Flipper/Rehabber · Portland, OR · Member since 2016 · 60 posts · 10 votes
Snapshot of issue:
I have accumulated 5 small multi-families. 4 in Indiana, 1 in Portland, OR. Through that have had to heavily renovate one and two others with significant tenant turn over needs this past year. I have about $200k in various forms of debt out there that needs to be paid. 70k on a HELOC, 70k on a private money loan (5% interest only), and about 70k in credit card debt (some with higher interest, some with 0% for a few more months)
One rental has about $250k in equity and I have held it over a year. Would it be better to sell it, pay capital gains (estimated $50k) and wash all the debts away. Idea being its a sellers market, its at its peak potential value right now. This home brings in $12k a year cash flow, vs $200k now flow.
Or...Refinance my primary and pull an additional 100k out, add a HELOC to the above mentioned rental at around $100k. This will add about $1000 per month in additional fees eating up the one rental homes cash flow but allowing me to keep all 5..
Normally I don't advocate selling since there's often a way to avoid losing the asset, but in your situation, I'd strongly consider it for a couple reasons.
You're a flipper/rehabber, so having a significant amount of personal debt is going to eliminate safety nets if a future project goes south and you need to float it. Plus, you're in a situation where you can potentially make up the loss of an income generating property faster than others since you're experienced using OPM.
The other reason I'd consider selling is timing. While you can certainly pay that debt down over the next couple of years, I'm guessing that focus will take other opportunities away from you.
One reason to not sell is the makeup of the properties. How long have you had the four you'd be keeping? It sounds like there were issues in two of them...were those one-time issues or could they reoccur? I wouldn't sell the good one to pay off four risky properties. If that's the lay of the land, then unload the risk, take the education, and keep the winner, even if it leaves you in the hole.
Nice to have a few scenarios for how to move forward!
Look at all your properties and see which one is the 'worst' rental. Then look at all the costs associated with either refinancing or selling. Now for the questions: For the $70K in credit card debt, how did you get that much? Was it a one time thing or are you continually spending more than you have? How much of that credit card debt is at a higher interest (and what is that interest rate, 3% is higher than 0%, but so is 20%). Is the $210K of debt keeping you up at night?
It is what me, the first two wouldn't bother me as you need to borrow money to have rentals, but the credit card debt would. I'd look at all of the rentals and as it is a seller's market see which one is the worst on paper or the one that might be the hardest to sell later on. Figure out all of the fees associated with selling and pick one and apply the money to your credit card debt.
Alternatively, you don't mentioned any mortgages, what about getting a mortgage on one of the rentals to pay off the credit card debt?
@Theresa Harris, @Mathew Wray, @Chris Pasternak Thank you for the responses! Sorry for the delay in getting back to you. All good thoughts. I was able to refinance one of my Indiana homes (the one with the major renovation work) and use that $73k to pay down most the revolving debts. Now I have about $130k to go. Most of the debts are one time issues. Purchases, renovations on two of the homes, and then some personal.
Currently working on refinancing my personal home to pull some of the equity and see where that gets me. The challenge with selling any of them is that the 4 on Indy are lower entry amounts and cash flow modestly but low equity. The one with all the equity cash flows about $1300/month but has al ot of equity in it.
To Theresa's point it is a bit stressful having the large amount of extra debt (all houses have loans, one is a private lender for next five years). That makes me lean toward selling and benefitting from the low capital gains rn and high sales pricing. nIf my math is correct @15k/year it would take 12+ years to match the payout now. That doesn't include the depreciation or debt pay-down.