Question on whether we should Cash-Out ReFi, sell or leave as is

[Bryce Matson]

Hi All,

We own a house in LA and are moving away. We want to convert our garage into an ADU and then rent out the main house and ADU. The main house would be 3 bdr/2 bath and ADU a 1 bed/1 bath. We think the max rent we could get would be $4K for the main house and $1,800 for the ADU. Our realtor estimates the house would be worth $1.2 mil after the ADU and currently valued at $950K. We estimate it will cost $50-70K for the ADU conversion. The main house has solar and tesla wall charger.

We are trying to decide whether to sell or ReFi after the ADU or leave as is and just rent it out. Our interest is at 2.89% so the rate would go up in today's market and after refinancing at $1.2mil we estimate our monthly payments to be higher than what the rent would collect after all fees, reserves, etc. If we sell we lose a decent house at a good rate as well as our only asset in CA that we could use to write off our visits back to CA.

We are currently leaning towards not refinancing the house and just collecting the extra cash flow from the ADU but we wanted to use the large cash-out of around $300K to get other houses. We could also minimize our cash-out to just cover the cost of the ADU (then use it for down payment on new primary residence) and a little more for a down payment on another investment property.

I wanted to see if there is something we are not thinking of that might make better sense to take advantage of the equity we have and would add with the ADU. If there is any other info you need to better help please let me know! I appreciate any advice!

[Rick Albert]

A couple of things (as someone who has built an ADU personally and helped clients do the same in Los Angeles):

1) It is going to cost a minimum of $100,000-$125,000 to do the garage conversion. Your upfront costs are in the range of $20,000-$25,000 before you even start. You may have to build shear walls all around, and it needs it own sewer line that runs all the way to the front of the house. I'm not saying don't do it, I'm saying make sure you get proper bids.

2) You can consider a HELOC instead of a cash out refi. You have a great interest rate and it is probably not worth losing. Plus if you ever want to create better cash flow without buying more properties, you have the option to pay off the HELOC instead.

3) It depends on your financial position, but I always ask my clients who are not sure on whether to sell or not is what their intentions are with the money.

4) Since it is your primary residence, the first $500K of profits is tax free (assuming you are married and file jointly). Three years go by, and the money is taxed unless you do a 1031 exchange. Just something to think about.