Sell or Cashout Refinance?

22 Replies

I'm currently active duty military and am having to move next summer. I purchased my house last summer and have built around $80k in equity. My only hesitation on keeping the property is that I'd be having to manage the property from across the country.

Recommendation to sell and reinvest or cash out refinance and rent or Air BnB?

@Charles Elliott what market are you in? That will affect a lot what strategy might work best. Also what are your goals, ie cashflow buildup, rolling equity into subsequent properties, etc?

As for refinancing, I'm an Air Force vet myself. Did you use your VA loan for the purchase? If so, you only have a certain amount of ‘entitlement' that you can use; you can look it up and it's based on county you're purchasing in and unit count (SFH, 2-unit, 3-unit, etc). If you are planning on using your VA loan again when you PCS, you are required to ‘dispose' of it (such as selling it) or get a one-time reinstatement of benefit in order for your full entitlement to be restored so you can use it again if you don't have enough ‘entitlement' left otherwise you'll have to put 25% of the difference as a down payment. I've met a lot of military and vets that don't know this. For example, we bought a home here in Meridian, Idaho using my VA loan 2 years ago. We won't be staying here forever, and I wanted to have my VA loan available for when we do move, so thanks to the INSANE amount of appreciation in the Southwest Idaho market, we have well over 20% equity now and just refi'ed our house into a conventional 30-year mortgage with the same interest rate and I'm in the process of doing the one-time restoration to fully free up my VA loan to use again. Not sure if this applies to your situation or not.

Keep it. Interview PM's, have someone manage for you. I love AirBnB's if you are allowed to and the market can sustain it. Let the equity build and utilize the equity to further invest. 

@Jason Bohling I’m currently in the Colorado Springs market. Huge jumps on home values and growing city. My goal is to accumulate multiple single family and small multi family for long term and short term rentals. 
i used a VA loan for my SFH and have accumulated over the 20% equity! Just like Idaho, the market here is crazy. thanks for the info on switching to a conventional! I didn't know all those details.

@Charles Elliott I agree with @Caleb Brown , you should keep it, ESPECIALLY in that market. Given the massive military presence there, I would recommend making your initial focus on renting to other military if the BAH numbers work out for what you need. The military is never leaving the Colorado Springs market, you can have them set their rent up for allotment so it's never late, and we both know the last thing someone wants is for their Shirt to be notified of anything shady and have them step in! I wouldn't do a cash-out refi if you intend to use your VA loan again to save room in your entitlement (unless you're going to employ the strategy I did), otherwise just see how the numbers work at your next duty station.

@Jason Bohling I'll check with my lender about the cash out refinance details you mentioned above. I'm still a little unsure if I understand correctly with reusing the VA loan and getting back the full entitlement. Also, good point with using the shirt for my own security. I think I'll keep my property and rent to a military member. Thanks so much for y'all's help! @Caleb Brown

@Charles Elliott You should also be mindful of the tax consequences if you sell. If you keep it as rental there are guidelines for not paying or deferring capital gains taxes. 

@Charles Elliott Did you purchase the home on your VA loan? Do you need to free up any of your entitlement to buy at your next duty station or do you plan on renting? If you sold, how would you 'reinvest' the profits? I would probably just hold it and rent it out (either long term or short term depending on your goals), but its tough to make a decision on your problem without all the info. What would it rent for as a long term or short term? Is there a strong rental demand for properties like yours? Etc.

@Douglas Spence I'm looking to purchase again once I move and use the VA loan again. If I sold, my plan was to reinvest the profit into an investment property (small multi family). My current residence would be profitable with either short or long term renting. That's what's making the decision more difficult. Doesn't seem to be a "wrong" decision

@Charles Elliott I would interview local property managers and see what they think they could get for rents in that market - let the numbers do the talking for you. If this is your primary residence, you could potentially still be eligible for the capital gains exclusion - and wouldn't have to make that decision to sell right away. Based on the financials - maintenance, capex, your mortgage payment, taxes, management fees - you should be able to run some numbers on this property to see how it performs. I work with investors who always manage from a distance - just have to have the right management team on the ground to make it work as long as everything else "adds up". I'm very hesitant to sell properties in high appreciating markets with high rental demand - but freeing up some equity might not be so bad either. May want to talk to a lender because the type of financing may change and require a higher LTV as well.

