Question on whether we should Cash-Out ReFi, sell or leave as is

Los Angeles County, California
Buying & Selling Real Estate
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Question on whether we should Cash-Out ReFi, sell or leave as is

Bryce Matson
Investor · FL · Member since 2022 · 10 posts · 1 vote

Hi All,

We own a house in LA and are moving away. We want to convert our garage into an ADU and then rent out the main house and ADU. The main house would be 3 bdr/2 bath and ADU a 1 bed/1 bath. We think the max rent we could get would be $4K for the main house and $1,800 for the ADU. Our realtor estimates the house would be worth $1.2 mil after the ADU and currently valued at $950K. We estimate it will cost $50-70K for the ADU conversion. The main house has solar and tesla wall charger.

We are trying to decide whether to sell or ReFi after the ADU or leave as is and just rent it out. Our interest is at 2.89% so the rate would go up in today's market and after refinancing at $1.2mil we estimate our monthly payments to be higher than what the rent would collect after all fees, reserves, etc. If we sell we lose a decent house at a good rate as well as our only asset in CA that we could use to write off our visits back to CA.

We are currently leaning towards not refinancing the house and just collecting the extra cash flow from the ADU but we wanted to use the large cash-out of around $300K to get other houses. We could also minimize our cash-out to just cover the cost of the ADU (then use it for down payment on new primary residence) and a little more for a down payment on another investment property.

I wanted to see if there is something we are not thinking of that might make better sense to take advantage of the equity we have and would add with the ADU. If there is any other info you need to better help please let me know! I appreciate any advice!

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Rick Albert
Real Estate Agent · Los Angeles, CA · Member since 2018 · 2k+ posts · 1k+ votes
4y

A couple of things (as someone who has built an ADU personally and helped clients do the same in Los Angeles):

1) It is going to cost a minimum of $100,000-$125,000 to do the garage conversion. Your upfront costs are in the range of $20,000-$25,000 before you even start. You may have to build shear walls all around, and it needs it own sewer line that runs all the way to the front of the house. I'm not saying don't do it, I'm saying make sure you get proper bids.

2) You can consider a HELOC instead of a cash out refi. You have a great interest rate and it is probably not worth losing. Plus if you ever want to create better cash flow without buying more properties, you have the option to pay off the HELOC instead.

3) It depends on your financial position, but I always ask my clients who are not sure on whether to sell or not is what their intentions are with the money.

4) Since it is your primary residence, the first $500K of profits is tax free (assuming you are married and file jointly). Three years go by, and the money is taxed unless you do a 1031 exchange. Just something to think about.

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  • Justin Phillips
    Lender · Phoenix, AZ · Member since 2018 · 440 posts · 256 votes
    4y

    When I lived in Hawaii, I desperately wanted to buy a home with the long-term plan of renting it out and having a tax-deductible trip to the islands each year. I ended up realizing that it would be better to find a very solid rental elsewhere and use some of the cashflow to enjoy a nice vacation each year. 
    All that to say, analyze the rental suitability in a vacuum. 

    My wife and I also faced the sell/keep as a rental dilemma our property recently. We decided that keeping it as a rental, while retaining long-term access to equity was the best of both worlds. We ReFi'd into a very specialized 1st position LOC that's tied to a zero balance sweep checking account. Even at a higher interest rate, our monthly cost actually got cheaper because it's just an interes-only cost. All the while, we're paying principal first with every dollar we deposit. So we have that long-term access to equity, without signing ourselves up for 30 years of higher interest-first payments on day 1. It's been a great option for us, and a helpful tool for us to have in our financial tool belt. We've enjoyed the monthly cashflow and California appreciation, all while having that equity ready for the next opportunity,

    2Reply
  • Bryce Matson
    OP
    Investor · FL · Member since 2022 · 10 posts · 1 vote
    4y

    Thanks for the advice Justin! Can you elaborate on the ReFi you did? What is a first position LOC(Line Of Credit) and zero balance checking sweep account? This is all very new so I appreciate the help!

    0Reply
  • Rick Albert
    Real Estate Agent · Los Angeles, CA · Member since 2018 · 2k+ posts · 1k+ votes
    4y

    A couple of things (as someone who has built an ADU personally and helped clients do the same in Los Angeles):

    1) It is going to cost a minimum of $100,000-$125,000 to do the garage conversion. Your upfront costs are in the range of $20,000-$25,000 before you even start. You may have to build shear walls all around, and it needs it own sewer line that runs all the way to the front of the house. I'm not saying don't do it, I'm saying make sure you get proper bids.

    2) You can consider a HELOC instead of a cash out refi. You have a great interest rate and it is probably not worth losing. Plus if you ever want to create better cash flow without buying more properties, you have the option to pay off the HELOC instead.

    3) It depends on your financial position, but I always ask my clients who are not sure on whether to sell or not is what their intentions are with the money.

