Refinance or sell to buy a new house? Please advise!

Buying & Selling Real Estate
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Refinance or sell to buy a new house? Please advise!

Serena Sun
Real Estate Investor · Kirkland, WA · Member since 2013 · 42 posts · 2 votes

hi All, 

I am not professional RE investors, so I hope that you can give me some advice for my situation.

We bought our primary home in 2002 for $300K, the mortgage plus taxes and insurance is $2600/mon. The house should be worth about $650K now, $47K mortgage balance remaining (should be paid off in two yrs), and we have $40K HELOC debt. We rented the house out in March this year for $2500, and the lease won't due till next summer. So we don't have any positive cash flow.

We are expecting a baby, so want to buy a bigger house (around $800K range).

We have two options:

1. Sell the old house, paid off mortgage and HELOC debt, after fees, we will get about $530K proceeds. Put all the proceeds in the new house as down payment, borrow about $300K for 15 yr fix.

2. Refinance the old house for about $300K for 15-20 yrs, and continue to rent out the house. Use $300K for down payment for new primary and borrow additional $500K for 15-20yrs. This will increase our monthly mortgage pmt to about $4300/month. Because our old house is almost paid off, so we can only use standard deduction on our tax return. New mortgage will give us some tax benefits.

My husband wants to sell the house so we don't have to pay capital gains for the old house, but we will have to wait till the leave is over. I don't know if refinance is a better option because it will be quicker and we will have a rental property on the side. 

Let me know what you think. I appreciate it very much for your analysis.

Thanks

Serena (Seattle)

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Ciprian L.
Real Estate Agent · Burbank, CA · Member since 2012 · 271 posts · 79 votes
11y

You have a 650k house that rents for 2600/month. Can you find a cheaper house that rents for 2600? 

If yes, I would sell it to get the 500k tax free money and buy at least another rental property and a primary residence with 30 years loan. If you want to pay it earlier you can do it.

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  • Steve S.
    Lender · Los Angeles, CA · Member since 2015 · 800 posts · 229 votes
    11y

    I always think refinancing is a better option as long as you can afford the payments. Obviously if the property has a positive cashflow then that is even better. 

    Refinancing in my opinion keeps you leveraged. You can access your equity, not pay taxes on it, and use it for additional investments. That's my opinion. Best of luck.

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  • Charlie Fitzgerald
    Lender · Las Vegas, NV · Member since 2015 · 2k+ posts · 1k+ votes
    11y

    I agree with Steve.  Additionally, your tenant is paying the Lions share of the costs anway, while you continue to enjoy the appreciation and depreciation benefits.  Over time, the ownership if that rental will be very much of a benefit to you and your family.  Selling it now woukd be a mistake.  I also would reconsider the size of the down payment you intend to make on the new house.  Unless you have to have that much into it to afford the payment.  I'd rather put less down, and conserve the cash for other investments.  Even if it meant extending the mortgage term to a 30 year.

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  • Kevin Harrison
    Investor · Woodbridge, VA · Member since 2015 · 476 posts · 197 votes
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    Don't forget to consider that refinancing to only a 300K loan at todays rates will likely lower your payment quite a bit, and would possibly make the unit cash flow a hole lot better. I have a 400K mortgage that I pay less than that a month on. Just make sure you leave yourself room in your DTI for the purchase of the new house. (Refinancing to a lower payment will help this as well though.

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  • Ciprian L.
    Real Estate Agent · Burbank, CA · Member since 2012 · 271 posts · 79 votes
    11y

    You have a 650k house that rents for 2600/month. Can you find a cheaper house that rents for 2600? 

    If yes, I would sell it to get the 500k tax free money and buy at least another rental property and a primary residence with 30 years loan. If you want to pay it earlier you can do it.

    1Reply
  • Serena Sun
    OP
    Real Estate Investor · Kirkland, WA · Member since 2013 · 42 posts · 2 votes
    11y
    Originally posted by @Steve S.:

    I always think refinancing is a better option as long as you can afford the payments. Obviously if the property has a positive cashflow then that is even better. 

