Cash out Refinance of Rental Property for my Son

San Antonio, Texas
Real Estate Agent
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Cash out Refinance of Rental Property for my Son

Kevin D Key
Member since 2023 · 3 posts · 0 votes

I am a retired 63-year-old military veteran considering giving a rental property to my only son, a 22-year-old senior in college. The rental home in San Antonio, TX is completely paid for and has a market value of about $356K. Option #1 I'm considering using a Cash-out Refinance to take out 80% of the equity $284K to use to help my retirement. The house will then continue to be a rental property using a Property Manager and having good potential to appreciate in value but will have only a small cash flow. I'll use a "Transfer on Death Deed" to give the house to my son after I die (which would avoid probate.) Option #2 that I'm considering is to sell the house using a Real Estate Agent which will cost approximately 9% total (in agent fees and closing costs) plus additional Capital Gain Taxes (about 15% of the capital gain of $150K which would be $22K). My federal tax bracket is 12%. I would use some of the remaining profit to help my son with a down payment on his 1st house. Which Option do you recommend to help my son get a good start on life after he finishes college.

Concerned Dad

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  • John Norman
    Realtor · Richmond, VA · Member since 2020 · 30 posts · 16 votes
    3y
    Quote from @Kevin D Key:

    I am a retired 63-year-old military veteran considering giving a rental property to my only son, a 22-year-old senior in college. The rental home in San Antonio, TX is completely paid for and has a market value of about $356K. Option #1 I'm considering using a Cash-out Refinance to take out 80% of the equity $284K to use to help my retirement. The house will then continue to be a rental property using a Property Manager and having good potential to appreciate in value but will have only a small cash flow. I'll use a "Transfer on Death Deed" to give the house to my son after I die (which would avoid probate.) Option #2 that I'm considering is to sell the house using a Real Estate Agent which will cost approximately 9% total (in agent fees and closing costs) plus additional Capital Gain Taxes (about 15% of the capital gain of $150K which would be $22K). My federal tax bracket is 12%. I would use some of the remaining profit to help my son with a down payment on his 1st house. Which Option do you recommend to help my son get a good start on life after he finishes college.

    Concerned Dad


     First, thank you for your service to our country!

    Second, you are a great Dad that is setting your son up for a great start into building wealth. 

    Luckily, you can achieve both goals! Debt is tax-free, so I would advise to do a cash-out refi to use for yourself AND you can "gift" funds for your sons down payment. Be sure to show the papertrail of these funds, as his lenders underwriters will want to confirm the money has "seasoned" 

    Put the rental home in a Trust (or maybe the Transfer on Death does the same thing) where your son inherits the property with the new step up basis. He can then decide on what he wants to do with the home to leverage the eqiity tax free! 


    The last thing you should do is sell the property and take a tax hit, unless you need the full funds for an immediate need. 

    I believe my above recommendation works best for your goals, but contact a Real Estate CPA in your state to confirm. 

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  • Devin PetersonBusiness Member
    Lender · Sarasota, FL · Member since 2022 · 2k+ posts · 695 votes
    3y
    Quote from @Kevin D Key:

    I am a retired 63-year-old military veteran considering giving a rental property to my only son, a 22-year-old senior in college. The rental home in San Antonio, TX is completely paid for and has a market value of about $356K. Option #1 I'm considering using a Cash-out Refinance to take out 80% of the equity $284K to use to help my retirement. The house will then continue to be a rental property using a Property Manager and having good potential to appreciate in value but will have only a small cash flow. I'll use a "Transfer on Death Deed" to give the house to my son after I die (which would avoid probate.) Option #2 that I'm considering is to sell the house using a Real Estate Agent which will cost approximately 9% total (in agent fees and closing costs) plus additional Capital Gain Taxes (about 15% of the capital gain of $150K which would be $22K). My federal tax bracket is 12%. I would use some of the remaining profit to help my son with a down payment on his 1st house. Which Option do you recommend to help my son get a good start on life after he finishes college.

    Concerned Dad


    Hi Kevin, First off - what a courageous and stong father. Thank you for your service and Im sure your son greatly appreciates you. I would recommend the DSCR cash out refinance for a couple of reasons. One, you avoid getting rid of an asset that could grow in value over the long run. If you sell off, youre hit of course with massive agent fees and short term capital gains tax. The cash out refinance would allow you take as much equity as possible and repay the principal down to give your son the option to do it all over again. Having an asset in the back pocket for emergencies is always a good option. If you seek a cash out on this rental property, I would recommend using a DSCR loan. This loan program will allow you to qualify and close hassle-free due to the nature of the loan not having DSCR constraints. All you need to show is that the rental income covers the anticipated mortgage payment.

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