Should I refinance, rent, or sell my first home?

Question

I purchased my first home in a nice Indianapolis neighborhood two years ago for 126,000. It was a HUD home, and I am currently living in it. The comps are anywhere from 175,000 to 200,000 once rehabbed. My current loan balance is 115,000, and my monthly payment is $898 with taxes and insurance. My question is this, if I want to get started investing in real estate would selling, renting, or cash out refinance be the best move? I am curious on everyone's opinion and why they think the way they do. I do not have any other properties yet.

Account Closed · Answer

Honestly it depends.  I think a cashout refinance could be a good idea if you are short on cash and could use it as a downpayment on a new property.  Selling is an option as well if you don't think it really works as a rental, although a $900 mortgage payment would surely let you cashflow on a $200k home.

I would live in it and use it as my home, maybe do a cash out refinance to pull some equity out and go from there.  I mean, you have to live somewhere.

Jaysen Medhurst · Answer

Hi, @Joseph Richardson, welcome to BP.

My guess is that your current home probably won't make a good rental. Reason being the fair-market rent won't bring in enough to cover all the expenses and debt service, plus generate a reasonable profit.

Your neighborhood is probably a bit too expensive to work out. You'll need to make at least $2k/month in rent to make the numbers work on a $200k property (the 1% rule). The problem is that most people who can afford $2k rent can easily afford a $200k house. Therefore, your potential rental pool is very small.

My suggestion is to start looking for a multi-family property that you can "house hack," i.e. live in one unit and rent out the others. Preferably, a triplex or quad.

The plan would be to sell your current house and use the capital to purchase the multi-family. Live there for a few years, then move out and keep it as a pure investment property.

Let me know if you have any questions.

Joseph Richardson · Answer

@Seth Row that’s good advice. That is what I have been leaning towards.