@Charles Elliott it's such a great market in Colorado Springs you should be able to get decent cash flow and build equity if you rent it. Long term rentals (unfurnished) are simpler. You could consider airbnb but you would need a good STR manager for this and I'm not sure the margin would be worth it if you don't self manage. My two cents, turn your CSprings place into a LTR and reuse your VA loan to do it again some place else.

Originally posted by @Charles Elliott :

@Jason Bohling I'll check with my lender about the cash out refinance details you mentioned above. I'm still a little unsure if I understand correctly with reusing the VA loan and getting back the full entitlement. Also, good point with using the shirt for my own security. I think I'll keep my property and rent to a military member. Thanks so much for y'all's help! @Caleb Brown

So here's a rundown of the basics of how the VA home loan works...

When you go to get a conventional mortgage, typically lenders want you to put 20% down which will enable you to avoid private mortgage insurance (PMI) which protects the lender in case you default. This can be a substantial amount of money. To help veterans and active duty (and of course, eligible Guard & Reserve) buy a home, the VA through the VA home loan program will guarantee 25% of the purchase price up to a certain amount (usually known as the Conforming Loan Limit), enabling us to buy a home with a 0% down payment and no PMI. This is based off the Conforming Loan Limit for the county the new home is being purchased in. The current Conforming Loan Limit for 2021 in most places is $548,250, meaning the VA will guarantee a home purchase with no down payment and no PMI for a price up to $548,250, which 25% of is $137,062. $137,062 is the limit of your 'guarantee' AKA your 'entitlement'.

So, let's say you bought your home in Colorado Springs for $280,000. The VA guartanteed 25% of this, which is $70,000. Therefore, you used $70,000 of your 'entitlement' leaving you with $67,062 of entitlement left ($137,062-$70,000 =$67,062). Meaning, say you get PCS'd to a cheap area like Barksdale by Shreveport, LA, you could buy a home there for $268,248 using the rest of your entitlement ($67,062 remainder of entitlement x4 =$268,248 total purchase price) without having to pay a down payment and no PMI.

However, if the house you want is $400,000, then you will have to pay 25% of the difference between the $400,000 purchase price-$268,248 (maximum amount covered by the VA home loan guarantee/entitlement you had left equalling $67,062) which means you would have to make a down payment of $32,938 ($400,000-$268,248 =$131,752 difference. 25% of $131,752 =down payment amount of $32,938. This is still a better deal than having to pay 20% of $400,000 by using a conventional loan.

Now, let's say instead you get stationed at Joint Base Lewis-McChord by Tacoma, WA which happens to be in Pierce County (this is where I was stationed). Pierce County is a much more expensive area, and therefore this wouldn't be enough entitlement to buy a home with 0% down and no PMI. In certain locations, the VA allows a higher amount (remember the entitlement amount is based off the county you are buying the new home in as well as unit size; there's different amounts for SFH's, duplexes, triplexes and quadplexes). So in Pierce County, say you want to buy another SFH. In Pierce County that would give you a purchase price 'limit' of $776,250 (meaning the VA will guarantee 25% of the purchase price up to $776,250 which equals an entitlement amount of $194,062 (25% of $776,250 purchase price =$194,062 of entitlement). This new SFH in Pierce County will cost you $450,000, meaning you would need $112,500 of entitlement in order not to pay a down payment and no PMI ($450,000 x 25% =$112,500). Since the entitlement in Pierce County, WA for a SFH is $194,062 and you have used $70,000 of entitlement in Colorado Springs, this would leave you with $124,062 in entitlement to use on your new home in Pierce County ($194,062 Pierce County entitlement total-$70,000 entitlement used in Colorado Springs =$124,062 in entitlement remaining to use in Pierce County without having to pay a down payment or PMI). Since the new home is $400,000 and 25% of this is $100,000 and you have $124,062 left in entitlement, you would be able to purchase this home with $0 down and no PMI.

