Sell It or Rent it- HELOC Short Term Safety Net for Rentals

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Sell It or Rent it- HELOC Short Term Safety Net for Rentals

Anthony Parsons
Member since 2022 · 47 posts · 16 votes

Hello.  Your advice is greatly appreciated!!  I'm trying to determine if I should rent my current home or sell it.  What I'd prefer to do is rent it out for long-term purposes as I am 43 and this will pay my future home off when I retire.  If I sell I can make about 50-60k after fees.  Scenario upfront, questions at the end of the post. 

I don't have any debt and have good credit (low-mid 700's) but limited savings after recently paying off a card. I make a good salary (160k) and my current mortgage is $1900 at 2.25%, I believe I can rent it for $2400-2500. In 3 years I will have over $2500 additional monthly due to child support ending, and I am curious in the interim if a HELOC is a good backup plan should renters default or the market crash and I have trouble renting. Once I initially move this summer I will have enough to cover both properties monthly should I have to, but it would be tight. I'm trying to figure out a safety net.

 So A) Sell it and make 50-60k or rent it and B) Is Heloc a good safety net?  

Again, thank you for the feedback. 

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Tim Polk
Realtor · NWI (Northwest Indiana) · Member since 2018 · 63 posts · 36 votes
4y

If you rent your cash flow will be almost zero once you factor in cap x, vacancy rate, maintenance etc.  If your looking to just hold it for appreciation than sure, 2.25% is a great rate.  If you're going to sell though I would do before you get outside of the 5/2 rule.  ie your primary residence for two of the last five years to avoid any capital gains.  


HELOC's are great, especially if it's your primary because sometimes you can get 90%-95% LTV and use it same as cash, write of the interest. However, they can be called back. So if you take out $100k HELOC and leverage it all, economy tanks, someone at the bank has a bad day, the world freezes over, all dramatic but you get the point they can call the loan due leaving you with a $100k bill you need to figure out how to pay off.

Could cash of refi but your monthly is going to go up and their is a cost to it.  Hope any of that was helpful 

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  • Dave G.
    Investor · Phoenix, AZ · Member since 2016 · 349 posts · 418 votes
    4y

    @Anthony Parsons I would look at it from the perspective of would your current home fit the criteria of a rental acquisition that you'd want to buy. I just went thru a similar scenario. My wife and I just retired and were ready to move from Phoenix to Northern AZ. We could have kept our primary in Phoenix - 3100 sf semi-custom in an upscale neighborhood - and rented it out for a lot more than our mtg payment. However, the house would never be the kind of rental we'd ever separately pursue to add to our portfolio. Too big, too nice and a smaller market of potential renters. Expensive travertine and granite throughout, and renters in that price range would probably expect everything to always be maintained perfectly. I would if I was them paying ~$5000/month or more for the rental. So we opted to sell. Based on your info, you have a lot less margin of rent less mtg pmt at ~$500 or $600 dollars to cover expenses on the property. I would wager (on the limited info provided) that you would have negative cashflow property after you realize a year of actuals. So I would choose Option A for a variety of reasons. But that is just me and only based on info you provided and my personal experience and opinion. There are probably several ways that you could make it work if you wanted (STR?).

    Good luck to you Sir, Dave

    1Reply
  • Tim Polk
    Realtor · NWI (Northwest Indiana) · Member since 2018 · 63 posts · 36 votes
    4y

    If you rent your cash flow will be almost zero once you factor in cap x, vacancy rate, maintenance etc.  If your looking to just hold it for appreciation than sure, 2.25% is a great rate.  If you're going to sell though I would do before you get outside of the 5/2 rule.  ie your primary residence for two of the last five years to avoid any capital gains.  


    HELOC's are great, especially if it's your primary because sometimes you can get 90%-95% LTV and use it same as cash, write of the interest. However, they can be called back. So if you take out $100k HELOC and leverage it all, economy tanks, someone at the bank has a bad day, the world freezes over, all dramatic but you get the point they can call the loan due leaving you with a $100k bill you need to figure out how to pay off.

