This week’s question comes from Brandi through Ashley’s Instagram direct messages. Brandi is asking: Our current home could give us about $260,000 in net proceeds if sold. We plan to purchase rentals with those proceeds. But, our home is in a good location with good appreciation. Should we sell our primary to buy properties or refi and make it a rental?
The sell vs. refi argument is back once again! In this hot housing market, it’s no surprise that homeowners want to take advantage of their growing equity by selling their properties. But, doing so could cause you to lose one property only to have to go out and find another. Although the sell vs. refi answer is specific to each investors’ situation, there are a few quick ways you can establish which is a good move for you.
Here are some suggestions:
- Ask “what’s going to give me a higher ROI?” and look at metrics like cash-on-cash return and return on equity (ROE)
- Take out a home equity line of credit (HELOC) instead of refinancing and BRRRR your next rental to pay back the loan
- Don’t forget to factor in future appreciation that you could miss out on by selling
- Double-check your interest rate on your primary residence (it may be too good to give up!)
- And more in the episode…
If you want Ashley and Tony to answer a real estate question, you can post in the Real Estate Rookie Facebook Group! Or, call us at the Rookie Request Line (1-888-5-ROOKIE).
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Listen to the Podcast Here
Read the Transcript Here
Ashley Kehr:
This is Real Estate Rookie, episode 182. My name is Ashley Kehr, and I am here with my co-host Tony Robinson.
Tony Robinson:
And welcome to the Real Estate Rookie podcast. And if this is your first time joining us, we are thee podcast focused on those investors who are at the beginning of their investing journey. And so if you don’t have a deal, or maybe you just got a couple and you’re looking to scale. This is the podcast for you. Ashley Kehr, my wonderful co-host, what’s going on? How are things happening on your side?
Ashley Kehr:
Not much, we’ve had a busy week of recording podcast. And so this is sad this is our last one for the week.
Tony Robinson:
I know.
Ashley Kehr:
But we just found out that Tony will be coming to my area in a couple weeks.
Tony Robinson:
Yep.
Ashley Kehr:
So that will be great to get to hang out for a day while Tony potentially looks at a property.
Tony Robinson:
Yeah, I’m super excited for that. We got a beautiful property under contract in Western New York. So excited to see that one come together. And obviously happy that I get to hang out with my co-host, because I’ve never been to that part of New York before. So I get to see what all the hype is about.
Ashley Kehr:
I know. I’m wondering how I’m going to be able to convince you to shorten the property tour and come to see some of my properties.
Tony Robinson:
Come see Buffalo? Yeah.
Ashley Kehr:
Yeah. But yeah, I’m so excited for you and Sarah’s coming too. Right?
Tony Robinson:
Yep.
Ashley Kehr:
Okay.
Tony Robinson:
Sarah’s coming, Naomi’s coming. So it’ll be the whole Alpha Geek Capital crew.
Ashley Kehr:
Oh, good. Okay, well-
Tony Robinson:
Yeah.
Ashley Kehr:
… I’ll be excited to have you guys here. I already put it into my calendar and-
Tony Robinson:
There you go.
Ashley Kehr:
… hope to my chauffer to chauffer for me around, but hopefully I’ll have my car by then.
Tony Robinson:
Yeah, fingers crossed.
Ashley Kehr:
Yeah. So today we actually have a question from my DMs @wealthfromrentals on Instagram. You guys can always send Tony and I a message. He’s @tonyjrobinson, I’m @wealthfromrentals, or you can call and leave us a voicemail 18885-rookie. Okay, so today’s question is from Brandy Smith. Hi Ashley. I listen to your Real Estate Rookie podcast and love it. My husband and I have a question for you. We are just starting out with a real estate investment journey, and hope you would have some good insight on this question. Selling verse cash-out refi to keep our current home, and turn into our first rental property. Our current home could give us about 260K in that proceeds if we were to sell. Our plan is to purchase rental property with our cash proceeds in addition to using part of it for the down payment on our new home, new construction due to finish in May.
We need about 46 to 93K for down payment, depending on if we do 10% or 20% down. However, if we keep it, keep in mind it’s a good area, good appreciation, and good rental rates. Basing off of our current monthly mortgage, we could cash flow about a $1,000 per month on strictly rent charges versus mortgage costs alone. Not sure how much our monthly mortgage costs would change with the cash-out refi option. Assuming we could get out near as much as we would profit by selling.
So with all that background, bottom line question, what would you do in our situation? If you believe hanging onto it would be better, how would you justify that to someone when it would take about 20 years to make the amount in profit by selling on just rent alone, not adjusting for rising rent rates, just keeping the same $1,000 chase per cash flow per month for quick scenario, comparative purposes? Hope that makes sense. Thanks so much for your time. Tony, what’s your initial thoughts?
