Selling one home to get three - smart or stupid?
Member since 2022 · 2 posts · 1 vote
Selling one home to get three - smart or stupid?
Most Popular Reply
Alan AsriantsBusiness Member
Real Estate Agent · Philadelphia, PA · Member since 2019 · 1k+ posts · 1k+ votesA lot of people really undervalue the power of a few paid off assets. Your property is generating 2300 in cash flow, thats incredible. People out here are bidding over asking price to cash flow 100 bucks a month on a 150k investment.
Rates are high right now and I think you have a great situation here for you. Don't forget - 3 properties thats 3x the headaches.
You have 100% equity and amazing cash flow. Personally, in this market, I would work on saving up and really doing my best to find a great opportunity and pull the trigger then. Otherwise, I would sit on that property collect the cash flow and seek out great opporunities.
Finding 1 solid deal this year could be your goal. Even finding 1 is tough in todays market, let alone 3!
Good luck
Alan Asriants - New Century Real Estate 591 Reviews
20 Replies
- 1yNicholas L.Pro MemberFlipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
no need to sell - why not refinance?
- Member since 2022 · 2 posts · 1 vote1y
So i'm not 100% sure what you mean. We took out a HELOC on the property a few years back to do some extensive repairs and we've just now got what we owe on the HELOC paid off
- Hong Kong · Member since 2024 · 161 posts · 57 votes1y
I think it's usually good to try to scale, so I like the idea of trying to go from 1 to 3.
You might also explore the possibility of refinancing the ranch and using that for down payments on other properties - which I'm some others might label as too crazy. But all I'm saying is that you can explore the options. Let's see what more experienced members have to say.
I'd talk to a banker anyway to see what they might be willing to work out with you.
Always good to know what your options are. Then feel free to make a more informed decision. - 1yNicholas L.Pro MemberFlipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
try a cash out refinance. you can use a DSCR loan if your DTI is too high for conventional. call a few brokers and just see what their terms are.
- 1yTheresa HarrisPro MemberMember since 2019 · 15k+ posts · 11k+ votes
Why not take out a smaller mortgage on the home and use some of that money to buy a second home?
- Real Estate Agent · Kansas City · Member since 2018 · 4k+ posts · 3k+ votes1y
I agree in doing a cash out refi. You can play around with how much you want to take out. Maybe start with adding 1 more property instead of 3. You know the model and have systems so tapping into your equity is a smart move. Just have $$ in savings
- 1yMiguel Del MazoPro MemberNortheast Georgia · Member since 2023 · 140 posts · 170 votes
You seem like you're doing all the right steps. You are being very conservative to avoid making mistakes, and that is a rare, admirable quality in real estate that is often undervalued.
Since you already have the HELOC in place, and were able to pay it back quickly, why not use it as your down payment and repair fund? Even if the new property only breaks even, you have shown an ability to handle the debt of the HELOC very well. Aggressively pay back the HELOC just like you did when you use it for the repairs, and you'll have a second property with it's own, independent long-term financing. Ideally, you pick a good property that is self-sustaining. When the HELOC is fully paid down, it can function as the next down payment and fixer-upper fund. Repeat as desired. DSCR loans are a viable financing option to secure 30-years, fixed-rate financing on each of the new properties.
Is this the way every investor would do things? Probably not. It's hard to get millions of people to agree on anything, but it is a very tried and true way to conservatively grow a portfolio. You'll be planting oak trees to grow over time, not bamboo, and that is absolutely fine. :) - Real Estate Broker · Barstow, CA · Member since 2024 · 15 posts · 8 votes1y
I don't think it would be a bad idea but I would personally keep the property that you know for sure is performing well. Maybe a HELOC/Cash out refinance would be better, then you could buy 2-3 properties as well without getting rid of the "guarantee" that you already have.
- 1yAlecia LovelessPro MemberMember since 2019 · 3k+ posts · 2k+ votes
@Brian Chadwick A cash out refinance might offer more favorable interest rates than your HELOC provides.
Personally I like keeping my properties that I know are successful and have low maintenance.
