When to cash out?

Question

Hi

I own 1 rental. It is cash positive, though only about $200/month. A realtor recently gave me a rough appraisal about $120k more than I paid for it. My wife and I both have a decent amount of student loans left to pay. My loans (even after consolidating) are at 5.2%.

Should I cash out and knock out my debt? Is this smart? Or should I keep the rental as long as I can? Should I cash out and look for another investment opportunity?

Daniel Hoffman · Answer

Thanks @Robert Wilson !That 2% also includes taxes and insurance...  Right now it looks like I could get some money out of it. Since this property was the house I lived in, I really don't have experience researching and purchasing a new investment property. I'm not quite sure where to start.

Robert Wilson · Answer

You're currently getting a 2% return on your equity... $2400/$120,000 and that assumes no repairs or vacancy issues come up.If you're in a position to refi and improve that return, there might be a good opportunity to get another rental.If you want a guaranteed 5.2% return... pay off the student loan. You will get that return from day 1.

Ashley Schroeder · Answer

@Daniel Hoffman I know they have a lot of information on here in many different aspects regarding financing.  We were able to pay cash for our lots and plan on doing construction loans to finance the project.  We watched a webinar on this topic specifically through a different website (my husband found it so I don't know it off the top of my head) that gave us a lot of helpful information (like we can use our cash equity from the purchase of our lots as part of the downpayment for the construction loan and may not need to put much extra cash into this project, depending on our end numbers - we're still waiting on building estimates, hopefully any day now).  There are so many ways to find the money if you don't have it!  Once we get at least one duplex with broken ground (we have limited time here in WI) my husband wants to try and find investors for a small apartment complex (3 buildings-ish, probably about 20 or fewer units).  It's definitely about building your contacts and people around you.  We actually have a mortgage broker who helps do the hard work regarding loans (and gets paid via the lender when we take out the loan so no extra cost to us).  But again, hard money lenders, private investors, there is money to be found wherever you go, you just need to have your homework done so they know you are as sure of a bet as can be!  Best of luck!

Daniel Hoffman · Answer

Thanks @Ashley Schroeder !

I need to find some good sources to get me started with that number crunching. I really need to get a good foundation in that area. I'd also love to know how to find financing for projects like that one you mentioned.

Ashley Schroeder · Answer

We actually just passed on a low income 12-unit apartment.  We chose to pass because one of the buildings needs to be torn down so the numbers just wouldn't work for us.  BUT turns out there is vacant land next door to build our own apartment complex.  We wanted to jump on this opportunity initially because the numbers worked out to be AMAZING (before we knew about the condition of the one building).  The main thing is there tends to be more hands on work with the lower end rentals.  Not necessarily a bad thing, but typically the buildings are older, need more maintenance... etc.  Also depending on who you rent to, there may be more hoops to jump through (an example would be if you plan on taking those who have government housing assistance).  But I wouldn't be afraid of any of those.  Success in renting typically depends on the area you are in.  We have no problems renting our SFR.  The apartments we were looking at had an excellent (better than the areas average) tenancy rate.  Just make sure you do your homework before going ahead!  Best of luck!

Daniel Hoffman · Answer

Hey @Paul Amegatcher and @Ashley Schroeder

Thanks so much for your responses! It's given me a lot to think about.

My current tenants said they plan to stick around until next spring at least. So I think it would be best for me to use that time to sort it out.

Paul I would love to hear more about getting that 10% return on future property investment. I have this rental because my wife and I lived there. I have yet to get an investment property for the intention of renting it fro the get go. Have you had luck renting in lower cost areas?

Thanks again!Dan

@Ashley Schroederundefined

Paul Amegatcher · Answer

@Daniel Hoffman

This is a tough situation because I assume you are cash flowing now because of the lower mortgage on the current property.  If you cashout you will no longer cash flow.  You will be operating the property on a negative cash flow but still have the appreciation available for a future sale.  I'm not a big fan of paying off student loan debts since they are low interest debts.  My rationale is if I could take the same 120K equity and invest it real estate and get a 10% return on my money then I'm doing better than paying off a 5.2% loan.

You may want to consider selling the current rental and looking for other rentals in a low cost neighborhoods.  You can keep the rental and pay down the mortgage.  You can increase the rents if they are lower then current market rates.  This will open up your cash flow and even allow for the cashout refi to cashflow or break even.

Hope this gets you thinking about other options.

Paul