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Real Estate Year in Review 2021: Part 2 Refinances and Purchases

Summary: This is part two of our real-estate-in review for 2021. We cover Purchases and Refinances. Each year I put together a real- estate-in-review blog post. Writing this post helps me reflect on the real estate moves we made over the course of the year, the motivations behind them and their results (thus far anyway!). The goal is to give you the opportunity to glean insights from what we are doing, learn from our experiences scaling our real estate portfolio and become better investors yourselves. With that, let’s continue our review of 2021!

 

[Disclaimer: We are not accountants, lawyers or financial advisors, so please consult your own team of professionals about the topics covered in this article.]

 

In part one of this post, I covered the two properties we sold in 2021. In part two, I’m going to go over the first of the three purchases for the year and also the three cash-out-refinances we ended up completing. 

 

Three Cash-Out-Refinances

Let’s start out with the three cash-out refinances. If you don’t know about cash-out refinances, CLICK HERE to read an article about them. 

This year we decided to do cash-out refis on three of our properties. This included a duplex and two four plexes, all of which were purchased early on in our real estate journey. 

 

Cashing in on Appreciation

We knew they had appreciated in value, but you never know just how much until you get the appraisal. We were definitely pleasantly surprised! Check out these valuations! 

Duplex – $320,000 to $900,000

Fourplex #1 – $389,000 to $760,000

Fourplex #2 – $400,000 to $877,500

I guess we shouldn’t have been that surprised, since we had done major rehabs on all three properties. As a result, we had increased rents significantly since purchase. Increasing the income of an investment property leads to increased valuation. That’s called forced appreciation. It’s one of the best ways to take large step ups in wealth quickly. 

In these cases, we also benefited from market appreciation as well. 

As a result of doing the cash-out-refinances, these properties’ cashflow has now dropped. Our overall COC return has grown significantly, though, since we pulled out our original investment and have put it into new properties that cashflow. Our older properties are now slow BRRRRs of sorts. 

Download the Cash-on-Cash Calculator

How Much Should I Refinance?

We are often asked what is the “right” amount of cash to take out with a cash-out-refinance? How much cashflow should one continue to get to provide security in case of an unexpected repair or downturn? 

We don’t believe there is a “right number” because we think you have to look at your portfolio as a whole. 

  • How much leverage are you OK with having across your portfolio? 
  • Are there other properties that are making so much cashflow that you can afford to float the ones with less cashflow for quite some time? 
  • Do you have enough cash in reserves that a few months of less cashflow won’t be an issue?

If you have just a couple of properties vs hundreds, your answers and your decisions will be very different. 

In our case, with well over 150 units, our portfolio no longer relies on the performance of a couple of duplexes.

Also, note that since we took cash from these properties and used it for our last purchase of the year, we are now going to add that cashflow into the portfolio. So we are adding an additional cashflow buffer into our portfolio. We also don’t rely on our cashflow for daily expenses, so that helps too.

Learning pearls: Cash-out refinances are a great way to access capital for growing your real estate portfolio. When you force appreciation, you give yourself the option of doing a cash-out refinance.

 

Why Didn’t We Sell?

Right about now, some of you are probably questioning why we didn’t choose to sell these properties. After all, it is more efficient to sell and use all of the money from the sales to 1031 into bigger properties (although one downside is the cost of selling!). 

The answer is: we like these properties. 

We believe in the future of the areas/neighborhoods in which they are located. We like having lots of different chess pieces (i.e., properties) to be able to move around in our portfolio. They are stabilized and require very little effort and work. They are also rehabbed and have little maintenance issues. 

Finally, it’s nice for our community to know that we continue to have our feet firmly in the smaller properties like duplexes and fourplexes as well. 

These are properties that 5-10 years from now, we still see ourselves being happy about having in our portfolio. 

 

The First Purchase of the Year: 42-unit

Our first purchase of the year!

Our first purchase of the year didn’t close until November!!

This one came to us off-market from one of our agents. 

Pros of the Property

One thing we loved about the property was that it was just down the street from the 32-unit we bought in 2020. This could mean extra efficiency, especially if we want to get onsite management. Usually, when you have >60 doors in one property, it’s financially beneficial to start thinking about having onsite management rather than having a property managed by an offsite property manager. As we now own a 32-unit and a 42-unit within a block of each other, we can tap into this management efficiency as well as additional efficiency when it comes to construction projects. 

