Rent&Refinance or Sell ???

12 Replies

I have currently lived in and rehabbed my primary residence.  I will have lived there for 3 years at the beginning of the year.   It is my understand that I will not have to pay any capital gains tax if I sell (please correct me if I am wrong).  I currently still owe $60k on the loan and will be able to sell the house for $280k (so call it $260k after all closing costs, etc.); which gives me 260-60=$200k cash to reinvest.

That all sounds great, however my question is would it make more sense to rent it out and refinance it?  Let me answer the next few questions I expect you to have if I rent it out.  It will rent easily and should be able to rent for $1700, using the %50 percent rule $850 for expenses (what BP calls expenses is not exactly clear for me yet, but I believe it is everything except the mortgage, does this include PITI??) and $850 for mortgage and profit, my mortgage would be roughly $600 leaving $250 for profit.  Renting conclusion, if rented I would be $250 cash flow positive and have $280k * 75%= $210k cash from refinancing.

One other question I have if I rent instead of sell, would I have to pay my capital gains tax down the road since it would no longer be my primary residence?
With all that being said rent&refinance or sell????  Thank you for the help!

Jonathan, I believe that owning a property to live in is almost always the best first step before investing. 

The question for you suggestion to sell would be: you are making $250 a month, but do you now need to rent another property to live in?

@Oleg Shalumov - Sorry I guess I left that step out.  I plan to purchase a multi-family (ideally triplex) living in one of the units and rent the other two.  If that doesn't work out I have other options that would not require me to rent another place until I found the right place to purchase.

@Jonathan Klemm - if you are buying another property then it all makes sense ... as per current property: what are you interested in investing? 

If you are interested in flipping then you can sell the property (double check with your accountant on the taxes part) and use the money to reinvest into flipping another property.

If you are interested in Buy and Hold strategy then if the property is providing positive flow I would recommend holding it and refinance it for getting some money out to re-invest in another Buy&Hold property. Please remember to calculate all the expenses, including Tax, Insurance, Vacancy, Maintenance, CapExp, Prop Management, Any Utilities, Landscaping, Trash, etc. when analyzing if the property is profitable.  

There is no way you will ever be cash flow positive on this property with the rent to value where it is.

If you have $200K in equity, with a investors value of 10%, that is taking $1666 directly off the top of your rent leaving only $34 per month return on the property itself before all expenses. Negative cash flow of $816/month plus the cost of the $60K loan and expenses.

If you could mortgage the property 100% at a 4% mortgage ($280K) the interest, no principal,  on that would be $933/month. Negative cash flow of $83/month plus principal payment.

There is no way this property should ever be considered a good investment as a income rental property.

Sell and move on to something purpose built as a rental that has workable numbers.

Originally posted by @Thomas S. :

There is no way you will ever be cash flow positive on this property with the rent to value where it is.

If you have $200K in equity, with a investors value of 10%, that is taking $1666 directly off the top of your rent leaving only $34 per month return on the property itself before all expenses. Negative cash flow of $816/month plus the cost of the $60K loan and expenses.

If you could mortgage the property 100% at a 4% mortgage ($280K) the interest, no principal,  on that would be $933/month. Negative cash flow of $83/month plus principal payment.

There is no way this property should ever be considered a good investment as a income rental property.

Sell and move on to something purpose built as a rental that has workable numbers.

Thomas S. , can you please break down the detail of your post above. I don't quite follow how/where the number come from (ie. $1666).

How can one mortgage at 280K (market house value) when the bank doesn't out 100% of the house value? 

@Thomas S.  - What if I only refinanced for $150k @ 4%?  Principal and interest would be $715 / Mo.  I am pretty convinced it is best to sell, but I do know that house is in a great neighborhood and it will appreciate over time, thus the reason I am contemplating renting it.

Originally posted by @Jonathan Klemm :

@Thomas S.  - What if I only refinanced for $150k @ 4%?  Principal and interest would be $715 / Mo.  I am pretty convinced it is best to sell, but I do know that house is in a great neighborhood and it will appreciate over time, thus the reason I am contemplating renting it.

If $90k in your pocket ($150k - $60k) is worth the risk/reward of having basically zero cash flow on your (ex) primary - but counting on future appreciation - will $90k be enough deposit to get you into a triplex - and will the income from the other two units cover ALL of its expenses including the NEW mortgage you'd also have to take out? We can't answer that question for you yet.

And as far as I know, even after you move, you should have a couple of years to decide whether to sell before your profit on sale becomes a capital gains issue.  All the best...

[Not official tax advice - but you should get some].

My two cents is that you would never buy a property like you have for a rental, so don't keep it.  I believe your money can be invested elsewhere for a much better return. By the way, the 50% rule you weren't 100% clear on is this: Over time, the expenses on a rental property will equal approximately 50% of the fair market rent. The "expenses" include & exclude the following

vacancy is listed as an expense

repairs (but not capex)

property taxes and insurance

any utilities you pay

advertising, etc.

management (even if you don't hire a manager, it's always good to include 8-10% for mgmt. so you can see what you're earning on your money vs. what you're earning for your time). Also, when anyone talks of the 50% rule, mgmt. is always included, so this will keep your analysis "apples to apples". 

@Kenneth LaVoie , over any extended period, of course capex will eat up some portion of your income - so likewise, SHOULD be anticipated in advance by apportioning it monthly - just like any other expense! But yes, you're talking about TAX DEDUCTIBLE expenses, right? (Whereas Capex costs are treated by the IRS as an asset investment - lasting longer than 12 months blah blah).

Nevertheless, I certainly want to know the cost of the capex ASSETS I'll be forced to buy over the years - with NO increase in revenue - and I DO want to deduct them from my gettable income when I'm trying to work out if a deal is a "deal"! Cheers...

Absolutely. Capex is not included in the expenses because it's more of a balance sheet item. Put a 10k roof on and now the cost basis of your 90k four unit is 100k.

I do budget for capex myself. I like to budget 10/10 on older buildings, at least the first few years (10% of gross income for repairs, 10% for capex) That's a little high but I live in an area where the newest buildings on average were built 10 years before I was born!

...and yes, when I am doing a budget sheet on a property to buy, I use my own numbers (not the 50% rule), and I include capex as if it's a income line item vs. balance sheet item. 

I agree with the people here suggesting this property does not cash flow. To make things more objective just look at the numbers as if it was a brand new investment. Calculate exactly how much it will cost you such as re-financing costs including the inspection by the bank and any other charges.

Then just do the same calculations of PITI, expenses, CAPEX, Vacancy, and etc. How does this property look now compared to other possible investments? Don't let the attachment to the property and what you think the shape of it is drive your decision.

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