Tony Robinson:
Yeah, there’s a lot in there, Brandy. So I just want to recap for the listeners to make sure we got everything set the right way. So the big question is, should she sell this property and reinvest those proceeds into another property? Or should she refinance and then keep that property as a rental? Now, the challenges, I guess the key differences here are, if you sell the property you get a bigger cash payment. So she said she would get about $260,000 in profits if she were to go out and sell the property. Now, if she were to refinance, I don’t think she says how much she would get if she were to refi. Did you see that number in there?
Ashley Kehr:
No, that number wasn’t in there, but assuming that she could pull out 80%, it would probably be less than if she sold it. Because saying that it sells for what it would appraise for. So it would be less than what she would get right now, I would assume.
Tony Robinson:
Yeah. So the way that I would approach it is I guess, two things I would look at. So first, Brandy made the statement that it would take 20 years to get that same $260,000 if she kept it as a rental. But I think that’s almost the wrong way to look at it, because she’s not just going to sit on that capital. She’s going to go out and reinvest that into something else. So I think the thing that I would look at is what is going to give you the better return on your investment?
Is it taking the cash, taking that full 260, going out and putting some of it towards a new house, and the other portion towards your rental property, and you figuring out what that cash-on-cash return is? Or you can look at the equity that you’re leaving in the property, and understand what your return on equity is for the one that you’re keeping as a rental? And I think when you look at those two figures, a return on capital invested versus the return on equity in the property, that’ll give you a better understanding of which one might be the better decision for you.
Ashley Kehr:
And plus that property’s probably going to keep appreciating too.
Tony Robinson:
Mm-hmm, yeah.
Ashley Kehr:
So that value is going to keep going up in that property. So at the end of 20 years, you’re going to have that property value. If you do decide to sell it, then you have made back that 260,000 and then you’ve also put in, or you also have this other X amount of equity-
Tony Robinson:
Right.
Ashley Kehr:
… in the property too. So in my personal opinion, I think that you can get the cheapest debt on a primary mortgage. So what you could do instead of going and refinancing, you could go and get a line of credit on the property, while it’s still your primary residence. And you can get a really low rate. So that way your mortgage payment isn’t changing. So your cash flow will be even higher than if you go and increase the mortgage, and you can use the home equity line to go and purchase properties, rehab them, refinance them, do the birth strategy, and then pay back that line of credit. So you’re only paying interest when you’re making that money work for you.
So we had Tyler Madden on recently, and he listened to the very first episode that he was on. That’s actually what he did with his primary residence. Before he turned it into a rental and purchased his new or next primary house, he went and got a line of credit that had the existing equity. Plus a lot of times with a line of credit, a lot of banks will lend you up to 85% of the home’s value. Sometimes I’ve seen even 90%, my one business partner got. So where usually if you’re going to refinance, a mortgage they’ll tend to only give you up to 80%. So there’s that advantage too. Okay. Well, anything else to add Tony?
Tony Robinson:
Yeah, hopefully that points you the right direction.
Ashley Kehr:
Yeah.
Tony Robinson:
No, I think that’s everything. Right? And a lot of these questions that pop up, there’s so many nuances and details that we don’t have. And I think ultimately it’s going to be a personal decision for you. But for me, I always try and let the numbers help me make my decision. And whatever turns out to be the better return is typically the route that I’ll go down.
Ashley Kehr:
Yeah. And I think too, one thing that she did mention in this there, is that it’s in a good neighborhood, good school. And so I think the fact that it’s not going to most likely won’t be a headache property, because it sounds like it’s in a class A area. I think is an advantage too. Where somebody going in and trying to buy a property for the purposes of it being a rental in that area will be higher or excuse me, will be harder if they’re going in and purchasing it as an investment property. Than if somebody used it as their primary, let that appreciation build up, and that equity build up in that property. So if I were to say, I would say keep it and put a HELOC on it, and use those funds from that HELOC to, you can use it for your down payment and then also use it to purchase other properties [inaudible 00:08:23].
Tony Robinson:
Yeah, totally agree.
Ashley Kehr:
Okay well, thank you guys so much for listening. Obviously, I’m stumbling over my words because we’ve had a long day of recording. Yeah, this is our last one for the week, but we will be back on Wednesday with another guest. Let us know if you’re loving the show, and leave us a review on your favorite podcast platform. I’m Ashley, @wealthfromrentals, and he’s Tony @tonyjrobinson. And we’ll see you guys next time.
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