Sell or Heloc and long term rent

Mobile, Alabama
Real Estate Deal Analysis & Advice
11moFollow

Sell or Heloc and long term rent

Shea Prior
Member since 2025 · 5 posts · 1 vote

Hi I'm Shea. I am trying to get started on my path to financial freedom and I need some advice. I have a home that I purchased USDA back in 2018 as my primary residence. Since then I've gotten engaged and we have purchased a new house that we live in back in February this year. I feel like I've made a lot of good first steps here by creating an LLC, putting in a little elbow grease to get the property rent ready, and listed it for rent on Facebook and all the usual suspects. I have had it listed since August 30th and have had several people interested, and one perspective tenant actually put in an application but ultimately decided not to commit to signing the lease. I am wondering if I need to sell the house and do a 1031 exchange to capture all the equity that has been built up over the past 7 years, and perhaps invest in a different market that I might be able to get a long term tenant into a property quicker for cash flow. Or should I keep looking for a tenant here but maybe lower the rent by $50 or $100, and seek out a HELOC to capture the equity that way. The ultimate goal is to try to look for a second investment property, and use the equity in this house as my jumping off point. I am currently covering monthly holding costs with my day job, which is manageable, but obviously it's not something I would like to do long-term. As it stands I have about $82k in equity in the house so there's potential there. Am I just being impatient? Should I lower my monthly rent? I know it's a buyer's market right now, but should I sell and try to just purchase a property in a more desirable area? Ideas/advice is appreciated

0Reply
114 views

Most Popular Reply

Dan H.Pro Member
Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
11mo

I believe you imply that you lived in the house since 2018 until fairly recently.  I also beilieve you are implying that you are first placing this into the rental market.  is my interpretation correct?

@Dave Foster knows 1031 way better than I do but if I am correct in my interpretation

1) you likely do not need the 1031because you can exempt $250k of gains because it was lived in for 2 of 5 years

2) if it has not been a rental it does not qualify for 1031 

If something I stated is incorrect, Dave can enlighten both of us.

As to your dilemma, first recognize the advantages of the 2 of 5 year rule and that it vanishes if rented 3 years.  Knowing this advantage of selling an owner occupied loan, determine if the numbers indicate that you should keep it as a rental.

If it is a good rental, the reason for it not renting is price.  Even a piece of $hit property will rent at the right price.  Vacancy adds up fast.  It is typically better to reduce rent for a quick tenant placement than to have a longer vacancy.   So if you decide it is a good rental, reduce the rent to get a tenant into the unit.  If you have 2 open houses without a qualified tenant, reduce the rent amount. 

Good luck

2Reply
See this reply in the discussion

7 Replies

Jump to latestLatest
  • Jason WrayPro Member
    Banker · Nationwide · Member since 2020 · 2k+ posts · 1k+ votes
    11mo

    Shea,

    Do your homework on the benefits or Pro's and Con's of a Heloc versus a Cash out refinance.  Sounds like in your situation a cash out refinance would be the better option since it is less risk and you can get a lower payment/rate verus a heloc.

    There is a lot of issues than can arise with a Heloc which is the same as a credit card verus liquid reserves tax free cash in hand that can be used as an asset for PITI reserves or collateral in general for compensating factors in underwriting or rate/term qualifications.

    I enjoy helping other BP members save more time and money I say it a lot here on the BP forum but its super helpful to avoid mistkes and lost deals as well. There is a long list of pro's and con's feel free to reach out if you need any advice or want to talk REI loopholes or tips.

    [email protected]727-637-4289
    0Reply
  • Shea Prior
    OP
    Member since 2025 · 5 posts · 1 vote
    11mo

    I've thought about doing a refi. But then I'll lose my 4.75% interest rate, and with the fact that I'm already having trouble finding a tenant, it would make my costs go up/cash flow go down. I just don't think that's a good idea in my situation.

    0Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    11mo

    @Shea Prior, It can't feel good having that house sit unoccupied. But no one here on BP can tell you why that is. Unless they know your specific market and house. You need to talk to professionals in your area to see why the house isn't renting - price, fit and finish, location, or whatever it might be. Putting more debt on a property that is a potential problem just adds to your problems.

    If you find that you'd ultimately rather sell the property and find an investment property with better potential, a 1031 exchange could be a good option to make use of all that equity and reinvest into something better.

    This would allow you to defer all of the tax you would normally pay and reinvest it into another investment property/properties and scale into better real estate and markets.

