Cash out refi and rent or sell current house?

Question

So I’m unsure of what I should do moving forward and am looking for some advice. I apologize in advance for the long post.

Currently in the process of purchasing a small multi family (2-4) units using a VA loan. I own a home currently that my wife and I purchased 2 years ago for $172,000 using a VA loan. Due to the VAs loan entitlement limits I can purchase up to $312,000 without a down payment.

My home has gone up in value quite a bit in the last 2 years and I believe (will obviously get an appraisal to know for sure) it is worth $205,000. The VA allows me to do 100% cash out refi. I can rent my home for roughly $1700 per month. Right now my home meets the 1% rule, but after refinancing it my payments would obviously increase as well as my current interest rate.

Option #1

Purchase a small multi to house hack and rent remaining units and sell my current house and save the profits. Live in for a year per the VA’s requirements and repeat.

Option #2

Purchase a small multi to house hack and rent remaining units and do a cash out refi on my current home and save the money for future down payments and rent my home even though it will be below the 1% rule. Repeat the process after one year.

This will be my first deal so I am nervous. Option two sounds great because I can potentially pull 20-40k equity out of my home depending on what it gets appraised at but then the numbers won’t make sense when rent it. Any advice would be much appreciated!

Seth Ferguson · Answer

Hi @Tony Iaconelli

I'm a proponent of refinancing instead of selling a property. As long as it services itself, even with marginal returns after a refi, you're much better off having it than not over a longterm hold. Take the cash from the refi and get another property.

Tony Iaconelli · Answer

@Jaysen Medhurst that’s my concern. If the refi raised my monthly payment 200-300 a month it would cut it a little to close for comfort. In terms of capex (if I did decide to keep it) I would use some of the money from the refi to update the furnace and A/C as they’re both over 30yrs old. The roof is brand new. Appliances as well. So I don’t think I would have many big ticket items that would need to be replaced, but I say that now...

Jaysen Medhurst · Answer

@Tony Iaconelli, have you run the numbers on your current home as rental after a refi? I'm not confident that it will cash flow well, if at all, especially if you have to pay PMI. You don't want to be in a spot where you're barely making any money and risk a big CapEx item or missing a month's rent due to turnover puts you in a bad spot.

I'd sell, hold on to the cash and house-hack your way into a 4-plex.

Tony Iaconelli · Answer

@Seth Ferguson thanks for the response. It definitely makes sense to keep.