In your situation I would keep this cash cow and figure out the best way to pull out a little of the equity to buy the next deal.
Sometimes less is more and just taking the step to buy one more might be better than selling your goose that laid the golden egg in the existing successful house.
I don't understand borrowing money to borrow money.
Especially in this environment, why take that risk? Save up and buy deep. Patience and discipline reaps its rewards.
@V.G Jason I'll disagree with you here. Despite higher interest rate environment, there's reasonable probability inflation will still continue - thus increase hard asset valuation. If OP can lever-up while maintaining adequate reserves, he will be in better position than buying with heavy cash position.
As we agree, the key is to not over-leverage.
- Agreed. Used your HELOC to fund the down payment on a second property if the right opportunity presents, otherwise those returns wouldn’t be juicy enough for me to take on more debt for the sake of scaling if you’re buying at retail.
Quote from @V.G Jason:
I don't understand borrowing money to borrow money.
Especially in this environment, why take that risk? Save up and buy deep. Patience and discipline reaps its rewards.
- 1yJohn MorganPro MemberRental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
@Brian Chadwick
Yes, do it. Or do a cash out refi to scale up. I've done both to grow from 2 paid off STR and now have 29 SFR by using equity that was sitting there doing absolutely nothing for me to buy more and more with 20% down. My net cash flow went from only $1600/month to 19k/month over the next 6 years. I'm a fan of harvesting the equity to buy more and more cash flowing properties with zero out of pocket cash for down payments. But some (Dave Ramsey) people would rather have just a few paid off properties making just a little cash flow. I'd rather double, triple or quadruple my cash flow by putting that equity to use and leveraging my way to wealth. That's how the wealthy do it with real estate or businesses. Leverage is key and will create generational wealth in less than 10 years.
- 1yTheresa HarrisPro MemberMember since 2019 · 15k+ posts · 11k+ votesLeverage is key and the diversity of options is also good. The only thing I'd mention is cash flow with a paid off property is a lot higher than with a mortgage, so it is 6 of one, half dozen of another. Yes with a paid off property, you have equity sitting there, but also have higher cash flow. With pulling out your equity (or selling), you can diversify and buy more.
Quote from @John Morgan:
@Brian Chadwick
Yes, do it. Or do a cash out refi to scale up. I've done both to grow from 2 paid off STR and now have 29 SFR by using equity that was sitting there doing absolutely nothing for me to buy more and more with 20% down. My net cash flow went from only $1600/month to 19k/month over the next 6 years. I'm a fan of harvesting the equity to buy more and more cash flowing properties with zero out of pocket cash for down payments. But some (Dave Ramsey) people would rather have just a few paid off properties making just a little cash flow. I'd rather double, triple or quadruple my cash flow by putting that equity to use and leveraging my way to wealth. That's how the wealthy do it with real estate or businesses. Leverage is key and will create generational wealth in less than 10 years.
I did sell one of my places and used that money to buy two others. At the end of the day, cash flow was similar because I now had mortgage payments. One difference was to have two properties appreciating (though at very different rates as they were in different areas) instead of 1. Looking back 7-8 years from when I did that, if I had held on to the one property between cash flow and appreciation, I'm not sure I'd be any further ahead. - 1yJohn MorganPro MemberRental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votesI’d rather have more properties with mortgages than a couple paid off properties. My first property was paid off making me only $1000/month profit. I did a cash out refi on it to buy 3 more properties. Yes, I’ve got a mortgage on it now, but my cash flow went from only $1000/month to $2400/month and I picked up 3 more properties basically for free with no out of pocket cash to buy them.