Another option you could look into in order to keep your Colorado Springs home and tap the equity to use toward new investments is to take out a Home Equity Line of Credit (HELOC) on your Colorado Springs home. Many places will give you up to 90% loan-to-value and most places will do this with no closing costs.  This would enable you to keep your Colorado Springs home and rent it out while having a 'pot' of money to use and repay like a credit card to purchase new properties with.

I'll use my own primary residence and situation as an example. I owed $280,000 a few months ago when I applied for a HELOC. The credit union I used offered a 90% loan-to-value (now, the way this works is they take the current value of the home x 90% which equals total they will lend on - the current amount owed =the amount of the HELOC) and valued my home at $397,777. Therefore, they offered me a loan-to-value of $358,000 ($397,777 current market value x 90% =$358,000). Then you subtract the $280,000 I owed at that time which left a HELOC amount of $78,000 ($358,000 - $280,000 owed =$78,000). Next, I just refinanced my mortgage out of a VA loan and into a 30-year conventional loan, which will enable me to have my full VA entitlement restored as a one-time thing to use on my next home while keeping this home in Meridian, Idaho as a rental AND I will still have my $78,000 HELOC on it to use towards other rental purchases.  Key in this is to open the HELOC while it is still your primary residence.

Now, as always, talk things over with your lender or prospective lenders and see how the situation will play out for you. Make sure to shop around; I had HELOC offers that ranged from 70% loan-to-value to 90% loan-to-value.

Didn't mean to write a novel; hope this explains things.  If you got questions please let me know.  And if any lenders have anything to correct me on, by all means please do...it's more important that people have the correct info than protecting my ego.

Updated about 1 month ago

Fat-fingered my math o n this part. It should have said: Since the new home is $450,000 and 25% of this is $112,500 and you have $124,062 left in entitlement, you would be able to purchase this home with $0 down and no PMI.

I'm new here, but I'm also military (army vet) and when I moved to Rucker I bought there, then stationed at drum and kept the place in rucker and rented it out to other pilots who were moving there for a year or 2 at a time for training.  I found a property manager through my real estate agent.  Where is it located, maybe someone here knows a good prop manager for you?  Cash out refi is always an option as long as you own it... but you can only sell it once.

@Jason Bohling thanks for the breakdown on all of that! I love it when people spell it out like that. I'm excited to start using VA on my future properties. I'm a 2LT and just getting started with my first 4-plex in Alaska, but need to keep all of what you shared in mind as I go along.

Charles, if you decide to sell , I would be interested. I live and invest in Colorado Springs. If you decide to keep it and need a referral to P.M’s let me know. I would be happy to help 

@Charles Elliott

If it has positive cash flow with a property management fee included, keep it and let it continue to work for you.

Many comments already mentioned finding a QUALITY PM.

If you end up not moving back to CS after your tour, then may be time to think about selling and re positioning to whatever market you move to. Then you could self manage.

Definitely talk to a cpa if you decide to sell, there will be capital gain implications.

Originally posted by @Landon Fillmore :

@Jason Bohling thanks for the breakdown on all of that! I love it when people spell it out like that. I'm excited to start using VA on my future properties. I'm a 2LT and just getting started with my first 4-plex in Alaska, but need to keep all of what you shared in mind as I go along.

 No problem, LT. I bet that's an awesome assignment up there!  I had Elmendorf (and Eielsen by Fairbanks) on my dream sheet the entire time I was in the Air Force; only problem was, like Europe, EVERYBODY wants to go to Alaska!  If there's anything else I can do, just let me know.

Originally posted by @Charles Elliott :

@Jason Bohling thanks so much for the breakdown! That explains it perfectly. I’ll be sure to take all that into consideration when it comes time for me to move. 

You're welcome, glad I could help.  Anything else, just let me know! 

@Charles Elliott

I don’t remember who said this, but I’ve heard this on BP many times over, “Cashflow keeps you in the game, equity builds you wealth.”

My vote is for holding onto the property if you find the numbers work for you and find someone you trust to manage the property.

Good luck! Here’s to the journey.