Refinance and rent out or Sell?

Question

I currently have a 3 bed 2 bath home 1800 sq ft. With the market the way it is now, I could profit around $20,000 by selling. After listening to the BP Podcast, I've learned about refinancing and holding long term. I  am working on understanding refinancing fully but I am still back and forth with selling. I want to take the jump and start investing in rental properties. I'm having trouble deciding if this home I've owned for 2 years is the perfect home to begin renting out of if I should take that cash and make a different move? Advantages and disadvantages of each option? Opinions appreciated!

Aaron W. · Answer

@Erika Rogers

If anything, you can probably refinance into a lower rate to save money.  Not sure if this is a primary home or a second home for you. This will play a role on whether you rent or sell too.

If the rent is at $1300 that may not be enough to make it a cash flowing rental once you calculate mortgage, repairs/maintenance, capital expenditures, insurance, and taxes. The general rule of thumb is your rent should be 1% or more of your home's purchase price.

Adam M. · Answer

@Erika Rogers

Rentometer is a good resource for checking rent comps on your own, but even better would be to ask property managers in your area to see what similar homes are renting for.

Blaine Alger · Answer

Here is my best advice given the information I have on hand.

I would say you could accomplish everything you want by refinancing. This will allow you to pull out your cash to move to the next venture while retaining ownership of the property and renting it out. I think it is a great strategy and it is how a lot of people get into the game by becoming an "accidental landlord".

Some things to consider:

-You will want to check the rental rates in the area and make sure you will be able to  cashflow with the higher mortgage payment and after accounting for your variable expenses (cap ex, maintenance/repairs, vacancy, property management, etc)

-Where will you live next? Chances are you will not be able to buy that same house for what you bought it for 2 years ago. So you will have to downgrade into something smaller or spend more money to get into something comparable. If you choose the latter, is it even worth it anymore? The increased cost of your new housing will probably offset the gain from your rental. I would encourage you to use the money from the refi and buy something below your means with an FHA 3.5% down. This will allow you to keep living expense comparable from before and allow you to realize the return from the rental.

Hope this helps. Let me know if you have any other questions.

-BA

Aaron W. · Answer

In order to determine whether to refinance or sell, there are a lot of factors that play into it. Will you be willing to share details on the property including what you currently owe, current interest rate, terms, etc. What terms and rates are you finding with a refinance?

For renting, what is the market rent for a comparable property (year built, size, layout, bed/bath #, etc.)?

For selling, what are the sold comparables?

This will start the conversation on whether to refinance and rent, or sell.

Erika Rogers · Answer

@Adam M.

I will check on that. Thank you

Erika Rogers · Answer

@AJ H.

It’s a 30 year conventional loan. I owe 140,000 property is valued around $165,000 with comparable in my neighborhood. My interest rate is 4.5%

I am not sure the renting prices but I think they are around at least $1,300. I need to find some numbers on that, but I’m not sure where to find that

Elise Marquette · Answer

It really depends on what you want to do. Are you wanting to purchase another property to rent out ASAP? If so, do you have a purchase price in mind? Would you plan on financing the next property or buying cash? Buying an investment property can be anywhere from 15%-25% down plus closing costs. Without knowing a whole lot about your situation, will the 20K from this property be enough to help you get your next property (if that's what you're wanting to do).

Aaron W. · Answer

Do you have a property in mind to purchase?  If you do a refi and pull cash out, then you will need to start paying on that money. Although, interest rates are low right now so it is something to consider.  Is there an option to do a HELOC (home equity line of credit) on the property? That way, you can pull the equity out when you need it.

What are rents in the area going for? There are dozens and dozens of articles about analyzing properties and you can do it for your property to see if you would even cash flow on the property. Things to think include the mortgage but also repairs/maintenance, capital expenditures, taxes, insurance, and utility costs to rent out the property.

Refinance and rent out or Sell?

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