Should I Pull Money (Equity) Out of Rental Properties?

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Bogglebendi
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Should I Pull Money (Equity) Out of Rental Properties?

Post by Bogglebendi »

How much equity should be in a rental to be considered safe? Should I be pulling out money in order to purchase more properties, or does that over leverage me? Pulling money out will decrease passive income on rentals.

Own 5 homes (including my personal residence). All in same HCOL area (Denver)

Equities:
House #1: Personal Residence (Paid off) ~ $616K (Redfin) = $616K equity
House #2: Rental - $468K (Redfin) / 191K (Mortgage) = $277K equity
House #3: Rental - $370K (Redfin) / 113K (Mortgage) = $257K equity
House #4: Rental - $357K (Redfin) / $98K = $259K equity
House #5: Rental - $409K (Redfin) / $353K = $56K equity

Rental Incomes:
House #1 - NA
House #2 - $1,200/mo income
House #3 - $1,000/mo income
House #4 - $1,000/mo income
House #5 - Variable income through Airbnb solely. Testing the waters with Airbnb. Have been profitable (even through COVID) so far.


I am 36 (wife 35). Annual Gross (150K). Wife does not work. 4 Children (8,6,4,2).
401K - $274K
Roth - $42K
Cash - $79K
desiderium
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Re: Should I Pull Money (Equity) Out of Rental Properties?

Post by desiderium »

Your question suggests that this is a great time to do a deep dive on your business plan.

What is your plan-short, medium, long term?
How much time do you and your spouse spend or want to spend on this business, given your other work/family responsibilities? Do you want to transition away from your day job/career or do you want this to be passive income?
How much cash should you have on hand to make your RE business resilient in the case of unexpected repairs, economic downturns, wildfires, etc.? Your cash balance seems low given the size of your family and the number of homes you own. I would think separately of EF needs for family and cash cushion for business.
What does your current financing look like; could you restructure your debt to obtain lower rates?
How are your current rentals? Vacancy experience, expected maintenance/repair schedules, rents keeping pace with markets etc.? Could you improve the situation by remodeling, shedding a poor performer, etc.?
What is your exit plan/timeline?
What is your tax management plan now and later assuming your realize gains?

Leverage is one form of risk among others in your specific situation, in addition to a reduction in cash flow and an opportunity for growth. I don't think there is a stock answer to your question
Topic Author
Bogglebendi
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Re: Should I Pull Money (Equity) Out of Rental Properties?

Post by Bogglebendi »

desiderium wrote: Sun Jan 10, 2021 12:30 pm Your question suggests that this is a great time to do a deep dive on your business plan.

What is your plan-short, medium, long term?
How much time do you and your spouse spend or want to spend on this business, given your other work/family responsibilities? Do you want to transition away from your day job/career or do you want this to be passive income?
How much cash should you have on hand to make your RE business resilient in the case of unexpected repairs, economic downturns, wildfires, etc.? Your cash balance seems low given the size of your family and the number of homes you own. I would think separately of EF needs for family and cash cushion for business.
What does your current financing look like; could you restructure your debt to obtain lower rates?
How are your current rentals? Vacancy experience, expected maintenance/repair schedules, rents keeping pace with markets etc.? Could you improve the situation by remodeling, shedding a poor performer, etc.?
What is your exit plan/timeline?
What is your tax management plan now and later assuming your realize gains?

Leverage is one form of risk among others in your specific situation, in addition to a reduction in cash flow and an opportunity for growth. I don't think there is a stock answer to your question


I will try to address some of the questions above...

I started buying my rentals in 2012 and purchased (2012, 2014, 2016, 2019). I would love to use the homes as passive income to eventually get out of my day-job (which I dislike greatly). Currently, I manage the homes myself, and have had great success with screening and finding great tenants. I have maintenance people that I can contract to do work and repairs, so most of my time is spent making a few phone calls a few times a month. I do all 1-2 year leases and just recently started dabbling in Airbnb, which is more work and admin. Denver rental market is very high and easy to find tenants. But due to high home prices, it is getting difficult to make the numbers continue to work. It is also difficult to continue to save up the 25% down that I usually put down on homes (Thus considering HELOC or refinance). Current rates on homes do not make it worth refinance to improve rates at this time.

I am considering a rental management company if I continue to grow. But it has not been worth it yet for the work that is needed. I continually update the homes and do much of the homes. None are in absolute need of repair at this point, but I aim to do a maintenance item (floors, kitchen, bathroom update) at each tenant change.

Is there a magic equity/dept ratio that I could consider? I have separate accounts for each home and currently have 6mo emergency funds in each account. My personal emergency fund is currently only at 3mo, but I consider my Roth as emergency if needed.

