just asking for some advice as a new investor

First-Time Home Buyer
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just asking for some advice as a new investor

Ryan Havens
Member since 2019 · 13 posts · 3 votes

my first brrrr and it's past my 6 months to refinance. with these new interests rates if I was to refinance I would be braking even. so here is my predicament. I used a HELOC for the down and rehab and I have good renters in the sf home.my HELOC is a 15 year fixed 5.9 and my primary is a 30 year 5.1.

so with the 15 payment and the 30 year I'm going backwards $100 a month however with the 2 I'm paying $400 month princibal.  so I guess I'm making something just not in a (in my pocket) form.. 

the education I received is priceless.l and still luring.

In my original calculation I was going to refinance get all my HELOC cash back and start again. now with the interest close to 8 if I was to refinance I would break even if not loosing a bit.

the property is in the Midwest and I'm getting top market rent for the location. 

so do I keep it where I am with all my money stuck so I'm back to saving money to reinvest or do I refi. realtor estate it's value is $175-180 I think I can up that with some curb appeal.  I'm into it total around $143 so I have equity. am I stuck on cash flow as opportunity as passing me bye. yes I know I goofed, I'm proud I have equity in my first brrrr I could have done better. it's what you do with your mistakes that makes  you a better person. thanks 

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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
3y

@Ryan Havens, if you goofed (not saying you did necessarily) it was by not having your numbers stress tested much more stringently.  I do like that you've identified that you're not as bad off as it feels - The Internal rate of return for you is still very positive.  it just feels icky to write a check every month.  But to be off by $100 a month isn't exactly a massive error.

But I'm not sure a sale will benefit you any at this point.  It sounds like you'll invest some money into getting it ready for sale.  Then your realtor has given you a range - and this range is just about always going to be optimistic.  And then you have to factor  negotiations and closing costs.  And then you have to factor in taxes on the short term hold.   Just a guess but I think you'll be lucky to walk with $8k net in your pocket after all is said and done.  And that is still going to leave you "saving to invest" again. 

The BRRRR method, or @Corby Goade's model works because time is your friend.  Because time smooths out the speed bumps.  It lets your property catch up to y9our mistakes or mistiming.  And it does it while minimizing the trauma to your bank account.  I had many of 1031 clients who lost 80% of their net worth in the 2008 debacle.  None of them who didn't have to sell ever lost a penny and are worth more now than ever.  Time was their friend.  

If you can wait then I'd recommend it.  At least wait another 6 months or so.  This will give you a good feel for where the Fed is going with rates.  It will give you some time to explore some of Corby's suggestions.  you'll save that much more money and have that much more principle in your old property.  And it will then let you take advantage of a 1031 exchange.  which would be a game changer for you.  Instead of walking with $8K you would end up with $15K - $20K to be used to purchase the next property. And that by itself gives you so many more options.

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  • Charles Carillo
    Rental Property Investor · North Palm Beach, FL · Member since 2018 · 2k+ posts · 1k+ votes
    3y

    @Ryan Havens

    I would sell it. You are going to be negative cashflowing for years and taking money out of your pocket every month to not only pay your debt but to also pay for repairs and maintenance. Yes, you are building equity but if interest rates keep going up; that might disappear (in the short term). Another option is to possibly find a private lender (someone with a 401k or IRA) and offer them ~6% to refinance the property (interest only - paid monthly). Ask for 10+ year term with no prepayment penalty. They now have a secured investment, with 20% equity, that will pay them .5% per month.

    1Reply
  • Corby GoadeBusiness Member
    Investor · Boise, ID · Member since 2014 · 3k+ posts · 3k+ votes
    3y

    Generally, I am all about keeping properties, even if there's slightly negative cash flow- you also need to keep in mind the depreciation- that's actaul cash in your pocket that most investors don't use as part of their calculations. 

    That being said, it really depends on the market that you are in. In the midwest, appreciation and rent increases tend to be much lower than in other parts of the country. In my market, we generally can plan on 8% annual rent increases, so a place with rents of $1500 and negative $100 cash flow would be cash flow positive in a year, plus appreciation, depreciation, etc. In your market, that may not be the case. 

    One other thing to consider is that if you sell now, you'll be paying regular income taxes on the profit- depending on your tax bracket, that may or may not be a big deal. A huge tax bill today can be offset significantly if you can hold on long enough to do a 1031 exchange, which MAY be possible once you hit the one year mark, check with your accountant. 

    In either case, you WILL make some money and will have learned some good lessons and things will only get better from here. Best of luck!

    1Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    3y

    @Ryan Havens, if you goofed (not saying you did necessarily) it was by not having your numbers stress tested much more stringently.  I do like that you've identified that you're not as bad off as it feels - The Internal rate of return for you is still very positive.  it just feels icky to write a check every month.  But to be off by $100 a month isn't exactly a massive error.

    But I'm not sure a sale will benefit you any at this point.  It sounds like you'll invest some money into getting it ready for sale.  Then your realtor has given you a range - and this range is just about always going to be optimistic.  And then you have to factor  negotiations and closing costs.  And then you have to factor in taxes on the short term hold.   Just a guess but I think you'll be lucky to walk with $8k net in your pocket after all is said and done.  And that is still going to leave you "saving to invest" again. 

    The BRRRR method, or @Corby Goade's model works because time is your friend.  Because time smooths out the speed bumps.  It lets your property catch up to y9our mistakes or mistiming.  And it does it while minimizing the trauma to your bank account.  I had many of 1031 clients who lost 80% of their net worth in the 2008 debacle.  None of them who didn't have to sell ever lost a penny and are worth more now than ever.  Time was their friend.  

    If you can wait then I'd recommend it.  At least wait another 6 months or so.  This will give you a good feel for where the Fed is going with rates.  It will give you some time to explore some of Corby's suggestions.  you'll save that much more money and have that much more principle in your old property.  And it will then let you take advantage of a 1031 exchange.  which would be a game changer for you.  Instead of walking with $8K you would end up with $15K - $20K to be used to purchase the next property. And that by itself gives you so many more options.

    The 1031 Investor5137 Reviews
    WebsiteView Page
    4Reply
  • Greg Bates
    Essex Junction, VT · Member since 2015 · 5 posts · 3 votes
    3y

    Im in a similar situation. Your path forward will depend on your long term goals.

    If you are focused on near-term cashflow, you may want to sell and 1031 the profit into your next deal.

    If you are playing the long game, and are able to absorb the negative cashflow for the time being, you may want to keep the property. After 10 years, it is likely you will experience significant equity gains.


    1Reply
  • Alex Olson
    Real Estate Broker · Kansas City Metro · Member since 2015 · 2k+ posts · 1k+ votes
    3y

    @Ryan Havens I always say that the best uses of a 1031 exchange are when you don't like the property (for WHATEVER the reason) or have a lot of untapped equity (meaning your return on equity is low). Your situation fits the bill. Have you considered looking at other markets other than your own?

    0Reply
  • Preston Hillard
    Real Estate Agent · Dayton, OH · Member since 2021 · 10 posts · 4 votes
    3y

    Sticky situation brother, I am a buy, borrow, repeat type of guy and 95% of the time would avoid selling. In this instance, as mentioned above I would probably go ahead and sell if it makes sense (sounds like it does). Use the 1031 to your advantage here and go find a more profitable deal that can cover these high interest rates. 

    Cheers & best of luck!

    0Reply
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