I need your advice.
I'm trying to decide if I should sell or refinance this property so that I can use the equity to buy other rentals.
I have a condo/TH that I purchased for $121k nearly 7 yrs ago. It's worth $148k today with an outstanding principal balance of $61k at a 4.875% 30yr fixed mortgage. It rents for $1295/mo.
I can refinance with a 30yr at 3.786% or 15yr at 3.064%. Or I could sell it at the end or the current tenants' lease (May 2018) unless they want to buy it before then.
What number crunching and wholistic analysis would you do in order to decide?
Thanks in advance,
Updated over 3 years ago
Rate updates: The ones I quoted were from the website. I called the loan officer and got the actuals: 5.12% for the 30yr and 4.82% for the 15yr. The difference is that this is a condo vs. a SFH and an investment property vs. an owner-occupied.
If you get the equity out of the property for the 30 year terms, it is only a slight increase in interest rate and a couple hundred more per month. You can run the numbers here:
You will get less monthly income than what you are used to and have capital to invest in a second property. Where as, if you sell the property then you have only capital and no income.
Thanks for the insight @Account Closed
Agree with Scott Carr
Take funds out tax free and lock in money for a long time with a 3-handle cost of capital.
We’ll soon be in a rising rate environment so you’ll be better off borrowing that money now at long term, low rates and redeploying it elsewhere at a higher yield.
@Kelvin Lozano where in the world are you getting 30-year investment property loans for 3.786%? Can you share the source? Thanks!
@Dan Schwartz at the bottom of his post, he listed the rates from the loan officer instead of those he saw on the website. He could have told you that, but I thought I'd say hello. Hi, Dan! :)
Hmmm. I don't see it, but it might be one of those things that doesn't show up in the mobile app? But hi to you too, @Emily Powell !!
Either is solid. If you sell, then re-invest either through a 1031 exchange or syndication. Personally I like the route of doing the refi and buy another, but just make sure you are getting the long term fixed and have solid cash flow in case of a downturn.
@Dan Schwartz - quite possibly. He added an addendum to the post that went like this:
"Rate updates: The ones I quoted were from the website. I called the loan officer and got the actuals: 5.12% for the 30yr and 4.82% for the 15yr. The difference is that this is a condo vs. a SFH and an investment property vs. an owner-occupied."
@Todd Dexheimer would he need to do a 1031 since he's owned it for more than 4 years? Or is it because it's not his primary residence that he would need to use it to keep his profits tax free?
@Jordan Carnes if it is not your primary residence you would need to do a 1031 exchange in order to take all of the profits and place it into the next property. If you do not do a 1031 exchange your pay approximately 15% in long-term capital gains to the federal government and then you will pay your state income tax on a regular basis.
If I had more money to invest I will get into a duplex to increase my rental income.
Hi @Todd Dexheimer , it was my primary residence until May 2017. How does that affect taxation of the capital gains?
If rent covers the mortgage payments and all expenses on the house, I believe it is worth it to keep it and refinance rather than sell, if you believe that the rent will be steady income. Once it's paid off, the rent income is yours, and you own the house as a plus, hopefully it will appreciate as well. Triple-win as I see it.
@Kelvin Lozano I would talk with a CPA. I think it will be treated as an investment property if you sell
@Kelvin Lozano , because you have lived in the property for 2 out of the previous 5 years you can take all of your gain tax free if you sell. You will only have to recapture the depreciation which will be minimal given that you converted the property this May. No need to do a 1031 exchange
That alone doesn't make your decision since the real issue is what will be your net NOI on two properties if you refi vs what it will be if you sell and purchase just one versus what security you are looking for at this stage in the market and investing defensively so cash flow is downturn resistant.
Another option would be to look at where you're living now. Would that convert into a rental? Could you sell this property tax free and use the proceeds to buy another primary residence so you get preferential terms and convert where you are living now into a rental?
@Dave Foster , thanks for the clarification on the 1031. Also, we are renting our current residence.
Since we didn't intend for this unit to be an investment property when we first bought it, we never ran any numbers for cashflow. As a newbie, I thought it would strictly be income - (mortgage + HOA + Taxes + Insurance) = cashflow. If it were that way, the cashflow would be a nice $350. I even thought it was way better than that since $360 of the mortgage is going toward principal.
But since I've been on BP starting in the last couple of weeks, I've learned that is a big big mistake.
So, I was thinking. One way to decide if I should sell vs. refi is to analyze this property as if I hadn't yet bought it.
I'm going to assume 8% for vacancy and 8% for management fees (even though I manage it). The part I'm a bit confused on is the repairs and cap ex. The condo was built 10 years ago but the HOA covers maintenance of everything outside. How much would you reserve for these 2 areas? By the way, the square footage is 1350.
When figuring cap ex think about all of your bigger ticket items in home that need to be replaced overtime..
Roof in Florida shingle about every 15 years, a/c (10 years), hot water heater (8 years), appliances 10 years, electrical panels (20 years), Take the cost to replace this item and divide it by how many years remaining until you have to replace.. add them all up and you will get the amount you need every month to ensure you have everything covered.
Does that make better sense.. I use maintenance as paint etc..
We are thinking about selling our primary residence pulling out the equity and renting and waiting to find a deal to house hack. There aren't many good deals in Florida right now (on market) but I am at work every day looking for one..