Should I sell or do cash out refinance for rental property ?

Question

Hi, there, I have a previous primary house in Southern California. The house build in 2008, 3000sq in a so so neighborhood. We convert that to a rental property in 2015. It has about $600K equity now. I’m just wondering whether I should sell it or do a cash out refinance to invest in a better neighborhood.

Thanks for any of your advice !

Jeff Shumway · Answer

This depends on a lot of factors- in most cases I recommend doing the cash out refinance so you continue to have that cash flowing asset. Of course as your tenant pays the rent and the value of the home appreciates, you build equity to access at a future date whereas if you sell, it's one and done. You no longer have access to the potential future nest egg. There are definitely long term advantages to retaining the current property, so you'll have more sources of passive income.

That being said, what would be your next investment and how much do you need? Do you need to sell the current property to get enough assets to either finance or purchase your next property outright? If you need all the capital from selling the property, perhaps look at going in on a deal with another investor instead of selling? Even if you end up with a slightly smaller piece of the pie, you still have two slices of pie instead of one.

Twana Rasoul · Answer

@Maggie Li really depends what a cash out refinance would look like for you vs doing a 1031 tax deferred exchange. Generally I like the idea of holding on to property if possible. If you were to do a 1031 it would make more sense to move it into a small multifamily property vs another single family home. It’s different for everyone’s situation though. I’m currently working with several people who are going the 1031 route while a couple of others going the cash out route.

For me personally I am doing a cash out refi on one property and 1031 on a different one and in other scenarios moving to small multifamily from SFR.

Dan Portka · Answer

@Maggie Li I’d check with your CPA on the tax implications. Uncle Sam is going to want a big piece of that 600K if you sell. How has the property been performing for you?

Maggie Li · Answer

Thanks Jeff and Brad for your kind reply, your inputs are greatly appreciated . I’m in San Diego, housing price is historically high, I was so attempted to move the investment to a better school district, but of course property tax and everything else will be more expensive too .. yeah.. it’s better for me to keep it.

Brad Sneckner · Answer

@Maggie Li

Yeah, I agree with @Jeff Shumway to some extent. I'm always a fan of keeping property instead of selling. Especially if you have a great interest rate and it's cash-flowing well for you. A cashout refi on a rental property will put you in the mid 4's probably.

With that said, a 1031 exchange into a better property (such as a multi-unit) could sometimes provide just as much cash flow as two SFRs. $600k is quite the down payment, and depending on your other income and ability to qualify for a loan, a really nice 4-unit property with that kind of down payment could be a pretty sweet cash cow depending on your market. Where are you located in SoCal?

Should I sell or do cash out refinance for rental property ?

Should I sell or do cash out refinance for rental property ?

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