Sell? Hold? Refinance? What to do w/ primary?

Question

Hello,

This is my first post, and I’m looking for some insight in to what others would do in my current situation.

I bought a townhome in Aurora, Colorado using a first time homebuyer loan program in 2016 as a primary residence at the age of 23, I’m now 26. Conventional loan w/ all closing costs and down payment taken care of by loan program (4%).

Now, I have moved in with my girlfriend and I have been putting the townhome on AirBnB for the last 3 months, which has been good to me, but I’m looking to do more.

Here are some of the numbers...

Purchase price: $265k

Loan balance: $230k

Comps in area: $300k (conservatively)

Mortgage payment: $1650

Airbnb avg rental income: $2500 (net $200-$400/mo)

I want to know what you all would do in my situation. Here are a couple scenarios I’ve ran through my head.

- refinance the property as is

- make a few upgrades and refinance

- sell as is

- make a few upgrades and sell

- get a heloc on the home

- I am also eligible to use the first time homebuyer program again (no downpayment/closing costs), which I am interested in taking advantage of again

I want access to cash in order to get in to the real estate investing arena. If I sell I believe I would net about $45k after all is said and done. May not be a whole lot in the Denver metro market to work with but I would be willing to take my dollar out of town. Not sure how refinance or heloc would work in this scenario.

Don’t necessarily have a fixed agenda here and I’m ok with that, just want to make the best decision for where I’m at right now. Can’t really say I have a particular strategy such as a buy and hold, house hacker, fix and flipping. I’m open to most possibilities and looking forward to delving deeper in to real estate.

Would like advice on what you all would do with this scenario and particularly looking to get advice on where we are in this cycle. I want to protect myself as much as possible while also pushing the envelope and really kickstarting my real estate investing lifestyle.

Thanks and please let me know if you have any other questions about me or my situation that would help you get a better understanding.

Dominique Williams · Answer

Hello Teri,

The home would still cash flow if I went long term. I believe I can get $150-$200 if I went that route based on other rental comps in the area.

I don’t really have much in reserves as far as cash goes, about $10k.

Thanks for your response, I really like the repeatable action that you mentioned. Really believe if you continue to repeat the same actions, you become more knowledgeable, resourceful, and can execute with great confidence.

Thanks for you input!

Teri Feeney Styers · Answer

@Dominique Williams I would scratch HELOC off the list. Just not enough equity to work with. Will it still cashflow if you just do a simple rental instead of short term rental? Do you have any cash available without tapping the townhouse? If you used the first time purchase program again would they let you buy a fixer or a multi-family? If not, are you willing to own a new place for a couple of years and then move on again? Nothing wrong with that scenario. You have made yourself an extra $10K per year with your current property (via appreciation) and have created an additional $10K per year in equity (via mortgage pay down.) "Saving" $20K per year from your current salary would probably be a lot harder. And maybe you are even pocketing some of the monthly cash too. I say look for a repeatable action.

Bill S. · Answer

@Dominique Williams so one thing that was a bit unclear to me. Are you currently paying PMI on your current loan? You mentioned being able to qualify for another first time homebuyer program. Usually you have to refi out of the first home loan to qualify again but then again I don't know the details of your program. Just be sure to double check that.

A few thoughts - $40k while a good bit of funds is really not that much in the grand scheme of real estate investing. You could see ALL that equity evaporate with a market shift and it has happened a few times in the last 40 years.

My advise is to make sure you maximize the cash flow from the town house (not paying PMI) and rinse and repeat the low down payment program. If you can swing going the multiplex route then do that, if it's a large house and rent out rooms go that route. If the GF is a no go on those then get the smallest/lowest cost unit in the best area you can stand and live there two years and then rinse and repeat.

I would absolutely consider selling the townhouse to get a 4 unit property with a low down payment program provided the rents (including your payment) would cover the costs. (I would not sell the townhouse until I had a deal under contract to purchase) I would contribute the property management and the labor of the minor fixes etc from my own time. You might even look to making one or more of the units AirBnB to get more cash flow. Don't count on the AirBnB income since those laws are still fluid.

Personally it would be a no go on the out of area investing.

Marcus Auerbach · Answer

@Dominique Williams - if you read a lot of RE books, even older ones, one recurring theme is seldom sell. Buy & hold for the long haul makes you money. If you sell the property, you will also loose about 7% in sales expenses. I assume you are on a 30 year fixed rate note I would refi only to get out from PMI.

