Raising $: Sell the house? Cash-out Re-fi? Or HELOC?

45 Replies

I’m just getting started. Step one is to raise some capitol.

I’ve got a small house in Seattle that has gained some equity over the last 5 years. Purchased it for $150,000. Interest rate is 3.25%, 30 yr fixed. Currently owe $127,000. Estimated selling price at this time is about $378,000.

The house is currently being rented out at $1650/mo. I cash flow about $246.00 per month on it.
It was built in 1943 and has cinder block walls. It's a 2 bed, 1 bath at 780 sq ft.The house was remodeled about 5 years ago and looks relatively modern inside. Outside, the cinder blocks are covered by 4x8 sheets of fiber cement siding (HardiePlank), so it doesn't look too bad.

I've been renting it out for 1.5 years but lived in it before that. I could sell without incurring capitol gains taxes.

I'm leaning towards selling the house. It's old and I worry a bit about the walls falling down during Seattle's overdue earthquake. Also, the Seattle market has slowed and the monetary value of the house has started to decline recently.

Selling: could net me about $250,000 (how much would selling fees eat into this?).

Cash-out refinance: My lender says he can give me 70% of appraised value. So, about $264,600.The new interest rate would be 5 to 5.5%. So, new mortgage payment would be ~$2,550, which is about $1,300 more per month than I currently pay.

HELOC: Lender says HELOC is typically 70% of appraised value. Interest rate will be variable and tied to prime - about 7.5% right now.

What would you do?

Eventually I'd like to own a few duplexes/triplexes/fourplexes. Maybe in Idaho, or New Mexico or Texas. Not exactly sure on location yet.

Any and all suggestions are appreciated.

Thanks,
Cory

I'd shop your lender- if you have decent credit those HELOC and cash out refi rates seem super high to me. I'm in Seattle- which neighborhood is your rental in? Curious if there are any up-zones pending or other reasons to hold the property.

I didn’t know this when I sold my first home in 2014 (before I became an agent), but Washington state levies a real estate excise tax(REET) on all property sales. This state tax rate is 1.28% of a property's full selling price. Big surprise on my $532K sale!

Agent commissions and other closing costs will eat into that $250k too. 


You don’t have great rental numbers but it’s cash flowing and your mortgage rate is good, without more specific info my gut says I’d hold on to it. 

Originally posted by @Michael Haas :

I'd shop your lender- if you have decent credit those HELOC and cash out refi rates seem super high to me. I'm in Seattle- which neighborhood is your rental in? Curious if there are any up-zones pending or other reasons to hold the property.

Perhaps I should shop around for a different lender.

The rental is in the White Center area. It's just barely outside of Seattle City limits - so, unincorporated King County.

 

@Cory B.

I would second the hold opinion. We're geographically constrained here in the NW and Seattle has a thriving and diverse job market. Unless there is something structurally wrong you're not divulging then I'd keep your super low interest rate/cashflow and pull out a HELOC to play with for investments.

Timing an earthquake is like timing the market, impossible to do. I’d look into EQ insurance before offloading a property in such an expensive market.

Hi @Cory B. ,

Those refi and HELOC rates seem high to me as well - just as @Michael Haas mentioned.  Definitely shop lenders if you plan on utilizing one of those options.

One thing I would note is that excise tax is 1.78% in King County.  State rate is as mentioned above, but every county has an added rate on top of that.  Figure 8-9% total for selling costs (excise tax + commissions + title insurance + escrow) from the sales price of the home in order to arrive at your tax liability for capital gains.  Obviously you're already aware of the limit for the exemption :)

Let me know if you have any questions!

@Cory B. You can try Pentagon Federal Credit Union, penfed.org. They are pretty good and should service your area. They are one of the few that will even do a heloc on a rental property. Even without a branch there they still can work in your area. I used them on a heloc last year on a 4 plex. They do have other restrictions though if you have too many rentals.

For me the price of the property does seem high for that size of a home, but that is your market so its all relative. You could potentially take the gains while they are up, and use the proceeds to purchase a higher cash flowing property in another area, like one of the areas you mentioned. I would personally probably do that to trade up for maybe a 4 plex that will cash flow at $1k/mo, possibly even a couple properties that cash flow around that and split your earnings for two large down payments, or split into more SFR. There are banks or credit unions that have portfolio loans where you can get a smaller down payment, just make sure it still cash flows.

But yes, in general about 9% is what I would use as a general rule for the commissions and closing costs. But if it is a hot market, buyers may be willing to pay their own closing costs. Another local tax on top is something to consider as well.

In the end it's your money and your future, you need to decide what's the highest and best use. Consider the risks on all sides. If the market drops, will that house still rent for that same amount? Will it still cash flow if you need to lower the rent? Generally the more median rental amounts $600-$1000 tend to not waiver much with market shifts because the lower income households cant afford anything more and can't get a loan as easily to buy a home. Whereas someone who can pay $1600+/mo in rent possibly could more easily get a loan or move to another property they like better if the rates drop some. Anyway, I'm sort of a pessimist so I always consider what's the worst that can happen. If you decide to buy in Idaho let me know and I can give you the rundown of the area in the current market.

Hi @Cory B. - That is a tough decision. If you do decide to sell, at those rental numbers I would consider having the home vacant and staged to maximize your return. The current cash flow is not particularly compelling to an investor at a 300k+ purchase price,  but a first time home buyer might love it.  

@Cory B.

I’m about to start shopping for them as well so I’ll keep you posted. BECU is my first stop since I bank with them and then Seattle CU since they’re close by where I work. Let me know what you find!

