Hello all! I am fortunate enough to have one of those good problems on my hands and would love any advice or feedback I can possibly get...please forgive my neediness/density as I'm new at this and I've had quite a bit to consider and am desperate for some guidance! I (miraculously) bought a house on my own in 2007 in a very desirable neighborhood. A couple of years ago, I decided to try a job in another city and didn't want to sell just in case, so I rented it sort of unofficially to some friends who were building a house until their house was finally complete. Then their niece and her fiance wanted to rent it and they've been there for 2 years, rather more officially. They just bought a house and won't be renting from me again, but they have some friends who would very much like to rent after they leave, and the lease is up June 15th. I'm 37 and currently living with a friend and have no lease.
What I would like thoughts on is whether I should sell this house, conceivably for $300k or perhaps even $400k profit if I time it perfectly, or whether I should (try) to borrow against it in order to purchase what I think is a very well-priced duplex so as to be able to keep this original single family home as a rental, in addition to half of the duplex (I plan to live in one of the apartments in the duplex, if this plan makes sense business-wise, tax-wise, time-wise, etc). But here are the parameters of the situation to paint a clearer picture:
- I still owe $175,000 on the SFH (I refinanced years ago and took a bit of cash out to purchase a new HVAC system), and unfortunately am still paying private mortgage insurance of about $85 a month. My mortgage payment currently is $1550 a month (which includes taxes and insurance in escrow), and I'm currently receiving $1500/month in rent. Again, I never really expected my home to become a rental, and wasn't really looking originally to make money, simply to cover the mortgage while I figured out what I wanted to do. Now that I've seen how very rentable this home is, despite being only 2 bedrooms and 1 full bath, I can see it being a nice source of monthly cash flow if I can figure out how to best borrow, etc.
- I would like to refinance to a) get rid of the PMI and b) hopefully (still) be able to lower my 5.5% interest rate. My income was shoddy for lack of a better word after the market tanked in 2008 as I've been in the building industry in some capacity since graduating from college, and while I certainly know I'm not alone in that, I'm also keenly aware of loan standards being far more strict than when I qualified for my original and also the refinance.
- If I were to keep this little gem of a property (it's like the Giving Tree, I can't even believe I was so lucky to get it!), which I'm convinced more and more that it would be a worthwhile endeavor to keep it and make it work for me to buy another property, what would be my options as far as borrowing against it for the new property, the duplex, whilst hopefully simultaneously making my loan on it more palatable if you will? FYI, I've had a number of offers of at LEAST $400k so I know I could sell tomorrow for at the very least that. My realtor has told me that a more realistic selling price at this point in time would be $500k to perhaps even $600k. There have recently been a number of neighboring houses torn down as builders have put much larger homes on lots that are half the size of mine, so it's not only rentable but sellable.
- While my credit is relatively good, my salary is currently only $38k, independent of side design work I do and my rental income. I bring in another roughly $500/month in side work, but I don't know if my current salary is enough to secure a loan against my current house, even with as much equity as I conceivably have?? And what would be the first step in trying to procure some sort of loan, an appraisal?? Whether its a refinance cash out, HELOC, etc?
- The SFH needs a new roof to the tune of roughly $10k because the sub-structure needs to be replaced...it's a little bungalow built in 1920 and the eaves are sagging, it needs a new-substructure and roof. I've already re-done the kitchen and bathroom, and I don't anticipate much more immediate neediness (I know, ha! Right!)
- Also, if I were to borrow against this home, would it prudent to form a business entity of some sort? Or just purchase the duplex as little ole me??
I love real estate. I GET real estate. Stocks are for the birds in my view, simply because I don't understand that type of investing. I have a BFA degree in Interior Design and have never taken even a basic economics class. But my parents, my family, we've always bought old houses and renovated them and I GET them, which is a good thing in a city like Richmond, VA which is still full of charming old houses, with great bones, thankfully. It is my passion and to make a living owning a handful of properties that are historic and charming and rentable (or renovatable to be my forever home!) would be such an incredible opportunity, and a gift. Read: not here to get rich quick, just want some viable options for investing and perhaps eventually making a living. Also, if it helps as far as loan business, I have a very willing boyfriend who is happy to contribute in any way financially (he makes almost double what I do) but doesn't get the real estate thing. He just wants somewhere to live. Preferably with me:).
Thanks so much for any advice on all of this. I'm truly overwhelmed as far as where to best begin!
You may want to sell the house if you lived in it 2 of the last 5 years. Your capital gains tax will be small to non-existant depending on your basis in the house. If you have not lived in it 2 of the last 5 years, you may want to consider a 1031 exchange to avoid the taxes. Based on your income, you may have a tough time getting refinanced as it is not your primary residence. Another option is to pledge the house as collateral on a loan when you buy the duplex. Talk to your lender about this.
You find yourself in a great situation. Can you raise the rent so that it has positive cash flow? If you can make it cash flow, it might be nice just to refinance to get the money out of it to buy the duplex, because then you have two properties. Otherwise, selling is a good option, but with that much profit you could probably buy more than one duplex, especially if you are only using the cash for the down payment and leveraging the rest.
Thank you @Derek Dombeck for your reply! I have the opportunity to move back in...if it would be beneficial in the borrowing process, we have that option and would happily do so if it would prove to be more worthwhile than renting it out and moving into the duplex I’d love to buy! Thoughts??
Thank you @Heidi Kenefick for replying! Yes I think I could raise the rent for sure. I would love to buy a few duplexes slash (very) small multi-family homes (I can’t imagine personally owning more than 6 units at this juncture but then again I can’t realistically imagine owning this home and a duplex!;-) but also don’t want to get in over my head and in a short span of time??
If you move back in, your refinance will be smoother as an owner occupied loan. You can legitimately sign a lease with your boyfriend if he is living with you. This will increase your income for the lender.
@Blair Syme , It doesn't sound like you're still in the window to qualify for the sec 121 primary residence exemption. So a tax free sale is probably out.
A 1031 exchange would certainly be possible so you could defer the tax on that gain and the associated depreciation recapture which will be significant after 11 years. If you decide to sell you'll want to explore that definitely.
As far as should you sell or not - There's a lot that goes into that answer including thoughts of potential appreciation, available purchases, whether you want to be a proximity close landlord etc.
But the first blush is that you're losing several thousand dollars a year in that rental. So I'd get rid of it and 1031 into one or two of those good bones historic homes.