We also like the area. Lakewood, Washington has experienced tremendous growth over the last several years. This has meant market appreciation and that the neighborhood is improving. In addition, along with our fellow Semi-Retired MD members, we now own probably over 200 units in the area. Our community is literally changing the feel of the neighborhood as we improve our individual buildings. 

What we didn’t like about this property was the price. Just two years ago, we purchased our 32-unit for <$100K per unit. This time around, our total cost was much higher per unit. 

However, when we dug into it, we realized that the price wasn’t too far off when you took into account other factors. 

This property has many two bedroom units AND it has washer/dryers in every unit. The 32-unit has only one bedroom units and none of them have washer/dryers. Washer/dryers in units add an additional $100 a month in rent. This meant that the cash-on-cash return was still decent. The fact was the neighborhood has improved over the last two years as well. 

Financing our Purchase

What made this deal sweeter was that we got great financing, including 100% of the renovation budget. One thing we love about these larger properties is that lenders will often cover renovation costs. We love this because you get both the forced appreciation and the tax benefits (you can write off the renovation), with the bank’s money. Plus, you can afford much more when you don’t have to come up with the renovation costs out of pocket too. 

Closing

Surprisingly, this property closed without too much drama. For those who have bought investment properties before, it always seems like something pops up, making the close a bit bumpy. This is especially surprising given the fact that this was the replacement property for the 1031 exchange of the two properties we sold earlier in the year. 

1031 Exchange for Purchases

Most of the stress of the 1031 was meeting the 45-day identification period. For those who don’t know, once you sell a property, you have 45-days to identify a replacement property and then 180 days to close on the property(ies). We identified the 42-unit along with two other properties on the 45th day, just a few hours before the deadline!

We almost broke a sweat!

Fortunately, we closed on the 42-unit, so our 1031 exchange was preserved and we were able to defer our capital gains tax once again. 

Learning pearls: When you have >60 units in one location, you can consider hiring an onsite property manager. Having a washer/dryer in unit can significantly increase rents, so sometimes it’s worth making the upgrades when you renovate a property. When you get large commercial loans, sometimes you can get 100% financing for your renovation project. The 45-day identification is a strict deadline when doing a 1031 exchange. Finding ways to build in extra time by getting creative during the selling process, 1031 your proceeds into the next deal to take advantage of continued market growth and other opportunities for forced appgreciation.

 

Conclusion

There you have it, three cash-out-refinances, one big purchase and lots and lots of learning opportunities. Hopefully you’ve gained some insights that you can apply to your own portfolio from part one and two of this post. Now let’s head into part three of our real estate year in review 2021!

 

Want to learn how to build a significant source of income from investing in real estate while reducing your taxes? Join us in one of our courses, Zero to Freedom, or Accelerating Wealth. 

Do you want to learn how to creatively fund your real estate portfolio and achieve financial freedom? Join the conversation! Follow our Semi-Retired MD  Facebook page and join our Doctors or Professionals  group!

Semi-Retired M.D. and its owners, presenters, and employees are not in the business of providing personal, financial, tax, legal or investment advice and specifically disclaims any liability, loss or risk, which is incurred as a consequence, either directly or indirectly, by the use of any of the information contained in this blog. Semi-Retired M.D., its website, this blog and any online tools, if any, do NOT provide ANY legal, accounting, securities, investment, tax or other professional services advice and are not intended to be a substitute for meeting with professional advisors. If legal advice or other expert assistance is required, the services of competent, licensed and certified professionals should be sought. In addition, Semi-Retired M.D. does not endorse ANY specific investments, investment strategies, advisors, or financial service firms.

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Hi, we’re Kenji and Leti

we provide coaching and mentorship for doctors and high-income earners

Several years ago, we were newlyweds working as full-time hospitalists. On paper, it looked like we had everything: the prestigious careers, the happy marriage, the luxurious rental home, the cars, etc.

But in reality? Despite having worked for several years, we had very little savings. Despite our high income, we had very little freedom in terms of time or money.

One thing was clear: we had to do something.

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