@Jake Alger I was not aware of the excise tax in Washington State - although I did expect to loose a certain percentage of the profits to taxes. So, WA state excise tax rate is 1.28% of a property's full selling price. And then King County adds an additional 1.78%. All told I'm looking at loosing 8-9% to taxes + commissions + title insurance + escrow. So, about $34,020 off of a sale price of $378,000. Sound about right?

Hi @Cory B. ,

The excise tax is a base rate (state base) of 1.28%.  Each county then adds on to that.  King County's current excise tax is an additional 0.5% -- therefore the total is 1.78%.  The 1.28% and 1.78% are NOT added together.  My last post was a little unclear and I apologize for that.  Definitely see where it could have gotten confusing.

Hopefully this makes a little more sense? :)

@Don Spafford Thanks for the tip on Pentagon Federal. I'll look into them.

Yes, Seattle is an expensive place compared to some other parts of the USA. I'm glad I was able to buy low and have been able to gain equity as the market came back up.

Thanks for the offer regarding the Idaho marketplace. I may take you up on that at some point.

@Cory B. Hey Cory, welcome to BP!

Without a doubt, I will sell the small house and move all that capital to other markets as you've mentioned. 

With 250k, you can do a lot in other states. You literally could buy a really nice 4PLEX or even a 12-UNIT depending on where you go (and of course, if you are ready to deal with such assets)

Take the cash proceeds and scale-up now when the low-interest rates are so ridiculously low! (especially if you are going to be an owner-occupier)

@Cory B. I would sell when the market is high, so right now. I think the next year or two there will be more buying opportunities. Also, given the tax savings in within your time frame, this is even more attractive. If possible, you can try and find an off market non MLS deal and do a 1031, but I would not chase the next deal if it does not fall into place. Just my thoughts and good luck! TP

Hey @Cory B. unless your credit score is really low, your HELOC interest rate looks really high. my HELOC rate is less than 6% right now with TD bank. i'd shop around for your HELOC.

Now, back to your original discussion. I would only go with either HELOC or Selling. cashout refi is out of question (I can explain why but you seem to have done your homework so i don't think i need to). I would typically push for HELOC, because it gives you the flexibility of having cash when you need it, and having to payback whenever you want to. However, the reason i don't think i would feel strongly towards HELOC is because you mentioned that 1) you've lived more than 2 years out of past 5 years so you have no capital gain taxes (however on this note i would note you should check your state/city tax - sure on federal returns you may have no tax but you may still get taxed at the state level?), and 2) your market is slowing down so you don't expect that much appreciation. If #2 wasn't the case, i would have def told you to keep your house as you've seen a tremendous increase in value of your house in the past 5 years, but since you can't bank on that any more, seems like there are more downside than upside in keeping the property (potential upkeep costs, dealing with tenants, etc). The only problem is, now you have all this cash sitting around not generating any returns while you look for deals. But then again, you have $250K equity and only netting $250 a month (+principal repayment). you could put that money in the savings account or a CD and make more return than what you are making now lol

The benefit of HELOC though, is your interest expenses are deductible and can offset against your rental income. Overall, i think i would most likely sell it if i were in your shoes though. Hopefully this was helpful!

@Todd Powell he doesn't need to do 1031 exchange as he has no capital tax on the sales. it would qualify as his primary residence sale so he's exempted up to 500k of gain.

@Michinori Kaneko Thank you for the input. These are all of the things I had been thinking when I was leaning towards selling vs keeping the house. The market in Seattle does seem to have flattened out - so appreciation is not in my favor at the moment. I'll need to look more closely at a lender who can give me a good rate on a HELOC, and weigh that against the prospect of selling.

Also, thanks for the tip about HELOC expenses being deductible against rental income.

Originally posted by @Cory B. :

I’m just getting started. Step one is to raise some capitol.

I’ve got a small house in Seattle that has gained some equity over the last 5 years. Purchased it for $150,000. Interest rate is 3.25%, 30 yr fixed. Currently owe $127,000. Estimated selling price at this time is about $378,000.

The house is currently being rented out at $1650/mo. I cash flow about $246.00 per month on it.
It was built in 1943 and has cinder block walls. It's a 2 bed, 1 bath at 780 sq ft.The house was remodeled about 5 years ago and looks relatively modern inside. Outside, the cinder blocks are covered by 4x8 sheets of fiber cement siding (HardiePlank), so it doesn't look too bad.

I've been renting it out for 1.5 years but lived in it before that. I could sell without incurring capitol gains taxes.

I'm leaning towards selling the house. It's old and I worry a bit about the walls falling down during Seattle's overdue earthquake. Also, the Seattle market has slowed and the monetary value of the house has started to decline recently.

Selling: could net me about $250,000 (how much would selling fees eat into this?).

Cash-out refinance: My lender says he can give me 70% of appraised value. So, about $264,600.The new interest rate would be 5 to 5.5%. So, new mortgage payment would be ~$2,550, which is about $1,300 more per month than I currently pay.

HELOC: Lender says HELOC is typically 70% of appraised value. Interest rate will be variable and tied to prime - about 7.5% right now.

What would you do?

Eventually I'd like to own a few duplexes/triplexes/fourplexes. Maybe in Idaho, or New Mexico or Texas. Not exactly sure on location yet.

Any and all suggestions are appreciated.

Thanks,
Cory


Just had to make a similar decision. Ended up renting out my primary and getting approved for a HELOC (rate is 6%). How much do you have saved up to invest if you keep your primary and go the HELOC route? Even though you say the Seattle market is slowing, 5 years from now it could be a totally different story and you could see another $100-200k jump in value. You have cash flowing property with good equity to draw from, and it has the potential to appreciate further. I'd sit on that, rather than sell and have to pay out the commissions and closing costs.