    4) Since it is your primary residence, the first $500K of profits is tax free (assuming you are married and file jointly). Three years go by, and the money is taxed unless you do a 1031 exchange. Just something to think about.

    3Reply
  • Malcomb StapelPro Member
    Investor · Topeka, KS · Member since 2020 · 669 posts · 488 votes
    4y

    @Bryce Matson you could consider a HELOC. Many banks will loan 80% LTV, some will do 85% depending on their current lending criteria. That might get you enough to do the ADU and some capital to play with.

    1Reply
  • Bryce Matson
    OP
    Investor · FL · Member since 2022 · 10 posts · 1 vote
    4y
    Quote from @Rick Albert:

    A couple of things (as someone who has built an ADU personally and helped clients do the same in Los Angeles):

    1) It is going to cost a minimum of $100,000-$125,000 to do the garage conversion. Your upfront costs are in the range of $20,000-$25,000 before you even start. You may have to build shear walls all around, and it needs it own sewer line that runs all the way to the front of the house. I'm not saying don't do it, I'm saying make sure you get proper bids.

    2) You can consider a HELOC instead of a cash out refi. You have a great interest rate and it is probably not worth losing. Plus if you ever want to create better cash flow without buying more properties, you have the option to pay off the HELOC instead.

    3) It depends on your financial position, but I always ask my clients who are not sure on whether to sell or not is what their intentions are with the money.

    4) Since it is your primary residence, the first $500K of profits is tax free (assuming you are married and file jointly). Three years go by, and the money is taxed unless you do a 1031 exchange. Just something to think about.

     Thank you @Rick Albert. This is all very helpful.

    1Reply
  • Bryce Matson
    OP
    Investor · FL · Member since 2022 · 10 posts · 1 vote
    4y
    Quote from @Malcomb Stapel:

    @Bryce Matson you could consider a HELOC. Many banks will loan 80% LTV, some will do 85% depending on their current lending criteria. That might get you enough to do the ADU and some capital to play with.

     Thank you @Malcomb Stapel. We considered this but want to avoid the variable APR. We may consider an fix rate Home Equity Loan but wanted to see if there was some angle we hadn't considered.

    0Reply
  • Bryce Matson
    OP
    Investor · FL · Member since 2022 · 10 posts · 1 vote
    4y
    Quote from @Justin Phillips:

    When I lived in Hawaii, I desperately wanted to buy a home with the long-term plan of renting it out and having a tax-deductible trip to the islands each year. I ended up realizing that it would be better to find a very solid rental elsewhere and use some of the cashflow to enjoy a nice vacation each year. 
    All that to say, analyze the rental suitability in a vacuum. 

    My wife and I also faced the sell/keep as a rental dilemma our property recently. We decided that keeping it as a rental, while retaining long-term access to equity was the best of both worlds. We ReFi'd into a very specialized 1st position LOC that's tied to a zero balance sweep checking account. Even at a higher interest rate, our monthly cost actually got cheaper because it's just an interes-only cost. All the while, we're paying principal first with every dollar we deposit. So we have that long-term access to equity, without signing ourselves up for 30 years of higher interest-first payments on day 1. It's been a great option for us, and a helpful tool for us to have in our financial tool belt. We've enjoyed the monthly cashflow and California appreciation, all while having that equity ready for the next opportunity,



    Thanks for the advice @Justin Phillips! Can you elaborate on the ReFi you did? What is a first position LOC(Line Of Credit) and zero balance checking sweep account? This is all very new so I appreciate the help!

    0Reply
  • Justin Phillips
    Lender · Phoenix, AZ · Member since 2018 · 440 posts · 256 votes
    4y

    @Bryce Matson 1st position LOC/HELOC is much different than a traditional Heloc. One of the big reasons is being designed from the ground up to sit in 1st position, it has the staying power more similar to that of a traditional mortgage.
    Zero Balance Sweep account (ZBA) is a checking account that sweeps all activity over to your outstanding balance on the credit line every night at Midnight. So effectively it allows you to do all your banking inside of your mortgage, so your deposits and reserves are working for you, not a bank. It really maximizes flexibility. 

    My wife and I got it on our property, and I liked it so much that I left my job in medical sales to join the company we got ours through. 

    1Reply
  • Kerry BairdPro Member
    Rental Property Investor · Melbourne, FL · Member since 2011 · 3k+ posts · 2k+ votes
    4y

    @Justin Phillips, is the rate variable? What FICO is required? Is it only available on a primary residence?

    0Reply
  • Justin Phillips
    Lender · Phoenix, AZ · Member since 2018 · 440 posts · 256 votes
    4y
    Quote from @Kerry Baird:

    @Justin Phillips, is the rate variable? What FICO is required? Is it only available on a primary residence?


     Typically variable rate, there is an option to fix the rate for 3 or 5 years. We don't really recommend fixing it though, as it's just an added cost at closing and doesn't change the outcome. Minimum mid score of 700. We can put one of these one each property type per borrower; Primary, Investment, Vacation. 

    0Reply
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