    Refinancing in my opinion keeps you leveraged. You can access your equity, not pay taxes on it, and use it for additional investments. That's my opinion. Best of luck.

     Thanks Steve, 

    If we refinance the old house, the monthly pmt should be about the same as the rent. We might have a little positive cash flow for 20 yr loan. I feel refinance is a better option too. Thanks

    0Reply
  • Serena Sun
    OP
    Real Estate Investor · Kirkland, WA · Member since 2013 · 42 posts · 2 votes
    11y
    Originally posted by @Charlie Fitzgerald:

    I also would reconsider the size of the down payment you intend to make on the new house.  Unless you have to have that much into it to afford the payment.  I'd rather put less down, and conserve the cash for other investments.  Even if it meant extending the mortgage term to a 30 year.

    hi Charlie, 

    If we put $300K down payment for the new house, the mortgage will be over $4.2K. It might be challenging to afford a higher pmt with smaller down payment. 

    If our goal is to retired in 10, 15 yrs, will you still recommend to extend the new mortgage to a 30 yr? (we do have couple rentals now (all 15 yr loan), so we want to pay them off in 15 yrs, so we can retire earlier).  

    Thanks again for your reply.

    0Reply
  • Serena Sun
    OP
    Real Estate Investor · Kirkland, WA · Member since 2013 · 42 posts · 2 votes
    11y
    Originally posted by @Kevin Harrison:

    Don't forget to consider that refinancing to only a 300K loan at todays rates will likely lower your payment quite a bit, and would possibly make the unit cash flow a hole lot better. 

    Thanks Kevin, I probably should start to ask bankers about the interest rate :)

    0Reply
  • Serena Sun
    OP
    Real Estate Investor · Kirkland, WA · Member since 2013 · 42 posts · 2 votes
    11y
    Originally posted by @Ciprian L.:

    You have a 650k house that rents for 2600/month. Can you find a cheaper house that rents for 2600? 

    If yes, I would sell it to get the 500k tax free money and buy at least another rental property and a primary residence with 30 years loan. If you want to pay it earlier you can do it.

     The houses in Seattle are quite expensive now. I might be able to find houses around $500K to rent for $2400 or so, but not as good location and smaller lot. I haven't thought about that option, I will think it through. Thanks for the new idea~

    0Reply
  • Charlie Fitzgerald
    Lender · Las Vegas, NV · Member since 2015 · 2k+ posts · 1k+ votes
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    I would take the 30 year mortgage and cash flow it to pay to off in 15 years.   

    0Reply
  • Justin R.
    Developer · San Diego, CA · Member since 2015 · 1k+ posts · 1k+ votes
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    Why on earth would you hold a $650k house that's only getting you $2500/m in rent? I don't care about your cash flow - your return on equity is terrible. Long term, that's what matters. On top of that, you get all those gains tax free if you sell in the next three years. It's a no-brainier as far as I'm concerned .., the only question is whether you sell it now, next summer, or the year after. If you're willing to gamble that it will appreciate more in 2016, *maybe* you hold it another year. Take the tax-free money and invest it elsewhere - stocks, a duplex, something out of state... If you run the numbers for different scenarios, I bet you'll see the benefit.
    1Reply
  • Serena Sun
    OP
    Real Estate Investor · Kirkland, WA · Member since 2013 · 42 posts · 2 votes
    11y
    Originally posted by @Justin R.:

    Why on earth would you hold a $650k house that's only getting you $2500/m in rent? I don't care about your cash flow - your return on equity is terrible. 

     The return isn't good....We rent out in a hurry and I suppose we can increase the rent a little next year. The house is located in a good area, so I hope it will appreciate more in the future. 

    My husband like the idea to sell, get tax free money, use to buy a new house and another investment property~. 

    We will think about your suggestions. 

    Again, thanks for sharing your ideas :)

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  • Nick Jenkins
    Residential Real Estate Agent · Bothell, WA · Member since 2014 · 14 posts · 1 vote
    11y

    I agree with Ciprian. I know that you can find a property that will rent for more than that for 650k. You could find a property that will rent for that much with 375k on the MLS, if you refinance you might get you're mortgage below the rent and have some cash but I still doubt it will cover the expenses meaning that you'd be paying out each month to have it. I know you could do much better with 650k.

