Refinance/HELOC vs Sell?

Question

Hi, I'm looking on some advice for my next step. In October of 2016 I bought a 4-5 unit building for $655K in Chicago (5% down). This is legally a 4 unit building, we have restored it to 4 units, but it has a mega unit that I've been rehabbing (fixing up and combining a large artist studio into another apartment). Now that I'm about done with the rehab I'm looking for my next purchase, my plan had been to Refi or do a HELOC, but I keep getting hit with email appraisals for my current home that have the value between $950K-$1.2mil. So my question is, would it be smarter for me to sell? I've put a lot of work into the building and into our unit, but I don't want that to cloud my judgement.

Pertinent info:

- Rent from 3 of the units covers all but $350 of the mortgage, taxes & insurance.

- Meaning, I live in the 2000sqft mega unit for $350/month. Very soon this will be for free (my rents aren't at their max - I'm keeping them at 80% of AMI to qualify as affordable housing and get other benefits that way - think free energy efficiency & solar, etc.).

- Mega unit could bring in at least $2000/month - I would have to pay at least $1500/month for a home for my family for a unit half the size.

- At point of sale there was a large single family home that sold for $700K just across the street. Now there is one in the middle of the street that just sold for $850K.

-Two-flats are selling for $500K-$600K right now that 3-4 years ago sold for $150K-$200K. So I guess I'm believing the hype, but should I?

- I haven't talked to a banker yet, but I'm seeing refis for 3.3%, and I have very good credit and two very solid W2 full time jobs in our household.

- Was planning to invest next in 3-4 unit buildings that run $150K-$300K- cashflowing at $800-$1000/month/building. I've done all the math, and there are a good number of these in the low/mod income areas I like to work in. (I work in affordable housing professionally)

- I'd like to reach FI in the next 7-10 years via realestate investing.

So if values are right... Should I walk away from this building with a pile of cash to invest in more buildings, or should I refi or HELOC to buy more buildings that way?

Side question, what do you think about these online appraisals? Are any of them worth their salt?

Thanks so much!

-Anna

Jeff Burdick · Answer

Hi Anna! Fellow Chicago investor here. You give a lot of information in your post...so here are my thoughts...Sell, cash out refi, or HELOC largely depend what your goals are, both short term and long. If I were in your situation, I'd do a cash out refi(just did one in April, actually on our current four flat) and then depending on what equity is left, consider adding a HELOC as well. Your cash flow numbers aren't great on the surface, but when you factor in your living space, they sound okay. What neighborhood is this property in? I would take email appraisals with a grain of salt. Some lenders will say anything to try to get your business. You ask "So if values are right... Should I walk away from this building with a pile of cash to invest in more buildings, or should I refi or HELOC to buy more buildings that way?" These two are not mutually exclusive. My wife and I just did a cash out refi on our four flat and received a money wire with an amount of cash that would've taken me 3 years to earn at my old W2 job. We're now in the process of adding a HELOC on top of it. You can get the pile of cash without selling the property. If long term appreciation is that strong, this would be the best course of action IMO.

Michael Facchini · Answer

I agree with @Jeff Burdick, it does depend on your short/long-term goals, investment objectives, etc. Chicago is a tougher place to make numbers look fantastic right out of the gates. It takes time, and you've already passed the greatest barriers to entry with purchasing, those costs, rehab, etc. You're also using this as a primary residence, living for cheap, and have a massing 2k sq foot place. There's value to all that. If you can leverage, intelligently, to put yourself into another property that cash-flows but still cash-flow on the subject, that's certainly worth looking into. But because this is likely a long-term play in this instance, I'd stay away from a HELOC and focus on fixed rates.

Anna Markowski · Answer

I really appreciate the advice. My building is in Humboldt Park. I'm looking to buy my second in Woodlawn, South Shore, maybe Auburn Gresham. Not completely sure, but that's where it looks like the numbers work out to allow us to keep providing quality affordable housing while still setting up what I call my non-profit pension via realestate. :) I'm thinking 1-2 10ish unit buildings in those neighborhoods would greatly accelerate my plans and could be done if things appraise out where I think they should. No way I could afford anything in Humboldt Park right now for my second building while providing low income housing. The market is just too crazy. Where are you invested? I'm thinking the refi sounds like it might be the best option, but I also like the idea of having a HELOC for immediate rehab needs that might come up. HELOCs are usually have shorter terms from my understanding, so that would be my only hesitancy on pulling out too much that way. I'll have the building appraised in a couple months once all the work is done and report back on the path I'm taking.Thanks again!

Jeff Burdick · Answer

Hi Anna. I have a 3 unit in Irving Park and a 4 unit in Edgewater. The advantage of the HELOC is that you only pay interest on it while you're using it. The disadvantage of it is that the rate is usually adjustable...so if you have a large HELOC deployed and interest rates go up, it can really impact your numbers...especially if youre using it over a long period of time.

Anna Markowski · Answer

Interesting... I guess I think of the money I'd be taking out against the cash flow of a new building, not the existing. Does this make sense? Is that not the correct way to think about it? So I basically evaluate all the properties I'm looking at as though they at 100% loan, with 80% of that loan being on the building itself, and 20% of that loan being on the note for the first building. From that stand point I then evaluate what the cash flow would be for that second building, after 100% of those loans are paid, taxes, insurance, utilities, property management and CapEx. I guess I don't see it as the responsibility of the first building to pay for the second, just to create the opportunity to buy the second. And then view that that second building should take care of all the funds required to purchase it, no matter where they come from. So I don't see it as effecting the cash flow on building one. Perhaps this is a silly way of looking at it though. I'm happy to be shown/learn how I'm doing this wrong or thinking about it incorrectly. Thanks!

Larry Turowski · Answer

But what would be your cash flow if you took advantage of the equity by taking a HELOC?

Anna Markowski · Answer

Thanks so much for your response Larry! What do you mean in terms of cash flow? If I were to rent out the unit I live in, after all expenses, including CapEx I’d be netting $1000 on the low end/month. That’s $250 a door. As is, I don’t net that, but I live for free, so I net the savings. In major city like Chicago $250/door in cash flow is very good. I can invest in some lower income neighborhoods and get even better, which is my plan, but I’m assuming I will end up with more work for those units as well. I’m pretty happy with $250 a door though as is.

Larry Turowski · Answer

@Anna Markowski You do not give complete details, but at first blush it sounds like it may not be the best property for cash flow.If this is your primary residence and you've lived in it for 2 years (Oct 2016 - Oct 2018, or Nov 2018 to be safe), you are eligible to not pay federal taxes on the first 250K if single, or 500K if married and filing jointly (https://www.irs.gov/taxtopics/tc701). So, I would consider selling it when you are ready. But make sure of all your numbers before making a decision--what your house will likely sell for, and your tax advantages.