Sell Current Rental SFR for More Rentals Faster?

Question

Hello,

The question is in regards to opinions on whether to sell our first SFR for a large amount of equity money from it to be used to acquire multiple more SFR or duplex/triplex faster....or keep the current SFR as-is right now and let it ride slower.

We moved out of our residence house in the Twin Cities area and into a new residence house.  The old house has become the SFR and is currently rented out until the end of July 2021.  It pulls $2,150/month right now as it rented out during off-season, but during on-season good rental time of August/September the going rate for the area is about $2,300/month would be anticipated.

The SFR will be 100% paid off bank loan, free and clear in 5 months time.  I have a recent Realtor appraisal of it being worth $440k if sold, and in talking to another Realtor he said I could expect to pay with him all fees from him and bank and everything else about 8%.  So that would be about $405k in free and clear money to us.  We would easily meet the rule of having lived in the property 2 out of the last 5 years and would avoid the capital gains taxes scenario.

If we keep renting out the SFR past July 2021 we would get a much larger cash flow per month than any normal scenario, main reason being is that the bank loan will be paid off 100%.  But the money needed to acquire another property or two will come much slower logically it seems as we would then have to save about $1,500 per month (would earmark money from the rest of the monthly rent for CapEx and other expenses) and it would take a while to get enough for a new down payment and also repairs costs for a new rental.  Not all that super interested at the moment of looking at high interest hard money or private money.

To me it seems to make more sense to sell the current SFR and get around $405k to then buy new rentals and afford their repair costs too, avoiding needing to use hard or private loans.  I would scale up faster for money coming in overall and get more properties faster it seems.  Looking right now to have between 5-10 doors I think...I'm open to SFR, duplex, triplex right now I'm thinking.

Thoughts?

Bruce Runn · Answer

@Jason Jones

If you want to connect, we can take the conversation offline.  I own 16 rental properties, primarily in Uptown with 9 of them between Franklin and Lake Street.  It's hard to get SFH's to cash flow as investments as compared to duplexes and triplexes so I usually point people to the multi family route.

Jason Jones · Answer

@Daniel Anshus thanks for the Bridgewater name.  I will check into them for a HELOC.

The realtor that we bought our current live in residence with I asked him what he'd charge me plus other costs if we sold our Uptown Minneapolis SFR.  He said figure 5% for his fee, and 3% for other bank and misc fees and such....totaling 8%.  I have not sold a home before ever, so I was looking for a round number or percent to use.  Didn't want to get into the weeds of everything exactly to the penny when all I wanted was ballpark numbers, or do research on these BP forums or another website.  I was looking for a quick round number.

Kerry Baird · Answer

I’m for selling and repositioning due to capital gains situation and equity available.

Brian G. · Answer

@Jason Jones yes both 1 & 2 are viable options. Doesn’t hurt to get a Heloc on the property just in case you find a great deal you can move on it. You should be able to get 80%LTV on a rental (FMV x .8 - loan balance = Heloc amt.). And fyi, Heloc interest is a write off if used for business purposes the same as interest on a normal mortgage. Continue to think through your options and strategy. Protect your capital. That’s enough seed money to change the course of your financial future. Don’t be in a hurry. The RE biz isn’t going anywhere. Happy to hop on a call sometime. Nothing to sell. Just reach out.

Jason Jones · Answer

@Brian Gerlach @Noah Chappell @Bruce Runn

The book learning and reading forums learning is starting to make more sense and sink in a bit I think!

Nothing is set in stone for decisions as I still continue to learn and have time, but since my current SFR is leased thru the end of July 2021 I see two main paths for my preferences and situation.  1) I wait until August 2021 and sell the SFR house outright, avoid the 121 tax hit of capital gains, and have a sizeable large amount of money to sit in a Meryl Lynch account making 2%-3% while I pursue and purchase duplex's/triplex's slowly but surely in Fall 2021 and beyond.  2) If I want to buy duplex's/triplex's before Fall 2021 I could find a bank for a HELOC against my current SFR, to put 20%-25% down and fix costs and buy that new property.  Then come August 2021 I could still sell the first SFR that has the HELOC on it, and still avoid the 121 tax hit for capital gains.  And use the proceeds of that sale to pay off the HELOC and still have a bunch of money left over to place into a Meryl Lynch account making 2%-3%, and then waiting for the next duplex/triplex to buy....probably in 2022 I'd bet.  I read that 1031 exchanges have a 180 day total maximum time frame, that seems short, this does not seem desirable situation if I don't really need to use it currently to me.

Does #2 work logistically wise and makes sense wise?  Would the banks let me do this?

I read on the BankRate website that most HELOCs don't cost too much to get them approved and set up (if I could get one in current financial environment from a bank), and the money into my hands.  No closing costs and the like that other loan forms have.  And since it would be for a shorter duration, the little bit higher interest rate that a HELOC would have as compared to a cash-out-refinance wouldn't really matter much it doesn't seem.

Brian G. · Answer

@Jason Jones Fyi, Pen Fed still does Helocs on rental properties. Regarding your question, if you are looking to buy a bunch of rentals then a cash out refi makes the most sense as it’s low cost fixed rate. If you are looking to recycle your capital through value add projects, ie BRRRR or Flips, then a Heloc may make more sense. It all depends on your investing strategy. I would likely sell at some point before the 121 tax exclusion expires, nothing like locking in a great profit AND not having to be under the time constraints of a 1031. You have options. Congrats and good luck!

Daniel Anshus · Answer

@Jason Jones you could sell off market and pay a smaller amount. I'm working on an off market single family in Saint Louis Park. Save on paying buyers agent commissions.

Daniel Anshus · Answer

@Jason Jones you should be able to finnd a lender who will do heloc's. I got a heloc in April, when the world was on fire. Banks are doing them, just maybe not Bell. You could speak with bridgewater  they are a good investor friendly bank.

I would say that cash flow on a single family in uptown is really good. I would suggest taking a heloc or refinance (if you want to hold the property).  As far as 8% fees it sounds like you have a realtor looking to charge you 6-7% to sell it.  No need to pay that these days.

Jacob Sampson · Answer

I recommend a local bank.  They usually have more flexibility.  In my situation, my bank does a loan that spans multiple properties.  This allows me to utilize my equity by keeping the loan to asset value where the bank wants it.  I am not aware of banks tightening up at this point.  I just got a 150k HELOC, no problem.

Sell Current Rental SFR for More Rentals Faster?

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