Posted by Ronald * Starr(in No CA) on July 17, 2003 at 09:56:59:
By my calculation, your cashflow is about 7.2% of your equity. That is about right for typical investments. I figure in most parts of the country the cash flow is about 7-10% if you buy ok, not really bargains.
So, if you were to take out $85K by refinancing and you invested it at the same rate, that would be an income of about $510 a month, about twice the increased cost of the new loan. So, you would gain about $250 a month income. Does that satisfy you?
Now, it seems to me that the cash flow return of the condos is not real good. How about the appreciation potential? If they go up in value over the next 5-8 years, you might refinance them again at that time and buy still more income properties.
You don’t mention the price range of these units. The general rule is that you get a better cash flow return in lower-priced properties, worse in higher-priced properties. If these are higher-priced properties, you can probably get a better return by exchanging them for lower-priced properties.
There are three ways to increase the overall leverage that you achieve: to trade up, refinance and buy more properties, or else to buy properties with no money down. All of these approaches gets you more property ownership. Sometimes, when interest rates are higher, the best way to increase cash flow is to pay off loans. However, this is not so these days, with the low interest rates on loans, your cash flow increases by owning more properties with more loans on them. You make a positive cash flow on the portion of the properties “owned by the bank.”
If you could buy properties with little or no down payment and still get positive cash flow, this would probably be easier than refinancing the other properties. Depends upon your ability to find such deals without too much work.
The equity in house could be put to work by buying more properties as you suggest. This would increase your income. If you got just 7.2% return on the $35K, you would realized about $210 a month more cash flow. Plus you would have whatever appreciation the property/properties would provide. And, if you can use it, more tax shelter.
Some people seem to worry when they have debt on their own home. They fear being foreclosured upon and having to move in with their crazy brother or something. How would you feel with a larger loan on your home? I have refinanced my home a couple of times to take out more money for investing. I currently owe something like two and a quarter more dollars than I paid for my house when I bought it. I feel fine about it.
The exact way you increase your income property holdings is up to you. In summary: You can trade up; you can refinance and buy more units; you can buy units with little or no money down, if they provide you a positive cash flow.
While you want to emphasize the cash flow, you still probably want to consider the possible appreciation of any holdings as that is money you can tap into in the future. And, you probably should consider the return on equity and the return on the proprety value of future acquisitions. I would suggest that 7.2% is not very good cash flow, but that is without knowing your market and the return from appreciation and added tax benefits you could get. Here in Coastal CA, that would be a fantastic cash flow return. Of course, we also get a very high appreciation along with whatever meager cash flow we might get.
But you should see what returns other properties might give you. I’d suggest you shoot for 10% or a little more on cash flow alone.
If you have skills in buying bargain real estate, pulling money out of both the rental properties and your home and buying bargains makes a lot of sense. In some areas it is hard to buy bargains. And some people don’t have the skills or desire to go that route.
Good InvestingRon Starr