued (or new) business. Seek out the best terms you can. You have great ammunition to use ie. If they won't accede to your view of fairness, you can pick up your marbles and go home. Will they really want that? Kudos on getting to where you are, and, good hunting...

    1Reply
  • Brent Davis
    OP
    Investor · Petersburg, IL · Member since 2015 · 28 posts · 3 votes
    8y

    Thanks for the replies everyone!  I hope I didn't sound like I was giving a "sob story."  I love investing in real estate.  I do most of the rehabs myself.  Being a school teacher I have summers to do big projects.  My wife is also a teacher.  Our combined income excluding rentals is about 120k.  

    I would love to exchange sfh for multi.  I do own two duplexes and a five plex.  They make crazy good cash flow.  However, my niche is a really small town of appx 3500 people.  There just aren't a lot of multi units.  I really like all my properties right here.  Being a teacher I have great relationships with many people in the town and it gives me an edge for knowing tenants, etc.  

    Any time I've mentioned getting into a fixed mortgage my lender has always acted like it isn't possible.  I do have a 30 year fixed note on one of my duplexes.  ,

    Here are a couple of my properties I've randomly picked:

    Property 1

    20 year old duplex.

    I owe 61,000   

    taxes appx 1800 

    650 per month per side

    I'd say the property is probably worth 115,000

    I believe payment is 427 per month.

    (property 2)

    SFH (purchased this year)

    purchase price 10,000

    rehab amount appx 40,000

    I owe 48,000

    3 bedroom 1 bath  

    750 per month rent

    taxes  1700

    appraisal value 90,000  (doubt I could realistically sell for that)

    0Reply
  • Nuhan Demirkan
    Rental Property Investor · La Plata, MD · Member since 2011 · 216 posts · 117 votes
    8y

    Hello Brent,

    Before we can give you sound advice on your situation we would need to know what your goals are. We can't give you a path without knowing what the end game is. If you paid off the 20 units would that get you there? If not than you would have to buy more  which means more debt to take on. If you haven't already done so I would advise to develop a plan. The number of units you own should correspond with how much cash flow you want. Property 1 cash flows $230/mo or $2,760/yr. per side. if you paid it off it cash flows $450/mo per side (after taxes and insurance) or $5,400/yr. And if the numbers were similar on all of your properties $5,400 x 20 units = $108,000/yr. Is that enough? If not you need to buy more before paying them off. It is difficult to scale without debt or partners with money. Good luck.

    0Reply
  • Peter B.
    Investor · Ogdensburg, WI · Member since 2016 · 273 posts · 351 votes
    8y

    @Brent Davis

    I will share my experience. Your situation sounds like mine a few years ago I had a heck of a lot of equity and maybe 2k a month in cash flow. I worked with the same small bank for a number of years and they offered to due porfolio loans or some call cross collatorlized loans. Basically using equity to expand. You could maybe look into that? I picked of 2 four plexes a 20 unit and just last september a 22 unit. The 4 plexes were basically retail. The 20-22 were retail but were ran improperly. I was able to force a substantial amount of equity. 

    I am also in a small market and the challenge will be finding properties. Mine are all less than 20 minutes from my front door. 2 of the four were never on the market.

    Hope this helps feel free if you want to p.m or discuss further.

    Peter

    1Reply
  • Brent Davis
    OP
    Investor · Petersburg, IL · Member since 2015 · 28 posts · 3 votes
    8y

    Thanks for the replies.  My end goal is to retire early.  I have 14 years in teaching.  I'd like to be able to retire at 50 and be very comfortable.  I enjoy the rental properties.  I have no desire to get out of the game by selling.  I also am not real concerned with making money right now. (cash flow)  However, I think I probably do need to get some more cash coming in to keep my reserves funded.  I am currently 39.  I'd like to continue to purchase properties but only if the right deals come along.  I enjoy having projects during my summers off.  

    0Reply
  • Brent Davis
    OP
    Investor · Petersburg, IL · Member since 2015 · 28 posts · 3 votes
    8y

    @Nuhan:  Can you explain where you are coming up with 270 per month cash flow on property one?  It is bringing in 1300 per month.  Taxes and insurance are around 200 per month.  My payment is 427.  That brings me to 627.  What other figures are you using to come up with 270?  Vancancy? Repairs?  Just curious what percentages you used for those additional expenses.  THanks 

    0Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    8y

    I believe you need to start by educating yourself on finances. Not sure you fully understand how your investments work if you feel financially stressed every month.

    You biggest issue is your dead equity due to the lost opportunity value. Dead equity will decrease your potential income as opposed to increasing it. If you pull out all your equity you would exponentially increase your income through reinvesting in additional properties. 

    Pulling out your equity will increase your true cash flow on your existing properties and the additional income properties will generate positive cash flow above and beyond the debt repayment and expenses on each.

    Leverage will increase your cash flow income as opposed to losing income as your dead equity is now doing.

    The bottom line is you are losing money and feeling financially stressed due to the fact that you do not understand how cash and investing works.

    Without using leverage you are losing a great deal of potential income. Leverage will ultimately increase your positive cash flow every month putting more money not less money into your pocket.

    1Reply
  • Brent Davis
    OP
    Investor · Petersburg, IL · Member since 2015 · 28 posts · 3 votes
    8y

    So would a cash out refi be the best option to use that equity?  Sorry if these questions are stupid.  I want to be prepared and knowledgeable when I approach the bank.  

    0Reply
  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    8y
    Originally posted by @Brent Davis:

    So would a cash out refi be the best option to use that equity?  Sorry if these questions are stupid.  I want to be prepared and knowledgeable when I approach the bank.  