My 401k is low for my age, as I am noticing on this forum (I am new to Boglehead). I have plans to try increase my investments going forward. My current expenses are 40K (which would allow me to limp by), but really need closer to 80 to be comfortable.

I have considered many options and do not have a clear path forward...
1. Continue to grow properties in Denver
2. Try buying properties in other markets (with management company)
3. Sell and invest $
4. Pay off current homes and increase income
5. I am a novice and have had a hard time finding good financial advice that isn't just a financial planner (funds).
just_cruisin
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Re: Should I Pull Money (Equity) Out of Rental Properties?

Post by just_cruisin »

I just paid off my rentals.

We should meet up in 20 years and compare notes.
desiderium
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Re: Should I Pull Money (Equity) Out of Rental Properties?

Post by desiderium »

Bogglebendi wrote: Sun Jan 10, 2021 12:54 pm

I have considered many options and do not have a clear path forward...
1. Continue to grow properties in Denver
2. Try buying properties in other markets (with management company)
3. Sell and invest $
4. Pay off current homes and increase income
5. I am a novice and have had a hard time finding good financial advice that isn't just a financial planner (funds).
You own 5 home and have cash flowing, so I wouldn't call you a novice. Opportunities to buy homes with good rental returns come and go. In other words, your questions are highly situational. It depends on the timing and the specific market you are investing in. You know Denver; if you branch out into other areas you will need to study those markets. If you want to quit your day job and manage your properties, then hiring a manager (at least for the local ones) will not make sense. I have done ok with several properties I have owned, in what is now a VHCOL area. I have done much better as an armchair investor. During the GFC, having seen my equities tank, I considered and ultimately passed on several fantastic opportunities (in retrospect) to purchase other properties. I have one rental now and am frankly too old, having already missed my best chance to do really well at this. Many people have gotten rich slowly with just the start you have, using rents to pay down debt and continually exploring new opportunities for a good purchase when the situation is right. When you are ready to retire, you can cash out, simplify your holdings or otherwise make it largely passive in retirement.

Good luck!
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Sandtrap
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Re: Should I Pull Money (Equity) Out of Rental Properties?

Post by Sandtrap »

Residential Income Rental Property ownership and management is a business so should be approached as such.
There are some that would not include the numbers for your personal residence.

What is the net monthly or annual CAP rate for each property?
All properties?
Annual net ROI for each property?
All properties?
What has been the average rate of appreciative value of each property?

It can be helpful to look at each property in and of itself, sort of like one branch in a pizza franchise chain.
And, of course, all of it in entirety.

For every area and unique situation, there's a break point in the amount of SFH (single family homes) of inefficiency as far as return and expense per, as well as SPF (single point of failure) where each must sustain itself, compared to multi unit housing such as a 4plex, 6plex, 12 unit apartment building, 50 unit apartment high rise, etc. In the latter, there's "economy of scale" that happens and there's a greater potential for higher CAP rates, ROI's, etc, per "door".

In SFH units, the "per door" is each home. In a single building of 12 rentals, the "per door" is per apartment rental. So, financials can be computed "per door" as far as R/E Income Property profitability.

Do you have a "Business Plan" for a R/E Income Property Business? A long term strategy and specific quantifiable goals?

j :D
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gr7070
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Re: Should I Pull Money (Equity) Out of Rental Properties?

Post by gr7070 »

Depends upon whether one wants to optimize their rental property business. More leverage is fine in your situation, especially if you have cash to handle the risks.

I typed out a bunch of stuff but deleted it.

All that really matters is whether you want to have a significant RE portfolio and rental income or not. If yes, go for it. If you're content; stay where you're at, already have a nice setup for yourself!

Only other significant factor is there actually market appropriate where you're at to add viable properties.
megabad
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Re: Should I Pull Money (Equity) Out of Rental Properties?

Post by megabad »

What do you mean by "pull money out"? I would say in your case, I would strongly consider selling some or all of the properties as it looks like it is time to cash out. Personally, I would not consider cash out refi given the low returns on the current properties if that is your question.
Lexx
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Re: Should I Pull Money (Equity) Out of Rental Properties?

Post by Lexx »

Problem with selling and cashing out is OP will have to pay capital gains and depreciation recapture. Better to 1031 the properties if possible. Do that now before 1031 goes away.
megabad wrote: Sun Jan 10, 2021 4:27 pm What do you mean by "pull money out"? I would say in your case, I would strongly consider selling some or all of the properties as it looks like it is time to cash out. Personally, I would not consider cash out refi given the low returns on the current properties if that is your question.
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Bogglebendi
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Re: Should I Pull Money (Equity) Out of Rental Properties?

