Selling home to pay off debt!

35 Replies

Hi BP ! My husband and I are selling our primary residence to pay off all our bad debt and get started in realestate investing. We plan to rent for a year until we save up for a downpayment or buy cash. Should we get started with house hacking or buy a buy a rental and keep renting? Rent in our area is very high

Most responses will start that will depend on your situation and then ask for more details. It will come down to an equation. 

Desire to meet your goals * ability to make it happen = Meeting your goals.

My question comes down to are you financially ready to get into real estate. Your post says you are selling your primary home to pay off bad debt. Get you back to zero. But do you have the fortitude to stay bad debt free? 

@Yandry Mastromihalis I would personally house hack if you are in the position to do so. House hacking is like a cheat code to investing. You get to use either the 3.5% down FHA loan or the 5% down conventional loan to pick up a property, and if you do it right you can often re-position the property within 6 months to a year to get all of your money back.

Have you considered house hacking right away after you sell your current home? Why rent for a year? Let your renters pay back all your debts. 

I don't follow your logic. You're going to sell your home and pay off debt only to start renting in an expensive market? Why not just stay in your home and pay off your debt?

@Yandry Mastromihalis if you buy a great deal, you can then refinance the property at a higher value. This larger debt is paid for by your tenants (provided rents can support the debt) and it can often times put cash back in your pocket through a cash out refinance. I just completed a refinance of on of my first properties in Lyons, IL, and I received an amount equal to my initial investment back... tax free! 

I wish I had understood all of this when I was getting started in 2010-2014. I was paying off debts rapidly instead of investing... dumb.  That was the lowest interest rate environment we had ever been in, and the properties were all on sale. 

Once you are ready, I like house Hacking. You can use the income in several different ways and the switch easily. IE. 1000 PITI - 800 rent = 200 PITI. Or the rent can be saved as a reserve or Down payment. Another is the rent can be used to cover carrying costs while you are rehabbing or selling a flip/rental.

Look for value add SFH or 2-4plex. I am currently house hacking in St. Paul MN. The upstairs is rented, and we are close to finishing the basement. We used our rental income to pay for part of basement remodel. Once done, we will have added 1bd, 1ba, and 400' of living space. We can enjoy that space, sell the home with forced appreciation, or AirB&B it on weekends. A more extreme idea would be live in the basement, rent out the main floor and be making money while we live for free.

@Brendan F. Nagle I like the idea of living in the basement at this point I'm just trying to move up I feel like we've wasted so much time trying to live a "normal" life

I’m out. The cost of selling a home, moving, renting is too much, IMO, to make this a viable option. Maybe if I was gonna walk with a few hundred thousand.... maybe. Money is cheap right now. I would consolidate date and cut expenses. Just my take.

Hi Yandry,

Love the idea of selling and paying off your debt and freeing things up.  I know lots of people that have done that. They are all much happier. Less debt more monthly cash flow and enjoying life.  Restart and now work from a new position. 

There is a lot of information missing. What is the current equity? What is the expected rent versus current payment (PITI)? Selling will likely cost 8% to 10% of the value (commissions and preparations to sell). There is the cost/hastle of moving. Then purchase a new place? When you purchase the new place won't your debt be similar to it is today but minus the 8% to 10 selling expense off your net worth?

Owner occupied will allow loans as low as 3.5% down (FHA: 86.5% LTV). This will allow you to purchase as soon as your save a little bit of money and can get a loan. Mortgage insurance is mandatory so this adds some cost.

A non-owner occupied purchase is challenging to get conventional finding with less than 25% down (75% LTV). It would take much longer to save 25%.

Purchasing has costs.  All those costs add up (escrow fees, loan origination, appraisals, documentation, notary, potential points on the loan. etc.). 

This seems like a lot of hassle.  Can you house hack your current home in some way?  Rent out a spare bedroom?  The garage? 

I see you going through these hurdles to end up not much different than your starting/current place.

