In a quandary, sell my rental, or get a line of credit on my rental?

7 Replies

Hi All,

I own a rental townhome in San Jose, currently vacant as I was in the process of selling it. My tenants moved out today (6/15/2015). The market is super hot so I should get at least 20% over what i paid for it. My plan is to invest in better cash flowing properties with the proceeds, I was not cash flow positive on this house. (I live in an apt in SF right now).

I was going full speed ahead to sell it, but then I thought why not continue renting it out, and get a line of credit and invest the proceeds into cash flow positive investments?

The numbers:

- Owe 418k on the rental house (it used to be my primary home)

- Market value is probably 650k (my neighbor's house, exactly the same sold for close to that amount)

My thoughts are - getting a line of credit and using that to fund new investments will just lead to lower cash flow per month as I'd be paying interest on my line of credit and and any other loans.

I also saw this post and it seemed like more of a hassle, and higher interest on the rental equity line of credit versus a primary residence.

http://www.biggerpockets.com/forums/50/topics/1133...

Your thoughts? What other numbers/factors do you recommend I look into?

Thanks!

Lars

My thoughts are if you were not cashflowing before how will you handle the additional line of credit? you could find yourself underwater real fast...

Don't get me wrong, I don't believe in selling real estate properties if it could be avoided but I also don't believe in negative cashflow and over leveraging yourself...

Medium logowhite sJoseph Gozlan, Eureka Business Group | [email protected] | http://www.EBGTexas.com

Are you breaking even or actually loosing money every month?? Just my 2 cents but if breaking even then I would be inclined to keep it and use the equity credit to buy more cash flow properties. You could probably get a line of credit from a portfolio lender and then roll it into several mortgages. I'd look into alternative financing rather than the big banks. If you buy correctly then the rents on your new rentals should cover your additional cost plus cashflow. I'm a bit biased as I sold a place in NYC which is similar market to CA and I still regret it. People like living in these markets and seems that appreciation can be really good.

But if you're really negative cashflowing then it maybe smarter to sell and start in a house or area with better numbers. 

Not knowing the terms of your current loan, I'll offer this scenario. Refinance your current loan with an interest only loan (5/1, 7/1 or 10/1) to lower your monthly payment and keep the townhouse as a rental. Also take cash out during the refi. Take the cash from the cash out refi and by some rentals that will cash flow positive and have built in equity. Buy the new rentals using the fix up and hold strategy, which should allow you to eventually refi and pull out some cash to help pay down the balance on your townhouse. 

Every home I have sold, I have regretted. Hold on to the townhouse if possible. California property will always go up in value (in most cases).

Good luck

I think the key here is “compared to what”? What deal(s) are you thinking of rolling the equity into? I would be inclined to 1031 exchange the property for several that cash flow but it depends on your objectives. Have you looked into renting your property on VRBO? Might be worth researching. 

Our houses have lower margins but are located in appreciating areas. I looked at the same thing (HELOC) a couple of year ago. The issue I ran into was most places would only allow you to pull the equity out of the house above the 20% mark. So you have to leave 20% in the house and one could with draw the rest.

Unless you fall under the capital gains exception I recommend you look into a 1031, so you don't have to pay tax now.

What a jerk I am,  I never replied to anyone here. had a lot going on at the time, and was starting a new business. Thank you for all your input! 

 Long story short, I held onto the house, @Vincent Grant , I too would have regretted selling it. It's in a prime location in Silicon Valley. I will take a look at refinancing soon. 

@Walter W. I ended up AirBNBing it for 10 months.. some good months, but my townhouse neighbors tired of it. 

@Laura Williams , I now have long term tenants again and am finally cash flow positive by a small margin, nothing i would brag about on BP, but I'm getting 16% more rent than I was 3 years ago. 

Well done! 

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