Post by Bogglebendi »

just_cruisin wrote: Sun Jan 10, 2021 1:42 pm I just paid off my rentals.

We should meet up in 20 years and compare notes.
I am often tempted to aggressively pay off each rental. Do you miss the mortgage interest deduction? Do you also lose the depreciation deduction once they are paid off? There is also opportunity costs of accumulating more.
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Bogglebendi
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Re: Should I Pull Money (Equity) Out of Rental Properties?

Post by Bogglebendi »

megabad wrote: Sun Jan 10, 2021 4:27 pm What do you mean by "pull money out"? I would say in your case, I would strongly consider selling some or all of the properties as it looks like it is time to cash out. Personally, I would not consider cash out refi given the low returns on the current properties if that is your question.
By pulling money out, I did mean a cash out refi. Why do you think it is time to cash out and sell? By low returns, are you meaning in comparison with investing the $ in funds instead?
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Bogglebendi
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Re: Should I Pull Money (Equity) Out of Rental Properties?

Post by Bogglebendi »

Lexx wrote: Sun Jan 10, 2021 4:44 pm Problem with selling and cashing out is OP will have to pay capital gains and depreciation recapture. Better to 1031 the properties if possible. Do that now before 1031 goes away.
megabad wrote: Sun Jan 10, 2021 4:27 pm What do you mean by "pull money out"? I would say in your case, I would strongly consider selling some or all of the properties as it looks like it is time to cash out. Personally, I would not consider cash out refi given the low returns on the current properties if that is your question.
With depreciation recapture, I feel like I will be more and more unable to sell as time progresses. If it is practically not feasible to sell due to high capital gains and depreciation recapture, do you stop including these home equities as part of your net worth? Is the 1031 exchange going away?
Warsad
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Re: Should I Pull Money (Equity) Out of Rental Properties?

Post by Warsad »

Is the 1031 exchange going away?

Not to be political, but I have heard rumors that the 1031 exchange may be vanishing. But nothing in stone at all. Just a lot of rumors.
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gr7070
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Re: Should I Pull Money (Equity) Out of Rental Properties?

Post by gr7070 »

Bogglebendi wrote: Sun Jan 10, 2021 6:14 pm I am often tempted to aggressively pay off each rental. Do you miss the mortgage interest deduction?
I don't. I'd rather pay the government a percentage in taxes then the bank interest. It's simply a bonus benefit.

The leverage is big with regard to return on investment. Both more rents but also more capital appreciation.
Bogglebendi wrote: Sun Jan 10, 2021 6:14 pm Do you also lose the depreciation deduction once they are paid off?
No.
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gr7070
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Re: Should I Pull Money (Equity) Out of Rental Properties?

Post by gr7070 »

Bogglebendi wrote: Sun Jan 10, 2021 6:20 pm With depreciation recapture, I feel like I will be more and more unable to sell as time progresses. If it is practically not feasible to sell due to high capital gains and depreciation recapture, do you stop including these home equities as part of your net worth?
This makes no sense whatsoever.

You're simply paying taxes that you deferred. It's the exact same benefit as a 401k, that we love, but (likely) at a reduced tax rate. One doesn't refuse to withdraw 401k because of taxes.

You're still capturing a huge percentage of the deppreciated amount, an amount you would have paid taxes on up front without the tax benefit in place.

Just like 401k don't let the tax-tail wag the dog. Withdraw your funds/sell your properties when you've decided it's appropriate.

It's a great benefit all the way around.
Last edited by gr7070 on Sun Jan 10, 2021 11:13 pm, edited 1 time in total.
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gr7070
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Re: Should I Pull Money (Equity) Out of Rental Properties?

Post by gr7070 »

Bogglebendi wrote: Sun Jan 10, 2021 6:14 pm I am often tempted to aggressively pay off each rental.
I presume your rates are at least 3.5% if not more. I understand your inclination.

With a paid for primary it's even more understandable.

How's your securities portfolio? I would not neglect it, even for an attractive mortgage payoff return.

Edit: you have it detailed in OP. Certainly a nice securities start, but with your positions I'd definitely be maxing retirement vehicles and with that many rentals I wouldn't mind having a larger taxable investment - which I am usually inclined to not have.
Last edited by gr7070 on Sun Jan 10, 2021 8:13 pm, edited 2 times in total.
supersecretname
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Re: Should I Pull Money (Equity) Out of Rental Properties?

Post by supersecretname »

If that is your income pre-mortgage/expense, your rents are terrible compared to the value. Don't pull out the equity - sell and invest elsewhere. If that's net, a different story.
Lexx
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Re: Should I Pull Money (Equity) Out of Rental Properties?

