All Forum Posts by: Andrew Eherts

Hi Tristen!

I am going to assume you are referring to net worth (correct me if I am wrong!) 

There are lots of strategies out there--not all of them are for wealth-building. If you are looking to recycle capital and amass a portfolio most quickly, I would look at value-add cash out refinances (they've coined it BRRRR here). This keeps the property in your portfolio and adds wealth while you redeploy your initial investment. Unlike a flip, which is basically creating income and not wealth. You do need to find screaming deals and have a good team in place, which is what stays most feet.

An important thing to remember is that these strategies are on a spectrum. If you don't have the appetite for risk a value-add strategy entails, dividing your current capital into down payments for turn-key properties will also work, but there is the drawback of equity being left in the deal while you save for the next one. That's the price you pay for lower risk, however!

Cheers!

Hi Jose!

I'm glad the property is doing well so far! It's always nice not to have to worry about struggling performance when making these decisions. I apologize if the below is long-winded or if I just list things you already know, but these are my favorite problems to tackle.

This is a common scenario, and you would be looking at an opportunity cost analysis ("Money talks, BS walks!"). Some things to consider:

1) What would the property bring in if sold today as is? In this instance, you would be losing out on the cash flow, but I assume the capital would be redeployed. You can model a few options to see if you would improve your returns over what you are currently getting.

2) Your ROI on a rehab with two possible outcomes. First, consider your costs to rehab. Would you be doing the same rehab menu regardless of selling or refinancing? Sometimes, rehabs are different for tenant-focused properties than they are for buyer-focused.

3) Sale: what would your target ARV be for the rehab? Your agent can help with this, but if you know an appraiser and can get an opinion, that would be cool too! The ARV will give you an immediate ROI number for the rehab cost if selling right away. Just remember your closing costs!

4) Refinance: your available loan would hopefully take out the first position financing (and maybe leave you a bit of profit too). It is important to know exactly how the rehab would affect your cash flow, too. You would get higher rents, perhaps, but there would also be an increase in your monthly payment if the new loan comes in at a higher balance than the first position. There is also what we call static vacancy loss from the rehab timeline to think about. I like cash out refinances because you can redeploy the capital while retaining the newly improved asset for cash flow and appreciation. 

I generally work on commercial finance, so we tend to approach these decisions by comparing net present values (if you've nailed down your opportunity cost of capital) and internal rates of return on an apples-to-apples basis. The same concepts apply to residential. I am not sure if you have resources to model each scenario--I tend to build the models myself and would be happy to help!

Cheers!

Andrew