Good luck

I'm with Dan. I love the idea of being out of bad debt as much as anybody (my pic says 'NO PAYMENTS') but need lots more info.  It costs about 10% just to sell a house with realtor fees and closing costs. 

If you seriously overbought a McMansion on accident? Sure, sell it.  If a moderate house and rent is similar to your payment anyway?  Much easier and cheaper to move down in cars and cut back than sell and move and mess around.  But you may not value serenity like a 10x Napper does...

I'm with Steve and Dan.  Before selling your existing house, I would analyze a scenario which involves keeping your current house and house hacking that, or renting it out completely.  How quickly will that cash flow allow you to pay down said debt?  Do you have enough equity to cash out refi in order to pay down the debt?  Without knowing more it's impossible to say what the best option would be, but I wouldn't overlook using the home that you already own as your gateway to rental property investing.  As previously mentioned, selling a home is expensive.

Originally posted by @Yandry Mastromihalis :

We would make enough to pay off all our debt and free up about 1500 a month 

Still too much info missing.  In my market the average home cost ~$640K.  8% to 10% costs of selling an average home in my market would equate to $51K to $64K.  It would take many months at $1.5K to compensate for the selling costs.

If, however, the home is worth $100K so that the selling costs are $8 to $10K, then the $1.5K/month savings would quickly justify the financial costs of selling. 

However, for me (not a 10X napper but someone that wants to spend my time doing things I enjoy) there is a hassle and work factor with finding a new place to rent, moving, and selling.  I would want to make sure that the finances justified the effort/hassle.

Good luck

Originally posted by @Yandry Mastromihalis :

We would make enough to pay off all our debt and free up about 1500 a month 

 And then u would use that 1500$ to pay your rent ?

P.s. I would never sell an asset to pay off bad debt. I would make that property to make income , like rent out your basement , or rent out the house and move myself into a small appartment ,  etc...

Read “rich dad poor dad”... 

make your house an assett 

@Yandry Mastromihalis

Hi Yandry,

Have you considered using the equity in your property to pay off your bad debt? Is a cash out refinance an option? I just ask because it seems counterintuitive to sell your home, pay off bad debt, and spend a year renting in a high rent area. The money spent towards rent isn't debt but it is essentially a waste of your money if your goal is real estate investing. Additionally, real estate commissions, closing costs, moving costs, and taxes are all going to be additional fees you will encounter by selling your house - combine this with renting for a year and the total cost is extremely high.

I think there are definitely alternative options that can still accomplish your goal of paying off bad debt, investing in real estate, and keeping your house. Your current residence is your primary home and one you can get the best financing terms for. As @Mary Jay mentioned making your asset work for you rather than selling it is a better option in my opinion.

Hope this helps!

@Yandry Mastromihalis I would keep your house as a rental and rent it out! Then you have instant cash flow and can use that to rent while you pay off your debt!

I don't know how much you owe or what your mortgage payments are vs rent in the area.  Why not downsize and find a unit where you can rent out a room or part of the home?  If rent is really high, I don't know how much you will be able to save in a year vs what you have now.  Talk to a lender and find out how much you can borrow without your debt and see if it is worth it.

So right now we pay 1075 for mortgage and if we refinance we wont have enough to pay all the debt Im thinking maybe renting for 6 months instead of a year

Originally posted by @Yandry Mastromihalis :

So right now we pay 1075 for mortgage and if we refinance we wont have enough to pay all the debt Im thinking maybe renting for 6 months instead of a year

 If you are paying $1075 for mortgage, how much is rent where you are?  I can't see how you've be able to save that much in 6 months to be able to afford a down payment for a new house and pay off the rest of your debt.

Would refinancing allow you to pay off a large portion of your debt, especially the high interest debt?

Another thing to think about is how did your debt get to be where it is.  Was it unexpected medical expenses, job loss, etc?

We would use the proceeds from the sale to pay off debt and then save 1500 a month that we were paying in debt 

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