Post by Lexx »

You're always going to have a depreciation recapture issue when you cash out. It's also likely that 1031's are going away. And we also don't know if step up in basis is going away. So you have to pick your poison. What would be the benefit of cashing out now if your properties are well situated and cash flowing? If they all have positive cash flow, keep them and use the cash to fund other investments.
Bogglebendi wrote: Sun Jan 10, 2021 6:20 pm
Lexx wrote: Sun Jan 10, 2021 4:44 pm Problem with selling and cashing out is OP will have to pay capital gains and depreciation recapture. Better to 1031 the properties if possible. Do that now before 1031 goes away.
megabad wrote: Sun Jan 10, 2021 4:27 pm What do you mean by "pull money out"? I would say in your case, I would strongly consider selling some or all of the properties as it looks like it is time to cash out. Personally, I would not consider cash out refi given the low returns on the current properties if that is your question.
With depreciation recapture, I feel like I will be more and more unable to sell as time progresses. If it is practically not feasible to sell due to high capital gains and depreciation recapture, do you stop including these home equities as part of your net worth? Is the 1031 exchange going away?
megabad
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Re: Should I Pull Money (Equity) Out of Rental Properties?

Post by megabad »

Bogglebendi wrote: Sun Jan 10, 2021 6:17 pm
megabad wrote: Sun Jan 10, 2021 4:27 pm What do you mean by "pull money out"? I would say in your case, I would strongly consider selling some or all of the properties as it looks like it is time to cash out. Personally, I would not consider cash out refi given the low returns on the current properties if that is your question.
By pulling money out, I did mean a cash out refi. Why do you think it is time to cash out and sell? By low returns, are you meaning in comparison with investing the $ in funds instead?
I read your post again and I may have misunderstood what you meant by "income". If you are pulling 1000-1200 per month in profit, than ignore more comment. I thought you meant rent was 1000-1200 month, but I think I misread that. If that was your rent, your unleveraged return would be low single digits nominal so that was my reasoning for "low returns" and that would be a clear sell indicator for any real estate investor I know.
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Bogglebendi
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Re: Should I Pull Money (Equity) Out of Rental Properties?

Post by Bogglebendi »

megabad wrote: Sun Jan 10, 2021 10:12 pm
Bogglebendi wrote: Sun Jan 10, 2021 6:17 pm
megabad wrote: Sun Jan 10, 2021 4:27 pm What do you mean by "pull money out"? I would say in your case, I would strongly consider selling some or all of the properties as it looks like it is time to cash out. Personally, I would not consider cash out refi given the low returns on the current properties if that is your question.
By pulling money out, I did mean a cash out refi. Why do you think it is time to cash out and sell? By low returns, are you meaning in comparison with investing the $ in funds instead?
I read your post again and I may have misunderstood what you meant by "income". If you are pulling 1000-1200 per month in profit, than ignore more comment. I thought you meant rent was 1000-1200 month, but I think I misread that. If that was your rent, your unleveraged return would be low single digits nominal so that was my reasoning for "low returns" and that would be a clear sell indicator for any real estate investor I know.
Those are the net after mortgage.
#1 - 1,200 (mortgage), 2,400 (rent)
#2 - 800 (mortgage), 1,800 (rent)
#3 - 800 (mortgage), 1,800 (rent)
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Bogglebendi
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Re: Should I Pull Money (Equity) Out of Rental Properties?

Post by Bogglebendi »

Sandtrap wrote: Sun Jan 10, 2021 4:18 pm Residential Income Rental Property ownership and management is a business so should be approached as such.
There are some that would not include the numbers for your personal residence.

What is the net monthly or annual CAP rate for each property?
All properties?
Annual net ROI for each property?
All properties?
What has been the average rate of appreciative value of each property?

It can be helpful to look at each property in and of itself, sort of like one branch in a pizza franchise chain.
And, of course, all of it in entirety.

For every area and unique situation, there's a break point in the amount of SFH (single family homes) of inefficiency as far as return and expense per, as well as SPF (single point of failure) where each must sustain itself, compared to multi unit housing such as a 4plex, 6plex, 12 unit apartment building, 50 unit apartment high rise, etc. In the latter, there's "economy of scale" that happens and there's a greater potential for higher CAP rates, ROI's, etc, per "door".

In SFH units, the "per door" is each home. In a single building of 12 rentals, the "per door" is per apartment rental. So, financials can be computed "per door" as far as R/E Income Property profitability.

