Should I Sell or Refinance?

Question

Hi BP friends,

I have 2 family house and I am trying to make a decision whether to refinance it or sell it. It is located in Worcester, MA and currently financed via FHA. I bough it a year ago. After all expenses it cash flow $500. If I list it now, I can probably sell it for $150,000 and after all costs make about $24,000. Should I make money and buy something larger or keep it and continue cash flow.

Basically, I can make this $24,000 in about 4-6 years or may be I could buy something that can cash flow $1,000 so I will make this money back twice as fast.

What would you do ?

Thank you,

Darina

Anthony Dooley · Answer

@Darina Pogodina selling is a taxable event, so your $24,000 doesn't look as good. Refinancing will enable you do get cash for another deal, no taxes, and allow you to keep a cash flowing asset.

Brian Bradley · Answer

It depends on what you originally purchased the property for and the numbers you ran based off your goal. Each property has its own investment strategy to hold or flip etc. What is your mid to long term goal with this property? I personally like to buy and hold for 5-6 years then sell and upgrade. Your goal should be set for the property before you make your offer. If you plan to hold for some amount of time then yes refinance if you can.

Brent Coombs · Answer

@Darina Pogodina, your answer would have been easier to answer yourself, if you had asked it before even buying it! It almost sounds like you did have that option in mind, but, the answer still relies on information only you can find out. Remember, you'll always need to live somewhere (which gets you zero cash flow for that portion), so, it's basically balancing whether you expect to make more profit in future by buying for appreciation or cash flow. Yes, everyone wants both, but invariably, all areas are likely to do better with one than with the other.Would a $24k profit mean that you've turned 3.5% equity a year ago into 20%+ equity now? If so, kudos. That means that you do have both options available now, and you'd be free to apply for a new FHA-approved loan once you refi out of your current one.My guess though is that your resulting cash flow won't be as attractive as you might think (make sure you crunch the numbers carefully), and your FHA-approved Lender may balk at your Debt-To-Income ratio once they take into account having two mortgages.Nonetheless, that's how the game is played. Keep on winning! All the best...

Darina Pogodina · Answer

@Brent Coombs, Thank you. If with refi I can still make good profit, I would refi and do another FHA. I have heard that banks come back with very low appraisal when people refinance, so I do not anticipate to make any cash out. The property has appreciated during this year by at least 10%, however, I am not sure if this will help with refinzncinf.

Sherif K. · Answer

Darina,Did you go with a low down payment with this FHA loan? If so then a refi will get rid of your PMI if your LTV is 80% or under. Hey - if the property is preforming well, why sell it when you can continue to cash-out refi down the line? If your long term goal is to create a portfolio of MFHs then it sounds like you're in it for the creation of wealth! This property looks like it meets your portfolio's criteria.SKEdit - Also, it looks like you calculated that you can make the $24,000 in 4-6 years based on the $500/month cashflow alone. But don't forget part of your monthly mortgage payment goes towards paying down your principal! You'r equity is growing every month you keep that property.

Darina Pogodina · Answer

Hello Sherif, Thank you very much for your response. Good points and thinking. I was considering to refinance and see what my monthly payments would be and if I could make a better deal with that option. I am working with my mortgage broker on that particular solution. My long term goal is a portfolio of Multi families. With that being said, I should keep my my multi family perhaps.

Sherif K. · Answer

Hey Darina,I think you should share what your long-term goals are in regards to not only this property but also your portfolio. If its an FHA loan and you bought it a year ago I'm assuming you still live in it. If so, and I don't want to know otherwise if you don't, then I think you're making out pretty well! How would a cash-out refi affect your cashflow? Once you refi you could also move out. Would you consider that? Keep in mind if you do plan to sell, aim to live in it for a total of two years so you can differ capital gains taxes.Personally, I find the buy and hold strategy more attractive than flipping. But thats just what aligns with my long-term goals. Your's may be different.Good luck!SK