Quote from @Theresa Harris:
Leverage is key and the diversity of options is also good. The only thing I'd mention is cash flow with a paid off property is a lot higher than with a mortgage, so it is 6 of one, half dozen of another. Yes with a paid off property, you have equity sitting there, but also have higher cash flow. With pulling out your equity (or selling), you can diversify and buy more.Quote from @John Morgan:
@Brian Chadwick
Yes, do it. Or do a cash out refi to scale up. I've done both to grow from 2 paid off STR and now have 29 SFR by using equity that was sitting there doing absolutely nothing for me to buy more and more with 20% down. My net cash flow went from only $1600/month to 19k/month over the next 6 years. I'm a fan of harvesting the equity to buy more and more cash flowing properties with zero out of pocket cash for down payments. But some (Dave Ramsey) people would rather have just a few paid off properties making just a little cash flow. I'd rather double, triple or quadruple my cash flow by putting that equity to use and leveraging my way to wealth. That's how the wealthy do it with real estate or businesses. Leverage is key and will create generational wealth in less than 10 years.
I did sell one of my places and used that money to buy two others. At the end of the day, cash flow was similar because I now had mortgage payments. One difference was to have two properties appreciating (though at very different rates as they were in different areas) instead of 1. Looking back 7-8 years from when I did that, if I had held on to the one property between cash flow and appreciation, I'm not sure I'd be any further ahead.
I did this another time where I was only making $600/month profit with a lot of equity in a rental. I bought 3 more cash flowing properties with zero out of pocket by doing a cash out refi on it. My cash flow went from only $600/month off the one, to now over $2200/month with the 3 more I picked up from the cash with the cash out refi.
I did this again last year with a paid off property only cash flowing me $1200/month. With the new mortgage from the cash out refi, I’m only cash flowing $150/month off it now. But I bought 3 more houses with the cash and now cash flowing $3000/month vs only $1200/month with that one paid off house. Not to mention having many more houses leveraged and appreciating 3-5%/year. Your net worth and cash flow goes up exponentially when you tap into your equity to scale up and buy more and more cash flowing properties. Mine went from only around $1600/month with a couple paid off properties 7 years ago, to 19k/month by leveraging and harvesting equity in properties to scale up. But I also understand some people don’t really care about the cash flow as much as the security of not having to worry about a vacancy or whatever. But those who wouldn’t mind a lot more monthly cash flow, I recommend tapping into some of that equity that’s just sitting there doing nothing and using it to buy more cash flowing properties. Quote from @Allan C.:
@V.G Jason I'll disagree with you here. Despite higher interest rate environment, there's reasonable probability inflation will still continue - thus increase hard asset valuation. If OP can lever-up while maintaining adequate reserves, he will be in better position than buying with heavy cash position.
As we agree, the key is to not over-leverage.
That's too simple of a view. Yes, hard assets will go up over time. The question if such leverage is utilized can he weather any deflationary period? He'll be longer hard assets at 8% with significantly less cash flow. In a 10 year, 15 year timeframe he's absolutely better off.
I cannot see a scenario here where he is better off re-levering to enter if he can't weather a shorter time frame; and if he can weather one, then he has the funds to put a downpayment outright on a 2nd. So why borrow?
He could do the least risky one, which is cash out re-fi 20-30% and use that toward a downpayment. Now his original property is less cash flow, and is his 2nd is likely negative $500/mo. So probably $1000/mo net cash flow but he owns two properties, with one basket of reserves. That he can weather for 10-15 years, but not 3 at 25% down with $25k in reserves($300k in sale price would afford).
I'm a fan of leverage in the 20-40% against assets, to put into more assets. Not a fan of 20-40% leverage to enter more leverage. Especially not when rates are where they are, inventory is still pretty tight, and rent/unemployment is on thin ice. Pre-rona, sure, and anyone who has had success in that was all pre-rona. Re-levering at 7-9% with negative cash flow, you can't scale.
- 1yMiguel Del MazoPro MemberNortheast Georgia · Member since 2023 · 140 posts · 170 votes
I think a lot of the replies have made a lot of assumptions about the OP's situation. I'd like to clarify my assumptions (numbered below), and I would be interested in (constructive) feedback, especially from, the OP.
1. He has stated that he is a new investor, but he already has paid off his first investment fully, so he is clearly doing something right. Whether or not he is solely using the rental income to pay off the property or not, he has the ability to pay down a mortgage efficiently.