You could continue with short term rental or find a permanent tenant and then focus your energy on buying another rental property. If you are after long term wealth, then you need to build a portfolio of properties.

Maybe your next move should be to buy a 2 or 4 family and house hack again for a year?

Jonathan Taylor Smith · Answer

Hello @Dominique Williams - What a great situation to be in at 26 (especially if your girlfriend is the ONE) - Congrats! I met my wife of 19 years when I was 26 and we got married at 28. If only, if only, if only (not to lament the past) I had gotten into Real Estate Investing back then - but I waited another 15 years. Had I to do it over, we would have House-Hacked from day one, buying a new Du/Tri/Quad-Plex each year and moving repeatedly.

Instead, we bought the new big house at age 30 that we still live in today, and at that time my wife would have gladly been willing to move with me each year from plex to plex. Whereas, now she's not willing to move anywhere unless it is far better than where we live now, and she's certainly not living in any sort of plex.

If comps in your area are $300K, it all depends on what LTV you'd get on a HELOC, as most are 75% LTV, but some go up to 90% and here in NC there is even a Credit Union that will go to 100% (but at a much higher rate). And if you refinance, what will that LTV be such that you'd get any cash out, and what would your new rate be, such that you'd still have positive rental cash-flow?

I don't ever sell anything... If your Townhouse HOA permits AirBnB, are there any improvements you can make to the property, marketing, pictures / presentation, etc... to increase your income?

Erik Wilsom · Answer

@Dominique Williams

If you don't mind moving, then you may want to look in the Colorado Springs.  You can get a 4 plex there for the price of duplex in Denver.

Josue Vargas · Answer

@Dominique Williams

You didn't say what is your current mortgage rate.

Refi: It will make sense to refi giving you probably still paying PMIs and your property has appreciate enough.  You will get better interest rates (hopefully), but you have also pay for closing cost.  Consider appreciation to your property in the records may red flag your county tax assessor and rise your taxes based on your last appraisal.

I would not do upgrades before refi.  You got the appreciation in your favor plus banks want to refi your property, don't waste time and money upgrading it before a refi.

Upgrading: Not sure what your property needs are.  Figure out for how much it can be rent it.  Sometimes renovations costing you 15-20K upfront are really hard to offset the value of rent.

Don't sell. You got good appreciation and it will be easy to rent and cash flow than getting a new property, unless a good deal.

Bill S. · Answer

@Dominique Williams a few more things to consider in your strategy

1) Next time refi out of your PMI on your primary residence before you move out since owner occupied interest rates are lower than when the property is strictly an investment property.

2) You might have trouble getting the bank to count the AirBnB income since you don't have a lease to send to them that has a fixed amount you will get each month. That has been a stumbling block for some in the past but I have heard banks are embracing it in some cases.

3) Focus your time, money and energy on your agent business now and grow your income from that. Use the money you make there to invest. You will be wealthy sooner that route. The lasting wealth comes from how you spend the money you make (ie invest in real estate). Use the investments to offset your tax liabilities from your agent business.

4) Depending on the relationship with your GF you could pool your resources and perhaps qualify for a larger property. Just know that if the relationship goes bad you will end up owning a property with someone that may hate your guts. This is obviously not fun in so many ways.

Dominique Williams · Answer

Hey Jonathan, thanks for the response! I didn’t know there were lenders that go up to 100% LTV, that’s good info and gives me another option to explore. I had previously only known about the 75% LTV which really wouldn’t leave me with much wiggle room.

HOA is good to go with short term rentals for the time being and all neighbors have been informed with no issues as of yet.

The only couple of things that I haven’t improved in the home would be flooring and some backsplash in the kitchen would also be nice. Could also get professional photos done to be honest. I’ll look in to all options before selling.

Thanks again for your input!

Dominique Williams · Answer

Hello Marcus, I am definitely looking for long term wealth. I am on a 30 year fixed rate and currently paying PMI.

I have really been considering a long-term tenant as well because of all the “work” the short term rental requires. I have a great cleaner and only really have to respond to guests via app, but I’m not so sure that it’s worth my time yet.

If I went the long term route I would probably only cash flow $150-$200 month.

The only problem that I fear I’ll run into is qualifying for a 2-4plex here in the Denver metro area.

Thanks for the advice, greatly appreciated!

Sell? Hold? Refinance? What to do w/ primary?

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