Sell and Buy, or Heloc and Rent?

Question

Hello BP,

I’m deciding between 2 options and would love some guidance.

Our family just grew and we are looking to get into a new home. Our current mortgage has built up quite a bit of equity over the last few years and trying to figure out the best course forward. My goal is to own 2 rental properties this year, but also want to be wise with how I get there.

Option 1: Keep current house with low interest rate and use a heloc for a DP on the new property and keep the current one for a rental.

Option 2: Sell the current house and use that for a down payment and finish paying off some low interest debt, then save up for a rental.

Any advice would be appreciated!

Josh Matteson · Answer

Hey Milton, Thanks for the response! I've been pushing a house hack, but I think she is out on the idea at this time with a 7 month baby in the fold. We are actually looking even further south in Olathe/Gardner. Things seem to be ranging anywhere from 290-350 out there! Also, let me see if I can clear up those numbers. $1450 is our current mortgage, + the potential $750 cashflow if we rent it out for $2200. The new mortgage might be around $2500 (which is a conservative estimate based on recent preapproval estimates) and the $200 is another conservative estimate on the interest-only heloc payment. I would use the cash flow and additional savings rate to quickly pay down that heloc (likely in 18 months or less).

Bud Gaffney · Answer

@Josh Matteson option 1 ! ! ! HOLD

Caleb Brown · Answer

Hey! Local agent. Overland Park has been going crazy and hasn't slowed down. I would try to hold on and keep it if you can. There is a lot of development going in around Johnson County area. Is the next property you buying a house hack or a personal home? Want to make sure I understand. If you move out of the current home I wouldn't use a HELOC for another unless it was a house hack or a straight rental.

Josh Matteson · Answer

Thank you all! Here is a little breakdown of the numbers:

This example is located in the Kansas City Metro (specifically Overland Park).

- The current house is a monthly payment of $1450 at 3.375%. Heloc on this was approved at 10.49%. The 3bd/3br home in my area is currently renting for around $2200. The home valuation came in at $303K in Dec 2022 and currently owe $217K on the loan.

- Hypothetical "next house" was recently preapproved at 5.99% and the payment would amount to around $2400-$2600, depending on the overall purchase price of the home we find. Meaning we would probably add around $1000/month on the personal mortgage. DP in this example would be the minimum 3.5% of a potential $325-$350K home. So, for sake of the example, let's say 15K on the heloc.

The rental income alone isn't enough to offset the change in the mortgage, but we would reallocate current savings and rental income to pay off that HELOC as quickly as possible.

Payment now -- $1450 + $750 hypothetical rental income
Payment with new mortgage -- $2500 + HELOC payment (conservatively estimated) $200+additional principal

Dustin Street · Answer

@Josh Matteson I'm an agent here in KC, on the investing side of things. We like to think of ourselves as "tip of the spear" since being in investing allows us to see changes first. If you're able to hold onto it, you should highly consider that. I would never tell you what to do, however Johnson County is never NOT in high demand. The prices are ALWAYS going up over there, and as time goes on, deals there are getting harder and harder to locate. With JoCo being one of Zillow's most searched areas, KC on track to be one of America's best markets this year, the growth the city is looking at, and the fact that JoCo is debatably the best suburb in KC, with some of the best schools, holding onto a property there just makes sense.

Hope this helps!

Josh Matteson · Answer

Hey Lawrence, Somewhat new to this.. are you looking for numbers other than what I already shared earlier today? Thanks!

Lawrence Potts · Answer

Hard to say without any numbers!

Initially, I'd say take a HELOC and use that as a down payment to purchase the new home for you and the family.

Sometimes it makes sense to sell though. I sold my first home that was a SFR and didn't make much but had enough to buy a 4plex to house hack. And that was the best decision we ever made.

Just make sure that each transaction takes you closer to your goals. If it's to cashflow, make sure you are buying properties that take you there. If it's to build up capital to buy large apartments through live-in-flips or building equity and doing 1031's, those properties need to be aligned with that goal.

We would love to take a look at the numbers, but the above need to be considered too.