    Could cash of refi but your monthly is going to go up and their is a cost to it.  Hope any of that was helpful 

    2Reply
  • Anthony Parsons
    OP
    Member since 2022 · 47 posts · 16 votes
    4y
    0Reply
  • Anthony Parsons
    OP
    Member since 2022 · 47 posts · 16 votes
    4y
    Quote from @Dave G.:

    @Anthony Parsons I would look at it from the perspective of would your current home fit the criteria of a rental acquisition that you'd want to buy. I just went thru a similar scenario. My wife and I just retired and were ready to move from Phoenix to Northern AZ. We could have kept our primary in Phoenix - 3100 sf semi-custom in an upscale neighborhood - and rented it out for a lot more than our mtg payment. However, the house would never be the kind of rental we'd ever separately pursue to add to our portfolio. Too big, too nice and a smaller market of potential renters. Expensive travertine and granite throughout, and renters in that price range would probably expect everything to always be maintained perfectly. I would if I was them paying ~$5000/month or more for the rental. So we opted to sell. Based on your info, you have a lot less margin of rent less mtg pmt at ~$500 or $600 dollars to cover expenses on the property. I would wager (on the limited info provided) that you would have negative cashflow property after you realize a year of actuals. So I would choose Option A for a variety of reasons. But that is just me and only based on info you provided and my personal experience and opinion. There are probably several ways that you could make it work if you wanted (STR?).

    Good luck to you Sir, Dave

    Thank you for the reply I appreciate your feedback.

    With the home being new, there aren't many property expenses as such. I would anticipate them in the future however certainly. With 1900 a month out and bringing 2500, that's not nearly negative cash flow (unless it sits vacant which we aren't seeing anytime soon in today's market)-again, the (townhome) home is 2 years old. My thought process was since I purchased in a newly sought-after area/neighborhood (while not upscale per see) just prior to home increases over the last two years, I wouldn't need to be concerned about the home not getting traffic. Also, I have a 2.25% keeping my payment low as we grow into continued inflation. Even if I'm not making much cash flow, I could still benefit from having someone pay your mortgage down for the long term. I'm just not sure how selling for 50k helps much, especially in today's market.

    Thanks, again.

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  • Anthony Parsons
    OP
    Member since 2022 · 47 posts · 16 votes
    4y
    Quote from @Tim Polk:

    If you rent your cash flow will be almost zero once you factor in cap x, vacancy rate, maintenance etc.  If your looking to just hold it for appreciation than sure, 2.25% is a great rate.  If you're going to sell though I would do before you get outside of the 5/2 rule.  ie your primary residence for two of the last five years to avoid any capital gains.  


    HELOC's are great, especially if it's your primary because sometimes you can get 90%-95% LTV and use it same as cash, write of the interest. However, they can be called back. So if you take out $100k HELOC and leverage it all, economy tanks, someone at the bank has a bad day, the world freezes over, all dramatic but you get the point they can call the loan due leaving you with a $100k bill you need to figure out how to pay off.

    Could cash of refi but your monthly is going to go up and their is a cost to it.  Hope any of that was helpful 

    Thanks for the reply and feedback.  Again, I'm not seeing the cash flow at zero being a new home in a sought-after area with high demand.  Perhaps in years to come?  I'm more leaning towards holding for the long term.  I've lived here for coming up on two years this May. 

    The HELOC is something I would only leverage in the first 3 years until my cash flow (child support) returns and then is not needed. I'm financially responsible so it would only be a safety net. I have heard of banks freezing HELOC so hopefully, that wouldn't happen. Just hate to pass up on potentially holding on to this property, especially when you consider today's market though volatile potentially soon.

    Not interested in a refi if I'll be renting long-term.  

    If I sold, I could purchase but would hate to use all my profit to get into an overpriced home only to deal with it later once the market settles a bit.  Thoughts?

    Again, thanks so much for the feedback.  

