Author Topic: Refi and buy a new property or sell decrease debt/living expenses?  (Read 960 times)

SaraB

  • 5 O'Clock Shadow
  • *
  • Posts: 14
Hello Everyone! I need some advice. I'll try to make this short.....
I'm trying to decide whether to refi a current rental to purchase another rental(which is kind of a unique situation), or do nothing and try to pay off my debt. Here are the deets:
We currently live in an expensive (all things being relative but average home price is over 400k) housing market and we purchased a townhouse before the boom and have a decent aount of equity in it. It was a primary and then we moved to a new primary and are renting the townhouse. It is currently cash-flowing $500 a month. However, we are within the window for a major tax break, if we were to sell it by September of this year we would pay NO TAXES. We could probably walk with 120k. However, I happen to love the property and had actually hoped to retire there someday when renter had paid it off. HOWEVER, we have just been offered the opportunity to purchase a fixer-upper in downtown  (which is really untouchable otherwise for us at this point) at a great price that is also zoned for an business/airBNB. It has to potential to cash flow very nicely ($1000-$3000 a month) and I think it could be an important step toward FI. I'm just very nervous about taking on this much real estate debt. I would have to refi the townhouse for the repairs on the downtown house but I would still have at least 25% equity in both. That being said I have a 16k car loan and a 20K student loan. I'm feeling very  torn between wanting to be debt free and knowing that having two assets that are appreciating and that someone else is paying off is a good thing! I guess you can say I'm stuck between the bigger pockets and dave ramsey philosophies. They both make sense but I don't know which one makes the most sense for US. Also, I am 42 and my spouse and I earn a very good income but have only about 70K in retirement in addition to 60k of equity in our primary and the 120k in the rental. Here are my options.......

1. Do nothing. Keeping cash-flowing the rental and work towards paying off debt and stockpiling cash. Keep current mortgages which are 167k(rental) and 340(primary)
2.Sell rental, take 120k and pay off debt and buy the other rental with what's left
3.Refi rental (will still pay for itself but not as much cashflow) and buy the downtown property for air bnb. This option has the potential to generate $1000-3000 per month and is a very desirable location.

I would love to hear people's thoughts. Thanks so much in advvance!

Mustache ride

  • Stubble
  • **
  • Posts: 118
Re: Refi and buy a new property or sell decrease debt/living expenses?
« Reply #1 on: March 08, 2019, 06:29:55 AM »
What is the market value of your rental and the new property?

Bruinguy

  • Stubble
  • **
  • Posts: 141
Re: Refi and buy a new property or sell decrease debt/living expenses?
« Reply #2 on: March 08, 2019, 08:24:05 AM »
Assuming the new rental is a good investment, I’d say 2 is the best option. Your old place is not generating a lot of income, you get a tax break by selling now, get to pay off debt, a lot can happen between now and retirement where you may not ultimately want to be in your old place anyway, there will be a lot of maintenance/upkeep on you old place and retirement and it doesn’t look like you are making enough off it to cover that.

Tuskalusa

  • Bristles
  • ***
  • Posts: 436
Re: Refi and buy a new property or sell decrease debt/living expenses?
« Reply #3 on: March 08, 2019, 08:47:52 AM »
Agree with option 2. The tax benefits create a great opportunity to generate tax free cash. Paying off debt sets you up to accumulate investments, going forward.

Option 3 generates significant leverage and risk. Given the scenarios, option 2 generates the most benefit with the least risk.

SaraB

  • 5 O'Clock Shadow
  • *
  • Posts: 14
Re: Refi and buy a new property or sell decrease debt/living expenses?
« Reply #4 on: March 08, 2019, 09:36:54 AM »
Let add a third option....
Moving back into the smaller cheaper home and selling our primary. Current mortgage on primary is $2100 per month but we love the home and property. Lots of room to garden and for our chickens, room for kids and aging parents if need be. But the townhouse is certain cheaper with a mortgage at only $1000 per month.

Mustache ride

  • Stubble
  • **
  • Posts: 118
Re: Refi and buy a new property or sell decrease debt/living expenses?
« Reply #5 on: March 08, 2019, 10:05:21 AM »
I'll ask again, what are the market values of the properties? Cash-flow can be extremely deceiving. I'm not sure how anyone can give you good advice without this information. Also, are you factoring in repairs, capex, PM fees, etc. when coming up with your cash-flow #'s?

SaraB

  • 5 O'Clock Shadow
  • *
  • Posts: 14
Re: Refi and buy a new property or sell decrease debt/living expenses?
« Reply #6 on: March 08, 2019, 01:13:09 PM »
@Mustache ride
The rental is currently worth ~320, we are waiting official numbers for appraisal. The new property is worth 350-400, we are purchasing for 275. However it does need repairs.

Mustache ride

  • Stubble
  • **
  • Posts: 118
Re: Refi and buy a new property or sell decrease debt/living expenses?
« Reply #7 on: March 08, 2019, 02:37:26 PM »
You're generating $6k a year on a $320k asset, which is a return of less than 2%. Sell the house and take your tax-free gains. $120k at 15% LTCG is roughly $18k of taxes you would have to pay eventually. That's an extra 3 years of renting the house out just to pay for the taxes.