Do you have a "Business Plan" for a R/E Income Property Business? A long term strategy and specific quantifiable goals?

j :D
I really do not have a developed "Business Plan." Up until now, I just have purchased properties that give me passive income. I put all that into separate accounts and do not touch it. When I have enough in those accounts to put 25% down on another property, I buy another.
However, with rising house pricing, it is taking longer and longer to save up the 25% to continue to move forward. That is why I have started to consider cash-out refi to speed up the growth.

A rough long-term goal would be to own 10 homes at $1,000/each passive income.
sharp1aarohead
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Re: Should I Pull Money (Equity) Out of Rental Properties?

Post by sharp1aarohead »

I own 6 doors myself and I am constantly asking myself these questions. From a pure numbers point of view, my advise would be to either stay where you're at, OR leverage a bit more by refinancing one or two in order to buy more properties. In terms of wealth building, this (at least to me) makes the most sense.

On the other hand, the reason I always toy with paying them all off is because from time to time, the stress bugs me and I think that if they were payed off I'd feel a whole lot better. Something you could also do is decide how much monthly income you want from your rentals - if it's, say, 10,000 then you can get to a point where without a mortgage, you'd be making that number before you begin systematically paying them all down.

If you asked on BiggerPockets, 90 percent of people would tell you to leverage and buy more and they might say that your money isn't working for you. I can't necessarily disagree, but I also know that with my 6 units paid off, I could buy 1 new house for cash each year, then eventually 2, then eventually 3, etc. That's a slow path to wealth that I'm okay with. Good luck!
mogg
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Re: Should I Pull Money (Equity) Out of Rental Properties?

Post by mogg »

You're basically an expert at single family rentals. Keep buying single family rentals, preferably in the same area since that is your competency. Don't branch out into multi-unit rentals - cash flow may be higher, but they come with their own set of unique problems. Investing in cheaper areas may generate better returns, but not worth the travel expense for maintenance.

Some key ratios that some lenders care about:
20% down for mortgages
25% down for to get better rates on mortgages
43% max DTI on jumbo loans
50% max DTI on conforming loans

If you don't want to pay depreciation recapture (technically section 1250 gains) then depreciate to 0, and then step up and pass to your children.

As you are already thinking, you should prioritize tax advantaged accounts before rentals, but it's OK to prioritize rentals over taxable accounts. No need to have so much in cash, you just need enough to cover your expenses. Invest in less cash and more in mutual funds. In an an unlikely emergency, you can liquidate your mutual funds and withdraw contributions from your roth penalty free. The less cash you have, the more the money is working to produce income.

Cash out refinance if you can get a lower rate at minimal cost. Otherwise, don't worry about refinancing. You might put a HELOC on property 1 so that you can pull money out in an emergency, or to help fund your next purchase. However, using the HELOC to fund the purchase would make getting a mortgage for your next property more complicated since the lender will want to know what your monthly payment will be.

Don't worry too much about a business plan. Plans are good, but doing is better.
Oddball
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Re: Should I Pull Money (Equity) Out of Rental Properties?

Post by Oddball »

What are the terms of your rental houses? Why not do a mortgage or HELOC on your primary? 80% LTV will give you ~$480k to use for more properties, the terms will better than on the investment properties. Have you looked at multi unit (3-4 units) buildings?
CapRate
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Re: Should I Pull Money (Equity) Out of Rental Properties?

Post by CapRate »

This all comes down to your risk tolerance. You will make better returns in theory by leveraging up and buying more cash flowing properties, but the leverage also magnifies losses during a rough patch. That sword cuts both ways. This is really only an answer you can get comfortable with based on your own circumstances.

Good luck!
megabad
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Re: Should I Pull Money (Equity) Out of Rental Properties?

Post by megabad »

Bogglebendi wrote: Sun Jan 10, 2021 10:50 pm
Those are the net after mortgage.
#1 - 1,200 (mortgage), 2,400 (rent)
#2 - 800 (mortgage), 1,800 (rent)
#3 - 800 (mortgage), 1,800 (rent)
This would still be a sell signal for me but everyone is different. I know folks that count on massive appreciation and stomach lower returns on rent for a while. I am a rent guy myself and don’t account for any appreciation. But I also don’t have any 400k rentals so definitely a different animal.
basspond
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Re: Should I Pull Money (Equity) Out of Rental Properties?

Post by basspond »

I’m not a real estate guy, just numbers. Where would you be if you had a couple of properties vacant for several months and a couple of major incidents? Your debt is about twice what you have in non real estate investments, and with 4 children and no education funds. Until that number is at least 1-1, I wouldn’t expand and might consider getting rid of a property.
ddurrett896
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Re: Should I Pull Money (Equity) Out of Rental Properties?