2. He owns an asset that is worth (low-end) $300k that generates 2300/month (after all costs). He would like to sell it and buy 3 more properties of similar value with 20% down loans. So if he sells, after fees and such, he'll have $270k or so. 20% down on three $300k house = (.20 x 300,00 x 3) = $180K. After buying these new rentals, he will still have about $90k in cash to spend on upgrades and furnishings. That's a lot more than it takes to furnish 3 homes.
3. Financing $240k at 7% will be about $1600 a month in principal and interest. The OP made this math easier for me, since he let us know that he is clearing $2300 a month after all his fees, so that means the only cost he isn't including in that $2300 would be his principal and interest. Subtracting the $1600 leaves $700 of profit with each new house. With three of these houses, he will make $2100 a month, which is comparable to the $2300 he is currently getting.
4. He believes that area where he will be buying the new homes is going to appreciate and attract more MTRenters, but now, the big difference is that he would now have 3 properties that can go up (or potentially down) in value, go up (or down) in rent, and three times as many vacancies to fill.
My back of the napkin assessment is that for only a drop in $200 a month in cash flow, he would control a lot more assets with growth potential and as rents rise over the coming years, the combined rents will increase to a total more than the single rent.
HOWEVER. Selling an existing, well-performing asset has some risks. Why not use the existing HELOC (mentioned in his 2nd post) to use as the 20% down on property #2? 20% of $300k is $60k; financed at 7.5%, that's $420 a month for the HELOC. The profit of the original house would drop by $420 to $1880, but a new property would come under his ownership making $2300 - $1600 = $700. The numbers can be adjusted for taking more from the HELOC to do repairs and add furnishings, but I think it's fair to say that $1880 + $700 - (cost to borrow for repairs and furnishings) will be at or greater than the original $2300 in profit form the single house.5. Since the OP has paid off the HELOC quickly before, he can do this again. If he uses the HELOC responsibly, he'll be able to serially buy performing hard assets and eventually get to the point where the monthly cash flow will provide future down payments.
6. This is a "me" assumption: I assuming that I made a mistake somewhere in my analysis, so please feel free to show me. :) I learn a lot more from my mistakes than what I (very occasionally) get right on the first pass. - 1yAlan AsriantsBusiness MemberReal Estate Agent · Philadelphia, PA · Member since 2019 · 1k+ posts · 1k+ votes
A lot of people really undervalue the power of a few paid off assets. Your property is generating 2300 in cash flow, thats incredible. People out here are bidding over asking price to cash flow 100 bucks a month on a 150k investment.
Rates are high right now and I think you have a great situation here for you. Don't forget - 3 properties thats 3x the headaches.
You have 100% equity and amazing cash flow. Personally, in this market, I would work on saving up and really doing my best to find a great opportunity and pull the trigger then. Otherwise, I would sit on that property collect the cash flow and seek out great opporunities.
Finding 1 solid deal this year could be your goal. Even finding 1 is tough in todays market, let alone 3!
Good luck
Alan Asriants - New Century Real Estate 591 Reviews Quote from @Alan Asriants:
A lot of people really undervalue the power of a few paid off assets. Your property is generating 2300 in cash flow, thats incredible. People out here are bidding over asking price to cash flow 100 bucks a month on a 150k investment.
Rates are high right now and I think you have a great situation here for you. Don't forget - 3 properties thats 3x the headaches.
You have 100% equity and amazing cash flow. Personally, in this market, I would work on saving up and really doing my best to find a great opportunity and pull the trigger then. Otherwise, I would sit on that property collect the cash flow and seek out great opporunities.
Finding 1 solid deal this year could be your goal. Even finding 1 is tough in todays market, let alone 3!
Good luck
Agreed. From your current property--50% towards reserves, 50%s towards DP #2 & 2nd house reserves. Be patient, it's going to pay off.
Keep a leverage player on hand, if you find a great deal. Meaning truly intrinsic(2x DSCR not 1x DSCR), then roll the dice and lever the minimum you need to get the deal done and understand to put more to reserves than anything else for the first 3-5 years from your current and new property.
The risk:reward ratio is very low when you factor in a lack of liquidity. When you can enter from a position of strength financially, the risk:reward ratio significantly changes.
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