What to do with rental equity

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What to do with rental equity

Ginger Olinghouse
Member since 2025 · 19 posts · 9 votes

I have a rental that is a single family home. It is worth about $375000. I owe 105,000 at 3.5%. It is under rented to my cousin at $1800. I could probably get around $2100 in rent max. I used to live in it and if I sell it this year I can avoid capital gains. My primary residence has a $308,000 mortgage at a 6.99% with only 5% equity. I am trying to figure out what to do. I told my cousin I need to make a change this year because I cannot continue to rent it at $1800. Should I sell it and pay down my mortgage on my primary? Should I increase my rent to $2100 and keep it. Should I sell it and reinvest the money into duplexes/quads to leverage the capital. I am a realtor so I can save the realtor fees. It is a hard decision to make. I am a little low on reserve funds because of moving and having to sink a lot of money into home repairs on my primary home. The rental also has room for an adu to be built in the back yard. The yard layout would work nicely for that. I don't have the funds to do that at this time. I looked into an HELOC or 2nd mortgage, but the rates are too high on a rental. The rental is in Medford, Oregon. It is a hard decision for me to make. Any advise is welcome. Thank you, Ginger Olinghouse

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Melissa JusticeBusiness Member
Rental Property Investor · Phoenix, AZ · Member since 2024 · 518 posts · 1k+ votes
1y

@Ginger Olinghouse,

Hi Ginger, you’re in a complex situation, but it helps that you have several options and good equity in your rental. Let’s break it down:

1. Keep the rental and raise rent:
Current rent ($1,800) is below market ($2,100). Raising it would help cover expenses, but consider family dynamics with your cousin and the potential vacancy if they leave.

With a $3.5% mortgage, your cash flow is still likely positive at $2,100/month, but it won’t generate huge extra income.

2. Sell the rental and pay down your primary mortgage:
Selling at $375K with $105K owed would give you ~$270K before costs (though you save realtor fees as an agent).

You could pay down your high 6.99% mortgage, which is a guaranteed “return” by reducing interest costs. This could relieve stress, especially since you’re low on reserves.

The downside: you lose a cash-flowing property and future appreciation.

3. Sell and reinvest into duplexes/quads (or other rentals):
If your goal is to leverage capital for better cash flow, using the sale proceeds to buy small multifamily properties could make sense. Duplexes/quads often allow you to scale faster and increase cash flow while spreading vacancy risk across units.

You’d have to be ready for the learning curve, potentially higher management responsibility, and out-of-state considerations if you look elsewhere.

4. Consider a 1031 Exchange:
If you sell your Medford rental and reinvest the proceeds into another like-kind investment property, a 1031 exchange can defer capital gains taxes.

This is especially attractive if your goal is to scale into higher cash-flow or better-performing markets while preserving your equity.

Timing, rules, and proper guidance from a CPA or 1031 specialist are critical to execute this correctly.

Other considerations:
ADU potential is great for long-term value, but if you can't fund it now, it's more of a future option.

HELOC or second mortgage: As you noted, rates on rentals are high, so probably not ideal right now.

Taxes: Selling your former primary that has never been your current residence won’t give you primary residence capital gains exclusion, but since this was a rental, that may not apply anyway - something to confirm with your CPA.

If your priority is financial peace, lowering high-interest debt, and increasing cash reserves, selling the rental and paying down your primary could make the most sense right now.

If your priority is long-term cash flow and scaling your portfolio, consider selling and using the capital to acquire small multifamily properties that are cash-flow positive - either outright or through a 1031 exchange to defer taxes.

Raising rent is a moderate option if you want to keep the property without selling, but it may only marginally improve your position.

Given your flexibility and market knowledge as a realtor, you could likely identify solid small multifamily or even single-family deals that would make option 3 (with or without a 1031) a strong path for long-term wealth.

Always happy to share more on what's worked for other investors. Best of luck!

[email protected]313-221-8718
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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    1y

    @Ginger Olinghouse 

    You’re in a strong position with your rental’s equity and low mortgage rate, but I understand how the higher interest and low reserves on your primary can create pressure. You could do a 1031 exchange. A 1031 exchange would allow you to defer all of the tax and reinvest it into another investment property.

    Using the tax you would normally pay to scale into better cash flow and appreciation potential can have a big impact on growing your RE portfolio. And once you complete your exchange, you could do a cash-out refi at any time and pay down some of the mortgage on your primary residence if you like.

    The 1031 Investor5137 Reviews
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  • Ginger Olinghouse
    OP
    Member since 2025 · 19 posts · 9 votes
    1y

    Thank you for the thoughtful reply. I can avoid capital gains if I sell by fall of 2026 because it was my primary home prior to moving so that is part of the reasoning to sell. I may reinvest or pay down my primary. It depends on what interest rates do and how the year goes. I will most likely list my home to sell in the spring. Most people are advising that I sell it to unlock the capital.  

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  • Joe Denly
    Member since 2025 · 2 posts · 0 votes
    10mo

    That’s a tough call, but given your low rate and strong equity position, I’d lean toward keeping the rental if you can raise the rent closer to market. A 3.5% loan is hard to replace, and selling might not give the same long-term return unless you find a really good reinvestment. Building reserves and improving cash flow first could give you more flexibility later.

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