    Especially with the goal being to retire soon, I think you will want the best return on your investment possible. 

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  • Alex Chin
    Seattle, WA · Member since 2015 · 500 posts · 243 votes
    11y

    @Serena Sun - Just my 2 cents, but I would very carefully take a look at how much you can command in rent for your place. Which neighborhood is it in? If the house is located in one of the hotter Seattle areas, I would say you should easily be able to command upwards of $3,000-$4,000/month in rent.

    At that point, I would guess that the house would cashflow nicely and you'd be able to refi it, pull out all of that value and invest in a larger home with a 30-yr fixed. Remember, mortgage rates are ridiculously low right now, it makes a lot of sense to be able to lock in that low cost of money if you're going to be there for a long, long time.

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  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    11y

    Let's see.  An enormous tax free gain and a chance to re-deploy capital to a non speculative investment with an actual return on equity. Check.

    Or - forget about the IRS gift.  Thumb your nose at a tax bill you don't have to pay in the 10's of thousands and stick with a negative ROE asset, praying it continues to appreciate.  

    Longs make money, shorts make money, hogs get slaughtered. The old mantra comes to mind.  And I don't even think those hogs passed on the huge IRS gift.  

    I understand it's most comfortable to hold what we know, but after putting pen to paper on this a little bit I hope you guys can come to an objective decision.  

    Congrats on being in this position @Serena Sun!

    1Reply
  • Nghi Le
    Investor / Lender · Seattle, WA · Member since 2014 · 1k+ posts · 730 votes
    11y

    Hi @Serena Sun,

    Since you can't sell the house until the lease is over anyway, you can refinance now and get benefits of lower rate and lower monthly payments, then decide if you want to sell it later. You also may want to talk to a mortgage broker first to see if having the rental and purchasing a new primary is even possible with your DTI, reserves, etc. If you need a good mortgage broker, I can refer you to one in Kirkland.

    If you're confident you can find a good investment property after selling the house and getting the cash, go for it. But it's pretty hard in this Seattle market, unless you're willing to go out of Seattle. Otherwise your money is just sitting, which is the worst case of all. Again, make sure you talk to a loan guy who can tell you how much you can spend on a primary and investment property with your down payment, reserves, and DTI scenario.

    I also suggest choosing 30-year loans because the rates are so ridiculously low. You'll pay more in interest of course, but the value of the house will more than pay for it the longer you hold it since it compounds (and interest decreases every year). Plus, if you make the same payment as the 15-yr loan on the 30-year loan, you'll pay it off in about the same time anyway, but at least you have the flexiblity of having a lower payment (in case you hit some troubled times and income/cash flow gets tight).

    Take advantage of the low cost of borrowing during this time. If you decide to keep the house, take out the equity you need in the refinance to put a down payment on the new primary, and use a HELOC on the remaining to borrow at 2-4% and lend it out at 6-12% to create free cash flows off your equity.

    0Reply
  • Dave Skow
    Lender · Seattle, WA · Member since 2014 · 2k+ posts · 899 votes
    11y

    Serana - both ideas  have merit ...not sure if the timing aspect has been touched on with the replies ...so here is additional  feedback .....if you refinance the loan and pull out some cash to use for the  new property down payment , you can  control  when you can make an offer on the new property .....if on the other hand you find a new property and then  need to  sell the  current home for the larger  amount of cash - you will be  weakening any offer you might  make  if you ask for a longer  closing period to accomplish this ......summary - you will likely be in a stronger  negotiating position  if you have a large  cash position and don't need to worry about the present home selling

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  • Ryan Gibson
    Investor · Washington, DC · Member since 2015 · 9 posts · 5 votes
    11y

    I think this is covered in the other "posters" comments but my wife and I just went through exactly what you are going through. My vote is to keep the property (!!!!) just buy another place that suits your growing family for 1-6 years and then rent that place out when you are ready to buy a bigger family home... Sounds like you are looking somewhere north/east in Seattle/Kirkland and there are plenty of decent homes to buy in the 500-600k range for a young family. 

