Should Rent it or Sell it?

Question

I’ve posted about this before but never really landed on I guess a persuasive answer? Anyway I have a primary residence that I may have shot myself in the foot with. I refinanced to a 15 year @ 2.375% when I had the opportunity to save myself over $100,000 in interest. At the time I thought “well the payment is $1,710 if I can rent it for $1,700 I plan on just rounding off to $2,000 so I can pay it down quicker and move into a bigger equity position”. Equity position is currently about $60,000. Now I’m rethinking and had I went 30 year I could have pulled $500-$600 cash flow. I considered a refi back to 30 but rates are back up to 3.5%. On top of this I’m almost finished with a complete remodel that should push me into the $300,000 mark according to the appraiser. I’m wondering if I should just roll with the $1,700 plan, I get my number from my mortgage payment and Rentometer said $1,700 which I think is doable maybe. Or should I just finish my remodel and take the whatever it may be $85,000 after associated fees and reinvest it elsewhere? My big problem with this is the market where I’m at, a multi family that used to cash flow $1,000+ is now barley paying for itself. Just some thoughts I’d love to chat with y’all about more. I lean on renting it for the $1,700 and hoping I get a good renter that stays in it for a few years and loads my pocket with more equity, free money right?

Jody Sperling · Answer

Interest rates are an illusion meant to imprison you. While it's true that at 1.5% amortized, institutions are basically giving you free money, anything between 2.3% and 6% is great.

Equity position too is imprisonment. A different way to think about equity is trapped funds. Those funds could be out there making you money, but instead they're buried in the ground earning no income for you, doing no work but allowing the bank to lend to others.

That said, I avoid refinances as much as possible because I'd rather return my money to me and not to the bank. If you refinance your monthly payments return to the beginning of the amortization schedule where more than 50%, often as much as 80% of your payment is being collected by the bank, meaning you don't strengthen your cash position much for a long time.

The option I always pursue is a first lien HELOC. (High Cash Value Life Insurance works too, but takes time to become efficient). With a HELOC, you'll likely be quoted "higher" interest rates, but due to the nature of lines of credit vs. loans, you can overcome the interest rate scam and put money in your own pocket.

The way I illustrate this is: if you put extra money toward a mortgage, but the next month you need that money back for a great investment, will the bank disperse those funds? NO! But if you do the same with a HELOC they will disperse the funds. But if nothing comes up, all the extra payments toward the principle shield you from that interest, meaning as you pay down, your monthly cashflow grows.

With a mortgage the only way to grow cash flow is to pay the thing off or restart the hamster wheel. Not a winning solution. If you're interested in a deeper explanation, reach out, and we can talk more or I can share some video resources that taught me a ton. I'm not a financial advisor, insurance agent or banker and I have nothing to gain from sharing but that I believe banks trap people by creating false dichotomies. There's more than A or B. Best of luck!

Brad Jacobson · Answer

Hey Jeremiah, I lean towards selling the property because that's exactly what I did when I first started getting serious about investing and that first sale put me in a great position I couldn't have achieved otherwise.  I kept the first house I ever bought, made it a rental when I purchased the duplex I live in now, rented it out for about a year, then when the market shot up I sold and made about $80k all tax free.

I then used that $80k to buy another rental and flip a house. The $80k grew and it allowed me to purchase quite a bit more. I now own several properties and a few other investments like crypto and a small business. All that enabled me to leave my W2 to do real estate full time which was my original goal.

Sam Fickel · Answer

It would be a half decent argument if you had more equity and if you were in a rapidly appreciating market, but negative cashflowing properties are risky in the face of a downturn.

The upside is that if you keep the rental for 15 years, you own it free and clear. Buuuuut you lost money each month to get to that point. I'm all for going against the grain but this is a little too risky for me.

Side note: if you like your loan officer, wait until you've had your loan for 6 months before paying off the loan or else they get their commission charged back and they did all the work for your refi for free. Not telling you what to do, just making you aware.

Joe Villeneuve · Answer

Renting with negative cf isn't the answer, and never will be.

Your choices are to either refi to a 30 or sell.  Keep in mind, that if you refi to 30 and shave positive CF, your tenant is paying your mortgage...not you.

Joe Martella · Answer

This is a question that only you can answer. What are your goals?  What are the tax benefits/consequences of having a negative cashflow property?

Then again, you need to account for things breaking.  Things happen.so on your best months you will have a $10 loss.  Yeah, you are gaining equity, but what other benefits are you getting?  You are saving $100,000 over the course of 15 years.  That is if you lived in the property.

Now let's do the math:

If you collect $500 a month cashflow - over 15 years that is $90,000 while the $100,000 is paid by someone else.  $600 a month cashflow is $108,000 over 15 years while someone pays the extra $100,000.  Don't forget the mortgage is a complete write off and you get the benefit of depreciation.

The question I have for you is how quickly can you get the $90,000 or $108,000 once the 15 year mortgage is paid?

I think you are looking at this wrong.

The rate doesn't matter.  What matters is what your cashflow is.  On commercial mortgages you are paying 4.5 - 5%.

Just my opinion.

Should Rent it or Sell it?

Most Popular Reply