Hot Market-Sell? or Cash out refi?

Question

Hey, BP collective. I'm looking for some advice on my situation.

Said situation:

My wife and I own a SFH, that we bought in 2015, before we got into real estate investing. We've since moved out and now rent out the property.

It is in an area that has appreciated rapidly and is extremely desirable for tenants.

Some facts (as of now):

The property cash flows. We occupied it as a primary residence two out of the past five years. We can command strong rents and have a very healthy tenant pool.

Some numbers:

Based on the comps, I believe we could sell for north of 200k (let's say 210k for the sake of math)
We purchased the property for 130k and currently owe 117k
The mortgage, all in (PMI included) is about $970
The rent is currently $1625/month (tenants now on month to month)

Our strategy is really buy and hold. However, I don't want to operate blind to opportunity.

We're just past the one year owner occupant requirement in our duplex hack. Of which both sides will be renovated and ready for tenants in the next few months.

We're ready for our next property and would like to do one more hack before buying pure investment from the onset.

I don't want to kill our cash cow, but I can't ignore the fact that selling at a peak could put us in a position to grow our cash cow heard.

What are your thoughts?

Thank you in advance, -Q

Derek Dombeck · Answer

The answer really depends on what you will do with the 75k to 80k that you will have from the sale. Right now, that money will be tax free. If you hold on to the property for a few more years, you will lose the exemption and then your 130k basis in the property could get you a huge capital gain tax in the future. If you pay that loan off and free up some credit availability plus you have cash for down payments, you may be able to buy several more rentals with the sale of this property.

On the flip side, you could cash out/ refinance and pull about 50k of equity out. This is not taxable either, since it is a loan, and go buy more units as well.

Or my favorite, do a little of both.

1. Refinance with great rates and terms to pull some cash out. About 50K

2. Put a tenant/buyer in the house on a lease with an option to purchase. Be sure to keep the length of the option period shorter than the time you have left on your 2 of 5 year exemption so you avoid capital gains. You should be able to get a premium sale price as well as the upfront NON- REFUNDABLE option fee. At least 10k in my opinion.

There's other possibilities, but those are both easy to do.

Happy Investing

Derek Dombeck