    I think you should consider your tenant is building your wealth for you.... and  your home has more equity to be had for your person wealth! The fear of capital gains is a bad reason alone to sell your property. Think of it this way... if you could keep your property (600k) and someone else pays for it (a tenant) and buy a more modest place 500-600k you now own 1.2-1.3M in real estate versus only 800k. The difference with owning 800k is you pay for the entire property yourself and only gain appreciation on 800k versus 1.2-1.3M (which would cost you a lot more than capital gains).

     If you own 1.2-1.3M in real estate but 600k of that is being paid by a tenant that is really going to make your personal portfolio grow. The sacrifice is living in a little smaller place for a little bit longer. But if you buy a smaller place in a fun, rentable area you could save for your dream home and eventually rent out the place you are thinking about buying now! This would allow you some time and more wealth generation. 

    I also would not focus on cash flow too much because there are a lot more factors for building wealth. Anything cash flows with enough money thrown at it. I would focus on other variables like the principle/interest break down. If you are breaking even every month consider that about $500-600 is going to your principle. If your property keeps appreciating let's say 2% year over year that is $11,000/year. So by hanging onto the property you could be adding $18,000-$20,000 to your portfolio per year. 

    I guess it just depends on your personal and family goals and how much you can afford in monthly payments each month with your new home. Best of luck! 

    0Reply
  • Adrian Chu
    Real Estate Broker · Seattle, WA · Member since 2014 · 1k+ posts · 427 votes
    11y
    Originally posted by @Serena Sun:

    hi All, 

    I am not professional RE investors, so I hope that you can give me some advice for my situation.

    We bought our primary home in 2002 for $300K, the mortgage plus taxes and insurance is $2600/mon. The house should be worth about $650K now, $47K mortgage balance remaining (should be paid off in two yrs), and we have $40K HELOC debt. We rented the house out in March this year for $2500, and the lease won't due till next summer. So we don't have any positive cash flow.

    We are expecting a baby, so want to buy a bigger house (around $800K range).

    We have two options:

    1. Sell the old house, paid off mortgage and HELOC debt, after fees, we will get about $530K proceeds. Put all the proceeds in the new house as down payment, borrow about $300K for 15 yr fix.

    2. Refinance the old house for about $300K for 15-20 yrs, and continue to rent out the house. Use $300K for down payment for new primary and borrow additional $500K for 15-20yrs. This will increase our monthly mortgage pmt to about $4300/month. Because our old house is almost paid off, so we can only use standard deduction on our tax return. New mortgage will give us some tax benefits.

    My husband wants to sell the house so we don't have to pay capital gains for the old house, but we will have to wait till the leave is over. I don't know if refinance is a better option because it will be quicker and we will have a rental property on the side. 

    Let me know what you think. I appreciate it very much for your analysis.

    Thanks

    Serena (Seattle)

    I am not a tax professional.  But here are my thoughts.

    You can also consider selling it while the tenant is there.  It may not appeal to some home buyers but you need to weigh it against the potential increase in capital gains tax as tax will be prorated.  The longer you wait to sell the house, the more tax you will have to pay and the market can be unpredictable.  If the value of the house keeps going up, that's great. But $300k to $350k capital gains is pretty substantial.  And with the extra Obamacare tax, it is not advantageous to continue to hold a former primary residence as an investment property.  I would suggest selling the house. 

    Good luck.

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  • David Faulkner
    Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    11y

    You bought low in 2002 and now you have the opportunity to sell high in 2015 (or spring 2016), tax free ... I'd do that. If you were in a better cash flowing market, I'd advise differently. If this were an ice cold market like 2009, I'd advise differently.

    I'd also seriously reconsider buying such an expensive and large replacement property. It may be a financial, emotional, and time drain when those may already be drained by a newborn. I'd put 20% down on a more modestly priced home that still meets your needs (but maybe not all your wants) and invest the rest wherever you can find the best return (based on conservative estimates of the fundamentals, not speculation) ... this may or may not be rental properties in your backyard, or even RE at all. Don't invest remote. Best wishes whichever path you choose.