Post by ddurrett896 »

Savings looks good, rentals look good.

Former landlord here and while it wasn't bad managing a single place, the Sunday afternoon or calls while I was on vacation got old. Tenants were great and always paid on time,but offloaded it last year.

If it was me, I'd sell two of the properties, pay off two properties and bank the left over $$.
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Re: Should I Pull Money (Equity) Out of Rental Properties?

Post by Sandtrap »

Bogglebendi wrote: Sun Jan 10, 2021 11:07 pm
Sandtrap wrote: Sun Jan 10, 2021 4:18 pm Residential Income Rental Property ownership and management is a business so should be approached as such.
There are some that would not include the numbers for your personal residence.

What is the net monthly or annual CAP rate for each property?
All properties?
Annual net ROI for each property?
All properties?
What has been the average rate of appreciative value of each property?

It can be helpful to look at each property in and of itself, sort of like one branch in a pizza franchise chain.
And, of course, all of it in entirety.

For every area and unique situation, there's a break point in the amount of SFH (single family homes) of inefficiency as far as return and expense per, as well as SPF (single point of failure) where each must sustain itself, compared to multi unit housing such as a 4plex, 6plex, 12 unit apartment building, 50 unit apartment high rise, etc. In the latter, there's "economy of scale" that happens and there's a greater potential for higher CAP rates, ROI's, etc, per "door".

In SFH units, the "per door" is each home. In a single building of 12 rentals, the "per door" is per apartment rental. So, financials can be computed "per door" as far as R/E Income Property profitability.

Do you have a "Business Plan" for a R/E Income Property Business? A long term strategy and specific quantifiable goals?

j :D
I really do not have a developed "Business Plan." Up until now, I just have purchased properties that give me passive income. I put all that into separate accounts and do not touch it. When I have enough in those accounts to put 25% down on another property, I buy another.
However, with rising house pricing, it is taking longer and longer to save up the 25% to continue to move forward. That is why I have started to consider cash-out refi to speed up the growth.

A rough long-term goal would be to own 10 homes at $1,000/each passive income.
R/E Income Property Businesses should be looked at as a ROI/CAP per "door". Otherwise, profitability can be illusory.

Fore example:
A 1 million dollar luxury penthouse condo not far from the beach at Waikiki, brings in a Net return of $3,000/month.
Why only $3,000/month "net"? Because of exhorbitant HOA and building fees, because of very high property taxes, because of a zillion city/state fees and insurance requirements typical to Hawaii.
But, it is indeed bringing in a "positive passive income". Just not proportional to the investment in %.

So, the idea is to maximize the "net return" (gross doesn't matter as in the above example), per dollar invested, and. . . importantly. . . per net value invested (so leveraging has a downside at a certain debt/income ratio).

I've known many property owners that feel that they have a good investment as long as there is a "net positive" monthly cash flow from a "door".
For example: Total Monthly expenses, or yearly amortized over 12 months, are "less" than monthly rent coming in. As long as this criteria is fulfilled, no matter $1 or ?, then things are good. Perhaps true in a certain way of looking at it, but from a business perspective, "is it worth the investment?"

The other "bear under the rug" is property average annual appreciative value. And this can be the "game changer" if there is a low ROI/CAP on a R/E income property investment. For example: Let's take that 1 million dollar Penthouse Condo In Waikiki example again. Suppose it barely breaks even in monthly "net" rent income stream. But, the appreciative value increase per year or decade is enormous (Waikiki beach front). So, this is great for other reasons such as estate tax shelter (off topic) but not for "income stream" if that's the focus.

So, going back to monthly, or amortized, "net" ROI/CAP (use both) (use "net"). Compare 12 SFH (single family home) rentals with net CAP rates ranging from 1-8%, to, a 12 unit apartment building under one roof averaging 6-8% per door CAP/ROI net. In the lst there's no economy of scale and it's as if one is supporting the profitability of another, whereas in the latter, there's economy of scale, no single point of failure (drag), and lower and more consistent vacancy rates = net profitability.

The point of all this is that it might be a good idea to look at each "door" of a R/E Income Property investment as a "business" in structure and strategy. And, while there are many ways of doing things, and doing a R/E residential income property business, (and many opinions on it both academic and based on experience), there are core business strategies that are optimal and proven.

*Your goal is to stop being an "employee" and create an income stream as a "self employed" business person running your own "business". So, the above response is targeted to that. It would be different for many others who are wage earners working for retirement and also with some rental properties and/or a market investment portfolio with that perspective and approach.