    One other question that might make a significant difference: Have you lived in that house for 2 out of the last 5 years? If so, then you could sell and take the first $250K of profit tax-free. And that would be an awesome way to get all of your money out and get out of a problem rental and reset things.

    The 1031 Investor5137 Reviews
    WebsiteView Page
    0Reply
  • Sebastian MarroquinPro Member
    Real Estate Agent · Pasadena, CA · Member since 2015 · 476 posts · 263 votes
    11mo

    Hello. Great advice above here. 

    First: I would advise you to do a deep analysis on the property. 

    Look at your neighborhood and see what are other properties renting for? (go online and see the stats and also reach out to 2 property managers in your area: let them know that you are thinking about renting your home and how much could they rent it for or how much they expect the home to fetch). You may simply be overpriced (that's my guess). Use apt. com as they have a full system (from lease creation, to posting online, to managing the rental payments there after). 

    If this is a primary home: you cannot do a 1031 exchange... these are only for investment homes. Talk to your tax rep/ accountant and they will confirm this for you. The only way would be to rent the home, then claim the home as an investment in your taxes and then you could do a 1031 exchange. 

    If it is a primary home: and you have lived in the home for 1 or 2 years: you won't have to pay taxes anyway... again always confirm with your tax professional. 

    If I were you, I would not sell it... $82K is not that much and you will walk away with $60K or less anyway... You already did the hard work which is buy this one and qualify for this home... let it ride some more and let it appreciate. 

    Even if you break even with $0 cash flow... you will still come out on top once you do your taxes with deductions, appreciation, depreciation or interest payment deductions. Even at a $0 monthly gain, you will still make 5% appreciation, plus about 3-to- 6 % in deductions etc so a gain regardless. 

    If you decide to do a heloc (which I would do and not refinance) : Look into a He-Loan : you won't touch your current loan and interest rate and you will get a fixed "He-loan" loan that you could use on other projects. 

    Now do this carefully or not at all, like the gent above described: you don't want to put more debt on this home if you don't have to. 

    I would only take the debt if you will put an ADU in the home, if you can, and then rent the second unit for more than the payment on the He-Loan...

    Or use the funds to purchase a fixer, then fix it and then refinance it and once you do, pay the He-loan back. 

    I would go conservative on this one. Rent it out, save more money and buy the next investment as a primary home. 5% down maybe even a constructions loan (FHA Rehab loan at 3.5% down payment ) and keep going.

    Reach out to me if you like : DM me and we can get on the phone for Clarity! FREE :) GOOD luck 

    0Reply
  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    11mo

    I believe you imply that you lived in the house since 2018 until fairly recently.  I also beilieve you are implying that you are first placing this into the rental market.  is my interpretation correct?

    @Dave Foster knows 1031 way better than I do but if I am correct in my interpretation

    1) you likely do not need the 1031because you can exempt $250k of gains because it was lived in for 2 of 5 years

    2) if it has not been a rental it does not qualify for 1031 

    If something I stated is incorrect, Dave can enlighten both of us.

    As to your dilemma, first recognize the advantages of the 2 of 5 year rule and that it vanishes if rented 3 years.  Knowing this advantage of selling an owner occupied loan, determine if the numbers indicate that you should keep it as a rental.

    If it is a good rental, the reason for it not renting is price.  Even a piece of $hit property will rent at the right price.  Vacancy adds up fast.  It is typically better to reduce rent for a quick tenant placement than to have a longer vacancy.   So if you decide it is a good rental, reduce the rent to get a tenant into the unit.  If you have 2 open houses without a qualified tenant, reduce the rent amount. 

    Good luck

    2Reply
  • Shea Prior
    OP
    Member since 2025 · 5 posts · 1 vote
    11mo

    Thank you all for the good input! 

    Yes, I have lived in the house since I purchased it in 2018, up until February this year, so that would be awesome about the capital gains tax. 

    I'll be doing some deeper dives on rental comps in the area, and I may ultimately decide that I need to come down a little in the rent. As Sebastian said, 0 cash flow still has benefits, and even dropping the price a hundred bucks would cash flow. And also as Dan pointed out vacancy adds up quick.

    0Reply
  • Shea Prior
    OP
    Member since 2025 · 5 posts · 1 vote
    11mo

    Thank you all for the great advice! I'm happy to report that I have a tenant that has signed a lease and will be moving in next week, for my original asking price!! 

    1Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free