As for the other property, it's hard to say due to the huge range of potential rent and not knowing the repairs needed. It does seem like it could be a decent rental if the repairs are low and you can demand the higher rent.

waltworks

  • Magnum Stache
  • ******
  • Posts: 3441
Re: Refi and buy a new property or sell decrease debt/living expenses?
« Reply #8 on: March 08, 2019, 09:15:10 PM »
You know, if you're 42 and still trying to pay off student/car loans... you maybe should stick with a conservative course of knocking out debt and making simple/no-brainer investments. Taking on more debt/risk is probably not your best bet here.

-W

SaraB

  • 5 O'Clock Shadow
  • *
  • Posts: 14
Re: Refi and buy a new property or sell decrease debt/living expenses?
« Reply #9 on: March 10, 2019, 10:08:24 PM »
@waltworks I'm not "still trying" to pay off my student loans. My student loan debt is at 2.5% so I've made  a choice to hold off on paying them off.

clarkfan1979

  • Handlebar Stache
  • *****
  • Posts: 1942
  • Age: 40
  • Location: Pueblo, CO
Re: Refi and buy a new property or sell decrease debt/living expenses?
« Reply #10 on: March 11, 2019, 01:25:34 AM »
@waltworks I'm not "still trying" to pay off my student loans. My student loan debt is at 2.5% so I've made  a choice to hold off on paying them off.

I have $31,500 in student loan debt at around 4.5%. However, I have around $560K of real estate equity.

According to the book, "The Millionaire Real Estate Investor", people with over 1 million in real estate equity have an average equity position of 40% and 60% leverage. I try to always stay above 40% equity.

waltworks

  • Magnum Stache
  • ******
  • Posts: 3441
Re: Refi and buy a new property or sell decrease debt/living expenses?
« Reply #11 on: March 11, 2019, 08:30:06 AM »
"I am 42 and my spouse and I earn a very good income but have only about 70K in retirement in addition to 60k of equity in our primary and the 120k in the rental."

Whatever you've been doing, it's not working. I stand by my recommendation - pay off the car loan at the very least, and don't "invest" in another property, at least not now. Your student loan interest rate is indeed low enough that not paying it off makes sense - IF you are investing the money elsewhere. It doesn't look like that's happening, so for you, paying it off is probably a better move just as a form of enforced savings.

Max your tax advantaged retirement accounts every single year, sell the meh rental, and think about investing in something boring and easy instead of swinging for the fences on rentals (unless you're willing to put some time and effort into learning a LOT more about RE investing).

-W

Archipelago

  • Stubble
  • **
  • Posts: 237
  • Location: U.S.
Re: Refi and buy a new property or sell decrease debt/living expenses?
« Reply #12 on: March 11, 2019, 08:46:29 AM »
Quote
It was a primary and then we moved to a new primary and are renting the townhouse. It is currently cash-flowing $500 a month. However, we are within the window for a major tax break, if we were to sell it by September of this year we would pay NO TAXES. We could probably walk with 120k.

Is it cashflowing $500 and factoring in ALL costs? Including PM, CapEx, repairs, and vacancies? If it's cashflowing $500/month but you're personally managing it, the right decision is to sell. Basically, what @Mustache ride said.

If you've lived in the house for 2 out of the last 5 years, then even more of a reason to sell if you can avoid capital gains taxes.

George Reed

  • 5 O'Clock Shadow
  • *
  • Posts: 1
Re: Refi and buy a new property or sell decrease debt/living expenses?
« Reply #13 on: March 15, 2019, 02:05:00 AM »
The more assets you have the best. Don't rely on only one rental property, try to diversify your asset portfolio as much as possible.

Papa bear

  • Handlebar Stache
  • *****
  • Posts: 1269
  • Location: Ohio
Re: Refi and buy a new property or sell decrease debt/living expenses?
« Reply #14 on: March 16, 2019, 10:27:12 PM »
"I am 42 and my spouse and I earn a very good income but have only about 70K in retirement in addition to 60k of equity in our primary and the 120k in the rental."

Whatever you've been doing, it's not working. I stand by my recommendation - pay off the car loan at the very least, and don't "invest" in another property, at least not now. Your student loan interest rate is indeed low enough that not paying it off makes sense - IF you are investing the money elsewhere. It doesn't look like that's happening, so for you, paying it off is probably a better move just as a form of enforced savings.

Max your tax advantaged retirement accounts every single year, sell the meh rental, and think about investing in something boring and easy instead of swinging for the fences on rentals (unless you're willing to put some time and effort into learning a LOT more about RE investing).

-W

The more I read the more I always agree with waltworks.  Another member who is active on these real estate forums, Jon bon, who I know outside of MMM, mentioned this IRL as one of the other people on the board who knows their shit about real estate investing.

So what he said.


Sent from my iPhone using Tapatalk