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  • Yinan Q.
    Engineering Consultant, Investor · Seattle, WA · Member since 2013 · 213 posts · 61 votes
    11y

    @Serena Sun, I would sell the house before the capital gain tax benefit goes away, which means to sell in less than 2.5 years.

    Whether to sell now or later depends on your financial situation. Do you need the money for down payment? If not, I'd wait until the lease expires next summary. Maybe the house will need a little bit of fresh up to get you the best sell price.

    If you do need the money for down pay, I would either refinance or take a HELOC.

    0Reply
  • Serena Sun
    OP
    Real Estate Investor · Kirkland, WA · Member since 2013 · 42 posts · 2 votes
    11y

    Hi Everyone, 

    Thanks for taking the time and share you opinions. We didn't think about buying a bigger house one month ago. I guess my nesting instinct kicked in and want to a bigger space for baby to play. 

    We've been looking around our primary house the last couple weekend and decide we will refinance to get the down payment. We might sell within 2.5 yrs as some of you have suggested, but the decision will be made later. 

    I got a quote for refinance interest 15yr fix for 3.375% and 20 yr for 3.875%, is that good? 

    Thanks

    Serena

    0Reply
  • Serena Sun
    OP
    Real Estate Investor · Kirkland, WA · Member since 2013 · 42 posts · 2 votes
    11y
    Originally posted by @Alex Chin:

    @Serena Sun - Just my 2 cents, but I would very carefully take a look at how much you can command in rent for your place. Which neighborhood is it in? If the house is located in one of the hotter Seattle areas, I would say you should easily be able to command upwards of $3,000-$4,000/month in rent.

     The house is located in north Ross Hill, near Kirkland Costco. (98033) We might increase the rent to $2600-$2700 after the lease expires, but I am not sure about $3K-$4K. It feels the rent doesn't keep up with the crazy housing prices here. 

    Most likely we will get 30yr fix for the new home, the monthly pmt might be too much for 15 and 20.

    0Reply
  • Serena Sun
    OP
    Real Estate Investor · Kirkland, WA · Member since 2013 · 42 posts · 2 votes
    11y
    Originally posted by @Nghi Le:

    Hi @Serena Sun,

    You also may want to talk to a mortgage broker first to see if having the rental and purchasing a new primary is even possible with your DTI, reserves, etc. If you need a good mortgage broker, I can refer you to one in Kirkland.

    If you're confident you can find a good investment property after selling the house and getting the cash, go for it. But it's pretty hard in this Seattle market, unless you're willing to go out of Seattle. Otherwise your money is just sitting, which is the worst case of all. Again, make sure you talk to a loan guy who can tell you how much you can spend on a primary and investment property with your down payment, reserves, and DTI scenario.

    I also suggest choosing 30-year loans because the rates are so ridiculously low. You'll pay more in interest of course, but the value of the house will more than pay for it the longer you hold it since it compounds (and interest decreases every year). Plus, if you make the same payment as the 15-yr loan on the 30-year loan, you'll pay it off in about the same time anyway, but at least you have the flexiblity of having a lower payment (in case you hit some troubled times and income/cash flow gets tight).

    hi Nghi, 

    I did check with a loan officer, she said the loan amount is ok. Please refer me the mortage broker, I'd like to get another quote. :)

    We should choose 30 yr loan for the new home to be more flexible.

    Thank you so much

    0Reply
  • Serena Sun
    OP
    Real Estate Investor · Kirkland, WA · Member since 2013 · 42 posts · 2 votes
    11y

    Hi Dave, 

    I heard you...We will start the refinance process shortly, so we can make offer in good position. We mostly looked at presale new houses right now, but as you said good deal might come along and need quick closing. Thanks

    1Reply
  • Dave Skow
    Lender · Seattle, WA · Member since 2014 · 2k+ posts · 899 votes
    11y

    Serena - thanks for the message .. good idea ...glad that you have received at least some preliminary  feedback .....if you are confident that you will be buying , I would recommend  getting a  full " pre approval "  (  not a  pre  qualification ) in place ...thanks

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