*Business plan with short, medium, long term strategy, precise and by the numbers would be good. There are excellent business mentors at the SBA and other places where you can chat. I've known some of them have gone from nothing to owning an entire city block of apartment and condo buildings. So, they walk the talk.

I hope this is helpful to you.
Congratulations on your success.
j :D
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59Gibson
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Re: Should I Pull Money (Equity) Out of Rental Properties?

Post by 59Gibson »

I vote No on pulling out equity. I think you'd be taking on unnecessary huge risks. What happens If/When some properties go vacant, have problems etc..,RE market slows, economy slows. With 4 kids and 1 income, I think you need to take it slower. Leverage can turbo charge returns or crash and burn. Besides your personal situation, I'm not sure if this is the season/part of cycle to maxing up leverage. There may be better times for leverage.
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Bogglebendi
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Re: Should I Pull Money (Equity) Out of Rental Properties?

Post by Bogglebendi »

sharp1aarohead wrote: Sun Jan 10, 2021 11:36 pm I own 6 doors myself and I am constantly asking myself these questions. From a pure numbers point of view, my advise would be to either stay where you're at, OR leverage a bit more by refinancing one or two in order to buy more properties. In terms of wealth building, this (at least to me) makes the most sense.

On the other hand, the reason I always toy with paying them all off is because from time to time, the stress bugs me and I think that if they were payed off I'd feel a whole lot better. Something you could also do is decide how much monthly income you want from your rentals - if it's, say, 10,000 then you can get to a point where without a mortgage, you'd be making that number before you begin systematically paying them all down.

If you asked on BiggerPockets, 90 percent of people would tell you to leverage and buy more and they might say that your money isn't working for you. I can't necessarily disagree, but I also know that with my 6 units paid off, I could buy 1 new house for cash each year, then eventually 2, then eventually 3, etc. That's a slow path to wealth that I'm okay with. Good luck!
I like your strategy. I lean more conservative, as I want to ensure nothing is able to rock the boat later on. I spent the last 2 years paying off my primary residence (big opportunity cost), as it is peace of mind to me to have the place I live free and clear.
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Bogglebendi
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Re: Should I Pull Money (Equity) Out of Rental Properties?

Post by Bogglebendi »

megabad wrote: Mon Jan 11, 2021 5:32 am
Bogglebendi wrote: Sun Jan 10, 2021 10:50 pm
Those are the net after mortgage.
#1 - 1,200 (mortgage), 2,400 (rent)
#2 - 800 (mortgage), 1,800 (rent)
#3 - 800 (mortgage), 1,800 (rent)
This would still be a sell signal for me but everyone is different. I know folks that count on massive appreciation and stomach lower returns on rent for a while. I am a rent guy myself and don’t account for any appreciation. But I also don’t have any 400k rentals so definitely a different animal.
I’m profiting 3,200/mo. I would need 800k invested to reap that kind of return (at 4% rule) Plus add in appreciation year over year. Plus add that the rents pay down the loan every year as well. Win, win, win.
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Bogglebendi
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Re: Should I Pull Money (Equity) Out of Rental Properties?

Post by Bogglebendi »

Oddball wrote: Sun Jan 10, 2021 11:44 pm What are the terms of your rental houses? Why not do a mortgage or HELOC on your primary? 80% LTV will give you ~$480k to use for more properties, the terms will better than on the investment properties. Have you looked at multi unit (3-4 units) buildings?
My philosophy has always been that my primary residence is not an investment, but rather just shelter from the cold. But man, is it tempting and The thought crosses my mind often. Either HELOC on primary or liquidating and moving somewhere cheaper.
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Bogglebendi
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Re: Should I Pull Money (Equity) Out of Rental Properties?

Post by Bogglebendi »

basspond wrote: Mon Jan 11, 2021 7:49 am I’m not a real estate guy, just numbers. Where would you be if you had a couple of properties vacant for several months and a couple of major incidents? Your debt is about twice what you have in non real estate investments, and with 4 children and no education funds. Until that number is at least 1-1, I wouldn’t expand and might consider getting rid of a property.
The market could turn downward, but right now, if anything was to go wrong, I could sell a house in a weekend out here. I have 6mo emergency fund in each house account and 3mo in personal.

Major Incidents? I have 2MIL in umbrella ins, and consider my Roth extra emergency. I also have 100k HELOC on my personal if I ever need.
megabad
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Re: Should I Pull Money (Equity) Out of Rental Properties?