     I doubt a cash out refi would be a good option for you, Brent, unless it also gets you out of a balloon.  Debt is causing you stress.  Cash-out refi's will, by definition, give you more debt.  

    I guess I don't understand why you have balloons on residential property (not the 5-plex)? That would give me stress, too.  Sounds like you've refied out of some of those already only to roll back into a new balloon mortgage? Small town bank portfolio lender probably.  I'd talk to a mortgage broker who can get me fixed rate, fully amortizing fannie/freddie products.

    Sometimes I feel the same way you do - unsure about what is the best debt/equity and amort mix with my portfolio.  I paid off about half of my units this year and have a 10yr private loan and a couple 15yr fixed on others. The reasons were sound at origination as the 15s had a rate almost 30% less than 30s at the time in 2012.

    I'd keep plugging away like you are, but get rid of the balloons. Either way, I keep all assets below 80% LTV to avoid PMI. I wouldn't touch cross-collateralization/blanket loans. Too hard to peel one off and unwind if you want to sell one.

    Congrats on your success so far and your plan going forward!

    1Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    8y

    Refinance everything at 80% on thirty year fixed and reinvest all cash on additional properties at 80% 30 year fixed. This will increase your cash flow above and beyond your debt repayment costs. Far beyond any possible income due to your dead equity. 

    Your dead equity is what is killing your potential cash flow. Conservative investors that pay down mortgages at best garner a 3-4% return on total investment. Leverage increases your returns in most cases to 10%+ when properly done.

    In reality for every dollar of dead equity you are losing 10% - 4% = 6% lost income. That is a huge price to pay to purchase phantom cash flow on a property through debt pay down.

    0Reply
  • Brent Davis
    OP
    Investor · Petersburg, IL · Member since 2015 · 28 posts · 3 votes
    8y

    I haven't asked about a thirty year fixed for a super long time.  I think the reason they gave me was I wouldn't qualify because of my debt to income.  I'm certainly open to revisit any and all options.  That is why I am here.  Thanks again.

    0Reply
  • Allan Rosso
    Investor · . · Member since 2017 · 173 posts · 84 votes
    8y

    @Brent Davis I'm pretty sure some banks will consider income the property is generating, as income on your debt to income ratio. Especially if there is a history of this positive income being generated. It doesnt hurt to ask the bank(s) you sit down with. 

    0Reply
  • Paul B.
    Rental Property Investor · Dallas, TX · Member since 2015 · 503 posts · 504 votes
    8y

    Since you're in a small town, I'd want to know what the employment situation is there. If a factory closes, are you screwed? Is the population growing, shrinking, or staying the same? What is the long term outlook for employment and population? Even if the population is stable, if everyone is over 60, and young people aren't moving there, that doesn't bode well for 20 years from now. 

    If the answers are anything but rosy, I am not sure that increasing your leverage is a good idea. But at any rate, get out of those balloon loans if you don't intend to sell in a few years. What if interest rates are much higher when one of those loans comes due? Worse, what if there is a credit freeze due to economic conditions (e.g. 2009) and you can't get another loan at all? Would you have the cash reserves to make that balloon payment?

    Get some long term fixed-rate financing while interest rates are low. Since you have a bunch of equity, you could pull out that cash and do 80% leverage like @Thomas S. suggests. That's an aggressive approach. Or you could just refinance the loan balance and keep some of that equity in the property, which means less return but it is more conservative. 

    0Reply
  • Brent Davis
    OP
    Investor · Petersburg, IL · Member since 2015 · 28 posts · 3 votes
    8y

    I did speak with a mortgage broker today briefly.  We didn't go over specifics.  He did say that debt to income could be the "killer."  He also said Fannie and Freddie limit to 10 properties.  

    0Reply
  • Aaron K.
    Specialist · Riverside, CA · Member since 2015 · 6k+ posts · 3k+ votes
    8y

    Depending on how much equity you have you might be able to fully leverage 10 of your properties and own the rest free and clear.

    1Reply
  • Gabe N.
    Investor · Anchorage, AK · Member since 2015 · 29 posts · 24 votes
    8y

    @Thomas S. I see you always beating on the drum of "refi and reinvest" when it may not be be best option for somebody that has enough properties already and just wants to simplify their current investments. In my view paying down or completely paying off a few of the better performing properties in this portfolio may be the least stressful option and would increase cashflow.

    Another thing I'm curious about is this "ghost cashflow" or "artificial cashflow" as you put it. Cashflow is cashflow no matter how you get it. Whether that is 10 properties making 10% or 1 property making 100%. It's just money in the bank account at the end of the month.

    I don't mean to single you out but I just see this approach being foisted on every person and I would like some clarification as to why it's the best for every situation.

    7Reply
  • Brent Davis
    OP
    Investor · Petersburg, IL · Member since 2015 · 28 posts · 3 votes
    8y

    Judging by appraisal values/my view of the market I'd say I have around 722k in equity.  That is including my own personal residence.  I have about 120k in equity on it.  

    0Reply
  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    8y
    Brent Davis you may consider refinancing your primary to pay off some or all of your balloons if possible. I️ would get out if balloon payments if possible and would just pay off your other stuff as scheduled. Leverage is good but it’s not always good. People who lost it all in the crash were overleveraged. Those that weren’t probably just bought more and are now making a fortune. I️ plan to pay down my own portfolio ahead of schedule. I️ don’t really need the cash flow now so why not just blow it back towards my mortgages. I️ don’t want to paying thousands in interest for the next 3 decades
    1Reply
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