Sell Property or HELOC?

5 Replies

Hey Guys,

I am needing to get liquidity out of a rental property to use for starting a new business. I am torn between selling it or getting a line of credit to get the cash that I need out, and need your opinions on what route is best.

The house can sell at about $170k, I purchased it for $105k, and have $96k left on the mortgage. My expenses on the property are $1,400/month, and I currently have it leased for $1,600. So making about $200 cash flow per month.

If I sell it I estimate I can make about $60k after all realtor fee's/title fees/etc. However, I would need to pay taxes on that gain which it has been a rental property for a little over a year now. So I believe the tax rate would be 15% for that $60k gain + the depreciation/tax deductions I took for 1 year?

Or, I can get a HELOC and skip the taxes. But I don't think that it would get appraised at $170k so the equity may be less, and since my margin on cash flow is low I may be in the negative.

I appreciate any other ideas and your opinions here!

Originally posted by @George Andrade :

Hey Guys,

I am needing to get liquidity out of a rental property to use for starting a new business. I am torn between selling it or getting a line of credit to get the cash that I need out, and need your opinions on what route is best.

The house can sell at about $170k, I purchased it for $105k, and have $96k left on the mortgage. My expenses on the property are $1,400/month, and I currently have it leased for $1,600. So making about $200 cash flow per month.

If I sell it I estimate I can make about $60k after all realtor fee's/title fees/etc. However, I would need to pay taxes on that gain which it has been a rental property for a little over a year now. So I believe the tax rate would be 15% for that $60k gain + the depreciation/tax deductions I took for 1 year?

Or, I can get a HELOC and skip the taxes. But I don't think that it would get appraised at $170k so the equity may be less, and since my margin on cash flow is low I may be in the negative.

I appreciate any other ideas and your opinions here!

 Everything you said makes sense except one: once you take that heloc (it’s technically not heloc, it’s just equity line of credit)out, the Cashflow impact need to be compared with your business for which the loan is taken out.

You need to figure out what return would you be making in your this heloc proceeds and it isn't better than the interest you are paying on it.

The payment on the heloc is now your business expense, not rental. 

Think this as you taking our business loan from another bank, and using it on your busienss. 

If I were you, I wouldn’t sell the house. 

@George Andrade

Methinks you jumped to the conclusion too fast.

Problem: you need a loan for a new business. Opportunity: you have equity in a rental property. You decided to link these two together. 

But have you considered any other ways to fund this business? Maybe there is an SBA loan available. Maybe you can use a business financing company like Kabbage or Fundera (no endorsement, just a mention). PayPal offers business loans to customers, and maybe to non-customers, too.

Then, you might be able to get a business loan from a local bank or find a private investor. All these options need to be compared on their respective terms and risks.

If you really are determined to utilize your property's equity, it may be better to refinance it instead of getting a LOC on top of the existing mortgage. You will probably get a better rate and possibly a higher limit.

Selling the property should be considered from a bird's view. If you did not start this new business, would you keep this property, for cash flow and appreciation? If yes, then you probably should not sell, unless you really are out of options.

@George Andrade

I love equity lines. I hate tying up equity/cash and not making much on it. I am a buy and hold guy so I would take the Heloc turn it into a business and pay it back. I would have the property and the business and hopefully both continue to flourish and appreciate and provide more cash flow. You also increase your asset protection with the heloc. Good luck.