     

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  • Tim Polk
    Realtor · NWI (Northwest Indiana) · Member since 2018 · 63 posts · 36 votes
    4y

    Use the rental tool bigger pockets offers to do an analysis of your property. Hover over tools up top, calculators, Rental Property. There is a video somewhere you could probably just youtube how to accurately fill in the blanks if you need guidance on that. If you want to be conservative 5% vacancy, 7% maintenance, 10% cap x. That will put the numbers in perspective. You'd be skipping the 10% PM for now if you're managing yourself. Keep in mind with property tax when you move out eventually the homestead depending on where it is falls off and property taxes go up increasing operating expenses. If you want to scale and move I would house hack. FHA 3.5% down on a multi family or speak with one of the local credit unions to discuss lending options. After those two things are done you can decide to keep and go HELOC or sell. If you keep, risk the HELOC to leverage the purchase.

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  • Anthony Parsons
    OP
    Member since 2022 · 47 posts · 16 votes
    4y
    Quote from @Tim Polk:

    Use the rental tool bigger pockets offers to do an analysis of your property. Hover over tools up top, calculators, Rental Property. There is a video somewhere you could probably just youtube how to accurately fill in the blanks if you need guidance on that. If you want to be conservative 5% vacancy, 7% maintenance, 10% cap x. That will put the numbers in perspective. You'd be skipping the 10% PM for now if you're managing yourself. Keep in mind with property tax when you move out eventually the homestead depending on where it is falls off and property taxes go up increasing operating expenses. If you want to scale and move I would house hack. FHA 3.5% down on a multi family or speak with one of the local credit unions to discuss lending options. After those two things are done you can decide to keep and go HELOC or sell. If you keep, risk the HELOC to leverage the purchase.

    Thank you I'll look into that tool.  House hacking is also a great tool to place money back into the principal.  

    I have a VA loan currently and will at some point need to convert if I keep it as a rental, but also on the buying end, my VA loan is not getting me very far in this market.  I plan to speak with Navy Federal about all of my options this week.   

    Appreciate it.   
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  • Ana Marie B.
    Rental Property Investor · SF Bay Area, CA · Member since 2015 · 206 posts · 156 votes
    4y

    I would rent out the property and take out a HELOC as a safety net, IF there is good equity in the house and your estimates above are true.

    HELOCS are great to have in your back pocket in case you need the money and don’t want to dip into savings. However you need discipline to pay them off quickly, should you decide to use it, since they come with a variable rate.

    If cash flow allows, I’d highly recommend your hire a property manager. 

    As you know, available houses are in short supply so I’d personally only offload a house right now if I am in financial distress or the property is a dud (which doesn’t seem to be the case in this scenario given your estimated cash flow and description of the property).  

    Just my $0.02. Good luck!

    1Reply
  • Anthony Parsons
    OP
    Member since 2022 · 47 posts · 16 votes
    4y
    Quote from @Ana Marie B.:

    I would rent out the property and take out a HELOC as a safety net, IF there is good equity in the house and your estimates above are true.

    HELOCS are great to have in your back pocket in case you need the money and don’t want to dip into savings. However you need discipline to pay them off quickly, should you decide to use it, since they come with a variable rate.

    If cash flow allows, I’d highly recommend your hire a property manager. 

    As you know, available houses are in short supply so I’d personally only offload a house right now if I am in financial distress or the property is a dud (which doesn’t seem to be the case in this scenario given your estimated cash flow and description of the property).  

    Just my $0.02. Good luck!


     Thank you for your feedback.  I do plan to use a property manager as I am moving quite far from my current area.

    While it's tempting, I'm very reluctant to sell the property as it's in a beautiful area and fairly new. My hope is the restriction in the housing market will benefit me. Of course, nothing is guaranteed. This is why the HELOC question.

    Again, thank you. 

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  • Anthony Parsons
    OP
    Member since 2022 · 47 posts · 16 votes
    4y

    Also,  the home is new in an upcoming area which leads me to presume there is great potential for growth in the home.  I truly do feel like this home is a diamond in the rough…waiting to make me money.  Low interest rate, great potential, hot market, long term goals.  Just not sure it’s worth the quick buck by selling since it’s only 2 years old.  

    Getting started can sure be frustrating.

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