Post by megabad »

Bogglebendi wrote: Mon Jan 11, 2021 9:39 pm I’m profiting 3,200/mo. I would need 800k invested to reap that kind of return (at 4% rule) Plus add in appreciation year over year. Plus add that the rents pay down the loan every year as well. Win, win, win.
Like I said, everyone is different. Most folks in my circle are looking for about double or triple your returns on real estate. For example, using the "1% rule" I would expect to net maybe 7% just on rent unleveraged (higher leveraged). You are probably looking at maybe 2% unleveraged after all is said and done. In my opinion in my area, this would not be a reasonable risk adjusted return vs the equity market, but every area and situation is different. For example, if you very confidently anticipated 10% annual property appreciation, this would more than erase the difference but that is not a game that I personally like to play (I am a little more risk averse).
basspond
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Re: Should I Pull Money (Equity) Out of Rental Properties?

Post by basspond »

Bogglebendi wrote: Mon Jan 11, 2021 9:52 pm
basspond wrote: Mon Jan 11, 2021 7:49 am I’m not a real estate guy, just numbers. Where would you be if you had a couple of properties vacant for several months and a couple of major incidents? Your debt is about twice what you have in non real estate investments, and with 4 children and no education funds. Until that number is at least 1-1, I wouldn’t expand and might consider getting rid of a property.
The market could turn downward, but right now, if anything was to go wrong, I could sell a house in a weekend out here. I have 6mo emergency fund in each house account and 3mo in personal.

Major Incidents? I have 2MIL in umbrella ins, and consider my Roth extra emergency. I also have 100k HELOC on my personal if I ever need.
Replace roof, HVAC goes out, other house issues, etc... that would not be covered by your umbrella. Sounds like your mind is already made up. Hope you do great and not experience any hiccups.
WhyNotUs
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Re: Should I Pull Money (Equity) Out of Rental Properties?

Post by WhyNotUs »

I think that the Denver market is your greater challenge. Adding additional SFH that have positive cash flow will be a challenge given prices and competition. You bought in during a period of extraordinary appreciation in the Denver market. The last similar period was probably after the big fire or the mining boom. Your timing was good and you are enjoying the benefit of the world discovering Denver.

Given the challenges on cash flowing additional Denver sfh properties, my choice would be between looking into apartments perhaps as part of an investment group (go bigger and less active) or putting the excess revenue into taxable equities or similar (go more diverse). Up until the last several years, I would have had commercial property as an option as well but that seems pretty risky right now without insight into that market.
I own the next hot stock- VTSAX
Lexx
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Re: Should I Pull Money (Equity) Out of Rental Properties?

Post by Lexx »

Learn to valuate your investment properties using cash on cash as a measure. To do this, take the gross rents and divide it by the amount of cash you invested into the property. For example a $1MM property with $60k/yr in rent would be 60,000 divided by 1,000,000 = 0.06 or 6% return cash on cash.

Compare that with your returns in alternative investments such as the stock market.

But at the same time, remember that you want to diversify. If 100% of your assets are in RE, then you are poorly diversified and thus supposedly your investments are higher risk.

In my case, I traded my residential RE where I was getting a 3.25% cash on cash return for a commercial NNN property that yields 6.25% CAP rate and 8.8% cash on cash return.
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alexp
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Re: Should I Pull Money (Equity) Out of Rental Properties?

Post by alexp »

Lexx wrote: Tue Jan 12, 2021 8:26 pm Learn to valuate your investment properties using cash on cash as a measure. To do this, take the gross rents and divide it by the amount of cash you invested into the property. For example a $1MM property with $60k/yr in rent would be 60,000 divided by 1,000,000 = 0.06 or 6% return cash on cash.

Compare that with your returns in alternative investments such as the stock market.
Isn’t it more appropriate to compare the property CAP rates with the alternate investments. There might be expenses like property tax, maintenance, etc. that need to be paid from gross rents.
Lexx
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Re: Should I Pull Money (Equity) Out of Rental Properties?

Post by Lexx »

CAP rate tells you the net operating income and return on the property. Cash on cash gives you the return on your money invested. CAP rates can be used to compare the return between different properties. It's affect by things like location, condition of property, type of property, etc. Cash on cash is a measure of the return on your money invested and varies from property to property depending on the amount you put down.

Most investors use both to evaluate real estate.
alexp wrote: Tue Jan 12, 2021 11:02 pm
Lexx wrote: Tue Jan 12, 2021 8:26 pm Learn to valuate your investment properties using cash on cash as a measure. To do this, take the gross rents and divide it by the amount of cash you invested into the property. For example a $1MM property with $60k/yr in rent would be 60,000 divided by 1,000,000 = 0.06 or 6% return cash on cash.

Compare that with your returns in alternative investments such as the stock market.
Isn’t it more appropriate to compare the property CAP rates with the alternate investments. There might be expenses like property tax, maintenance, etc. that need to be paid from gross rents.
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