Just note, you can deduct capital gains if you live in the property in 2 of the most recent 5 years. If that helps run your numbers if you are considering selling.

Hope that helps! Post your numbers!

Daniel Mar · Answer

I would go with option 1.

Milton Chamberlain · Answer

Hi Josh,

Can you convince the wife to house hack? kill two birds with one stone? I understand that undermines the desire of finding a larger home, as there are no traditional side by side duplexes with 3+ bedrooms in A markets for sale under 350 k in the KC Metro.

BUT that scenario would satisfy your goal of owning two rental properties... Use your FHA for a multi and live in it for one year? Then you could buy a home that better suits your family size after you satisfied the one year as owner occupant while renting the other side? Once again though, tough to find a 3bed/unit in OP area <425k...

I assume you want to stay in OP? I see a few 2 stories >2000 sq ft with >4 beds in OP right now for 350-400...been on market for a while so I imagine you could get seller's to buy down rates or cover some of your closing costs. or maybe lower price.

Personally, I am in a similar situation with my primary residence in Liberty MO. I couldn't convince my wife to sell and use the proceeds to buy a duplex to house hack :) so we pulled a HELOC on it through bank of the west. sounds like similar terms to yours. I just used $44,000 of my HELOC to rehab one of our rental properties. Our interest-only payment/month is $338 (at 9.12% rate).

Sounds like you have savings to hypothetically pay off the HELOC quickly? (within a year or two?)

"Payment now -- $1450 + $750 hypothetical rental incomePayment with new mortgage -- $2500 + HELOC payment (conservatively estimated) $200+additional principal"These numbers tripped me up for some reason...I can't really follow them or understand what they mean, so feel free to contact me and you can talk me through them so I can better understand your situation and goals.

HOWEVER, to answer your initial question; if I were in your shoes, I would NOT sell your current house if at all possible. You will never get that price again, and you will most likely not see that rate again for many years, if at all. That is some great cash flow, particularly if you re going to self manage. So to answer your question, I personally would use the HELOC for a dp on a bigger home vs selling and using the proceeds to buy your new home (and then slowly saving to buy a rental)

Ben Rhodin · Answer

Hey @Josh Matteson! This is one of the most common and one of my favorite questions. I have helped numerous other clients through this exact scenario, and the answer is simple and just requires looking at the numbers. You'll find the answer once you find out where your money goes the furthest. Without some more info, it is hard to guide you in the right direction.

Would want to know what market you are in, what your current home looks like, what your equity is, and what the current property could rent for.

If you do choose to keep the property, and are planning to use the equity to buy another one. I would consider a cash-out refinance as well. The HELOC is great for short-term money, that can be re-utilized. So if you want to use the HELOC, I would push towards a BRRRR where you can then repay the HELOC and recycle it. This is mainly due to the HELOC being more expensive over the long term than a Refinance, so if you strictly want to buy and hold, it may be worth doing a cash-out instead.

In the end, either of your options will get you to your end goal. The question is can your current property support the additional HELOC payment, along with the current mortgage? Or can it support a cash-out refinance? Another question is, is this a property that I want to own in 5-10 years? Is it in such a great area, that the short-term cash flow on the property is not important as the long-term appreciation and desirability of the asset will offset the short-term cash flow? If that is a yes, then you may want to hold it even if it's not the answer in the numbers.

To cut to the chase, and since I don't have the necessary info, just take your current property, and calculate what you would net from selling it, vs pulling a cash out or HELOC on it. (Side note... Do the HELOC while you are still owner-occupying to get a better rate and terms). Then look at those Nets and see what you may be able to do with it, if you could spread them across two properties, or if you'll only be able to get one. In most cases, you'll net more by selling the property, but it's usually not enough to make a difference. The answer will come if your current home still makes sense to keep financially even with the HELOC or Cash out. Or if your overall returns will be greater by selling it, and not having an additional debt to be paid.

There are numerous other factors that I didn't touch on, such as Lending, and personal aspects. There is no one size fits all answer here, it will depend on your situation and your goals. Sometimes the answer isn't always the one that makes sense on paper, so I suggest reaching out and we can dig into it together!

Sell and Buy, or Heloc and Rent?

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