Please suggest : Apply for HELOC or Sell the Rental property

8 Replies

Hi All, I have a newbie question.

I have a town house in Jacksonville, FL. I lived there for 3 years, It’s my rental property (1 +Year). November 2021 it will be 5 years since I own the property. Now the property has appreciation, If the tax rules didn’t change, I think I can get proceeds without tax (minus 6 percent agent commission and closing cost).

My long-term goal is to own rental properties for cashflow and live on it.

This property doesn’t give much cashflow, Last year I spent around 6 thousand for HVAC.

My question is, should I sell this property and eventually build the rental property portfolio with BRRRR strategies or Get HELOC to build rental property portfolio. Please suggest.

Numbers are below

House type: Town House, 3 bed, 2.5 bath, 1636 sqft

Year Built: 2007

Purchased: 175,000

Mortgage Balance: 138,000

Zillow Zestimate: 257,000

Interest Rate: 3.625

Rent per month: $1625

Mortgage (PI) per month: 760

HOA per month: 200

Taxes per month: 308

Insurance per month: 62

Cash flow = $1625 – ($1330 + CAPX + Maintenance)

Not sure how much percent I should calculate for CAPX and Maintenance.

I don’t have property management company, If I include that also it will be negative cash flow.

@Kiran Vemula I just did the same, sold a luxury condo that I used as a primary for 2 of the past 5 yrs, and rented for the last 3. It had a high HOA so it didn't cashflow well but it had appreciated a lot since I bought it. I recently closed on it and plan to roll the proceeds into a down payment on a multifamily property. You're in a good market, so I'd recommend doing the same and find a property (or several) that cashflow well.

Hi @Kiran Vemula - the safe general answer is- it depends. At the current appreciation (which I would have a local realtor run an actual CMA on as Zillow is typically 5-7% off) you have the potential to pocket nearly $100K after commissions and closing costs (I'm in CA and I typically estimate around 8% total commission/closing costs for my Sellers).

If you were to go with the HELOC option, at best you would be able to secure a line that brings your Loan to Value (LTV) to 85% though its typically closer to 70-75% depending on your lender. With this being the case, that means that the most that the lender will give you access to is 85% ($205,600) of $257K minus your current balance of $138K which yields $6,600 under the best-case scenario. Under the worst-case- 70% LTV- scenario this would bring the max total loan to $179,900 (70% of $257K) you would at best have access to $41,900 ($179,900-$138K).

The other piece to factor is the amount of time that it takes to secure a HELOC which is averaging anywhere from 3-6 monhts (I'm currently nearly three months into a HELOC application for my rental). With all this in mind, I would have to second @Brendan Miller 's recommendation of heavily considering selling as it doesn't sound like there's much cash flow to offer an attractive reason to hold.

The only other piece of this puzzle is to determine what your goal is so that you can effectively leverage the gains. I'm not familiar with the markets in Jacksonville but will defer to you and a local realtor to assess what type of investment would help you achieve your goal within a realistic timeline. Hoping this all helps and definitely wish you the best with whatever decision you make. Congrats on a great first investment!!!

Updated about 2 months ago

Correcting my math on the 85% of $257K yielding a possible HELOC of $67,600 not $6,600

One other thing, I also wanted to second Brendan's allocation of 5% for CapEx and Maintenance but to base it on the condition of the property. The more turnkey and updated the lower the allocation versus a property that is in significantly poorer condition. Also, with regard to the Property Management, I would advise you to not fall into the trap of not factoring this in for two reasons:

(1) Even if you manage it, you could pay yourself the PM Fee as payment for your time spent on the management of the property; and

(2) If you ever decide to hire a PM, you already have that factored into your numbers and so you can be confident that the numbers still work

The biggest tip that I can give you is don't handicap your income potential by failing to account for the base expenses that need to be considered when assessing a properties ROI.

Not knowing the address it's hard to know for sure but $1625 seems low for a 3/2.5 in Jacksonville, most areas I'm familiar with.  And I'm assuming "lived there" is past tense, as in you're not house hacking there.

One way to get an idea of where rent should be is Rentometer or BP's rental estimator, and to cross check that you can go to various RE sites and map rentals and compare rent prices in your area.  I suspect what you're facing here is too low of a rent but that's gut speculation, not math.

If the rent proves out to be right for your area and the cash flow is still as light as what you describe, in a market like this selling would bring on significant equity capital for a more carefully planned deal. If you find rent is low, raise it for the next lease cycle, HELOC, and get what you can with the resulting cash.

Originally posted by @Ronald Allen Barney :

Not knowing the address it's hard to know for sure but $1625 seems low for a 3/2.5 in Jacksonville, most areas I'm familiar with.  And I'm assuming "lived there" is past tense, as in you're not house hacking there.

One way to get an idea of where rent should be is Rentometer or BP's rental estimator, and to cross check that you can go to various RE sites and map rentals and compare rent prices in your area.  I suspect what you're facing here is too low of a rent but that's gut speculation, not math.

If the rent proves out to be right for your area and the cash flow is still as light as what you describe, in a market like this selling would bring on significant equity capital for a more carefully planned deal. If you find rent is low, raise it for the next lease cycle, HELOC, and get what you can with the resulting cash.

Updated about 2 months ago

Hi @Ronald Allen Barney, Thanks for the information, This house in 32258 zip code, Bartram Park, Greenbrier Community.

@Brendan Miller Thank you so much for your suggestion.


Originally posted by @Brendan Miller:

@Kiran Vemula I just did the same, sold a luxury condo that I used as a primary for 2 of the past 5 yrs, and rented for the last 3. It had a high HOA so it didn't cashflow well but it had appreciated a lot since I bought it. I recently closed on it and plan to roll the proceeds into a down payment on a multifamily property. You're in a good market, so I'd recommend doing the same and find a property (or several) that cashflow well.

Hi @Eduardo Aguilar - Thank you so much for detail explanation. I do appreciate your input.


Originally posted by @Eduardo Aguilar:

Hi @Kiran Vemula- the safe general answer is- it depends. At the current appreciation (which I would have a local realtor run an actual CMA on as Zillow is typically 5-7% off) you have the potential to pocket nearly $100K after commissions and closing costs (I'm in CA and I typically estimate around 8% total commission/closing costs for my Sellers).

If you were to go with the HELOC option, at best you would be able to secure a line that brings your Loan to Value (LTV) to 85% though its typically closer to 70-75% depending on your lender. With this being the case, that means that the most that the lender will give you access to is 85% ($205,600) of $257K minus your current balance of $138K which yields $6,600 under the best-case scenario. Under the worst-case- 70% LTV- scenario this would bring the max total loan to $179,900 (70% of $257K) you would at best have access to $41,900 ($179,900-$138K).

The other piece to factor is the amount of time that it takes to secure a HELOC which is averaging anywhere from 3-6 monhts (I'm currently nearly three months into a HELOC application for my rental). With all this in mind, I would have to second @Brendan Miller 's recommendation of heavily considering selling as it doesn't sound like there's much cash flow to offer an attractive reason to hold.

The only other piece of this puzzle is to determine what your goal is so that you can effectively leverage the gains. I'm not familiar with the markets in Jacksonville but will defer to you and a local realtor to assess what type of investment would help you achieve your goal within a realistic timeline. Hoping this all helps and definitely wish you the best with whatever decision you make. Congrats on a great first investment!!!