Hi,

I have a question as follows:

I have a single detached house and mortgage free now, I am wondering whether I should sell it and use the money as down payments to buy another 2 houses or I can rent it out and use the home line of credit as down payment to buy another 2 houses?

which is the best way and cons and Pros?

Also, if I renovate the basement of the house, can I rent it out for 2 units/families? I do not have separate entrance of the basement...is it legal?

Thanks for your advice!

Sue

What is the goal here ? Cash-flow ? Wealth accumulation without or little cash-flow ? A bit of both ? Related post to illustrate the difference here: http://myreinspace.com/threads/what-is-better-cash-flow-or-higher-roi.26596/

What are your other sources of income ? How much time do you envision spending on this ?

Do you rent another property or own one to live in ?

Why not get an 80% mortgage and buy 4 more houses as you need 20% down for a house ? Why only 2 more ?

Is this city a city with upside and decent economic fundamentals, or one with ex-migration, dieing industries and high taxing governments ?

How much experience in real estate acquisition, financing, property management, legal and accounting do you have ?

Is this a 5 year view ? 10 ? 25 ?

Why not sell the house and buy a mobile home park, small multi-family building, small retail plaza or small commercial asset ?

How many other houses do you own ?

As a general rule of thumb, you do not get wealthy selling assets. You get wealthy buying more, and managing them very well. But perhaps wealth is not what you are after, just some extra cash, which is fine. Wealth building takes time. How much time do you have ?

As to the second question, ideally done in a separate post: no the suite is not "legal" but it is commonly done anyway.

^ Great answer above.

This is essentially a math question for me. I would just run the numbers. Forget about debt entirely initially. Take a look at the yield of the property: NOI / property value. Theoretically, my capital is indifferent to where it is invested and needs to go to the area of highest return. That being said, I invest in what I know because I know the returns that I can actually achieve and the strategy works.

Thomas asked great questions above. I don't invest in commercial because I don't have endlessly deep pockets to deal with a 4 month vacancy while I find the right tenant. I can't come up with a $100k cash call for tenant improvements. If I thought it was the right asset class to invest in, I would do so through a REIT or private investment and let someone with more financial backing operate.

In my mind, upgrading a house with a suite that isn't legal makes no sense. You are investing in a liability. Depending on the whims of neighbors and the city's attitude towards these suites you can get shut down on a moment's notice. I don't bother with illegal suites in Edmonton because the task force wants to shut them down. It's not a long-term attitude towards investing in my opinion. You need to keep $40k in your back pocket at all times so you can upgrade the suite to legal. If you developed properly within legal and zoning requirements, which is not overly onerous, you would have a long term income producing asset.

I have no doubt you might be able to get away with an illegal suite but what are the actual development shortcomings of the product you are providing? Are the windows too small to escape in a fire? Is the hot water tank to small for two families to shower? Is the kitchen plumbing sharing a 1/2 water line with the bathroom downstairs and kitchen upstairs? Ultimately, the quality of your development will reflect in the quality of your tenants. It always does. In the long run, shortcuts are paid for in full.

Thanks Thomas and Sweetzone and sorry I did not provide enough information...

Here is the detailed information:

This property is located at GTA Toronto area with potential annual appreciation 7~8% on the recent market, I am living in it now and we have paid off the mortgage...we bought another house and will move in next year, so that's why the question comes up: to sell it or rent it out?

I really like your 3 course meal statement

Here is the Analysis I did by myself:

Option 1. sell it and buy other 2 more as down payment
Cons: right now at GTA Toronto area, the housing price is pretty high, so cash flow will be little or none
Pros: I can use leverage and maybe some appreciation down the road

Option 2: Rent it out and may use home line of credit to buy more
Cons: since mortgage is paid off, there is No leverage and i have to pay interest for the home line of credit as down payment to buy more
Pros: cash flow is great and potential appreciation 7~8%, also since this is my primary resident, we have done a lot of upgrade, so no any more Reno needed

Myself and my husband both have full time job and we currently own another rental property...so we are still quite new for real estate investment...but we are very interested in it and our goal is to be as wealthy as possible and we can retire debt free...


any advice as option 1 or option 2 better? or maybe option 3 or 4?

Thanks a lot!

Sue

Yes they are all good options, and the road you take has more to do with personal preferences, life style decisions, cash-flow or desired risk profile.

More assets = more work = less cash-flow = more upside potential but also more risk due to higher leverage.

Like a good meal, the balance and detailed composition is critical and highly individual, and there are no right or wrong choices here besides ability to cash-flow or be able to cover short periods of negative cash-flow (during vacancy for example) with cash at hand !

Cash is King - Cash-Flow is Queen. (TM)

[EMAIL said:

[email protected], post: 159117, member: 23994[/EMAIL]]
Cons: right now at GTA Toronto area, the housing price is pretty high, so cash flow will be little or none

Click to expand...

Personally, I pass on no cash flow. Appreciation is not a real gain to me. I buy for cash flow and consider the PPD.


Personally, I calculate my cash on cash returns as cash flow (after debt payments) divided by cash equity invested. If I can live with that number, it's a go.

[EMAIL='[email protected] said:

[email protected], post: 159117, member: 23994[/EMAIL]]
Option 2: Rent it out and may use home line of credit to buy more
Cons: since mortgage is paid off, there is No leverage and i have to pay interest for the home line of credit as down payment to buy more
Pros: cash flow is great and potential appreciation 7~8%, also since this is my primary resident, we have done a lot of upgrade, so no any more Reno needed

Click to expand...

What is the yield?
Yield = NOI / property value

What is the yield of potential new properties?

You can get more debt on either one so take debt off of the table initially. (Note NOI = rent - vacancy - all operating expenses). That is to say that NOI ignores debt payments entirely but captures all other costs.