Right path - sell, refinance or rent

10 Replies

Hi All,

I'm new to BP and REI so here's a little bit about myself. I started out a year ago on the BP forums, podcasts and reading books. I fell in love with the idea of REI so here I am. My wife and I bought our first house in August with the plan to rent.

We bought a 2bd 2ba sfh planning to turn it into a 4bd 2ba because local rents seemed to be around 1900/month sfh. Long story short I haven't had any luck with turning our den into 4th bd (can't find egress window for RO). Since the local market is still screaming hot,  we had our realtors stop by. They said with the comps our house will likely go between 250-265k. Also, we have updated the main level and the basement is finished, just outdated. Our house, I believe, has the nicest main level and is better located (of the comps).

Here are our numbers:

-House 212k purchase

-Mortage $1267 (principal, interest, taxes, etc.)

-Owe 204k

-20k rehab estimate when finished 

Do we:

1) Sell using agents (safer path since we are very new to this but most likely break even)

2) FSBO (seems ethically wrong since we reached out to previous agents but can save about 10k+)

3) Refinace (use equity for investment property)

4)Rent (I'm assuming we won't get 4bd price since its legally a 3bd)

I understand that the numbers aren't great for flip and for sure 3bd rent prices. We wanted to do this over a couple years just to make sure we didn't jump into this too fast. Well, I'm hungry and just feel like we should take advantage of the high house values.

I'm sure I forgot something, since this is the 2nd time I tried to post this. The first time I lost it all! Ugh. We have an idea of the best route for us, but wanted to reach out and make sure we exercise all options! 

Thank you so much! 

Matt

Welcome to BP, @Matt Cecil !

Have you tried renting it as a 3br with a bonus room?  You don't need to specify how the tenants use each room (within reason) and they won't care that it isn't legally a 4 bedroom as long as it meets their needs.

Think about what your goals are and what the neighborhood is doing.  If the neighborhood is declining, that may influence your decision.  If you think you can get a better return on your money by selling it (whether it is break even or not) and investing somewhere else, that would be the path.  If the rental path (which is both option 3 and 4 isn't it?) gives you a better return on your equity, stick with that.

@Brendon Woirhaye we have not tried to rent it yet. Just finishing up the remodel. Do you think the bonus room will still generate the same rent as a legal 4bd? I was worried that it may cause legal issues if something were to happen. Also, my city has to check the property yearly to approve us renting it out.

I would sell. At a value of $265K your rent would need to be $2500/month to make this a worthwhile investment income property. Additionally if the markets turn you will lose all your equity very quickly.

Sell.

@Thomas S. if we rented the property we would plan to house hack another property so we wouldn't refinance the house. I may not be understanding how you are evaluating it. Wouldn't we go off current mortgage? rent 1900 mortgage 1267 cap ex *$100 maintenance/repairs *$100 vacancy *$100 what i see left over is $333. I can see that rent going $100 either way in my neighborhood. This is my estimate for 4bd but i do not have that 4th bed. I'm curious about a bonus room now that @Brendon Woirhaye mentioned it. I'll have to look into what value that would add to my 3bd.
Sorry for the replies lumping into one. The app isnt working right on my phone apparently.

I would most likely rent it out and househack a new place.

All this just to break even? Short term ordinary taxable income if there is a gain?

All over the place it seems difficult to acquire property so remember that before you sell to break even.  I'd give it a try as a 3+ bonus room rental.  My 4 beds seem to attract folks that want to turn the 4th into a vacation rental anyway. More risk and drama. Or they attract 2 families, roommates, daycares, etc.  I often advertise the least number of bedrooms possible to avoid these issues. Rents don't increase enough to offset the 'creative liberties' risk.

Never thought of tenants doing that so I appreciate the insight @Steve Vaughan . thank you to everyone for the advice so far.

When you execute a decision, come back and update the thread.  Good luck!

@Matt Cecil

Expenses on a SFH will be 50% long term. Basing that on your $1900 will be $950. With a mortgage at $1267 you will be negative $300/ month.

To produce positive cash flow your monthly rent needs to be 1% of the property value. Stats don't lie. 

@Thomas S. do you include taxes with the 1% rule? I plugged in my numbers on the BP rental calculator and it didn't appear to use my taxes. I guess I don't understand why you wouldn't include taxes, since thats apart of my mortgage.

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