Exit Decision Opinions

[James Derrick]

Hello, I am in the process of making a change this fall and have a couple of avenues to choose from. I would greatly appreciate some input as I am having a hard time deciding what is the smartest decision!

I bought a two dwelling single family home in Austin, TX on the last day of 2019 for $415k. I currently live in the separate garage apartment and rent out the main house to a family for $2500 a month +2/3 bills while I carry a mortgage around $2200 a month.

This house is on the west side near the lakes and is roughly a 40 minute commute to a couple hospitals that are my main places of business. I am in the process of opening a smoothie franchise and have LOIs pending for retail locations central to the city. In order to maintain my current career and be able to dedicate time to growing this business, I plan to relocate near the smoothie store to remove multiple commutes. The opportunities are aligning as the tenant's family is growing and they have asked if they could rent my entire property. So now, the choices:

- Rent the home in full and maximize the property's cash flow by increasing rent to $3300-3500 a month.

- Sell the property to capture Austin's spike in home values, with current estimates for this home are $680-800k. I would wait until January 2022 as this will be my two year of residency mark.

- Rent the full home and cash out refinance. This would decrease my cashflow, but allow me to not miss out on the wild amount of appreciation that has occurred.

- Rent the full home and setup a HELOC to have the appreciation gain available should a great opportunity come my way.

Ideally, I would like to continue renting the home as I could see myself returning to the west side in a few years. It is a unique .6 acre lot backing up to a nature preserve that I am not confident I could duplicate at a reasonable cost. However, I am concerned that these values will stop rising or possibly drop and I don't want to miss the opportunity for such a great 2 year return.

To complicate the decision further, the next question is what living situation would I choose for my in town move? I am tabling that decision for the time being until I have secured the smoothie store's location. 

So what would YOU do?

[Dan Schwartz]

1) I would absolutely live there until you pass the 2 year mark, unless it's so inconvenient that it tanks your new venture.  Then you can defer the sale decision for a few years without forfeiting the tax benefits.

2) If you need capital for your new venture (franchise fee, leases, etc.) and were planning on using savings to fund some or all of those costs, cash out refi before the complexity of doing so increases with the nascent smoothie business.  Take advantage of the appreciated property value, the low interest rates, and (hopefully) ease of refinancing in your current situation.  Talk with your tax advisor about making sure that the interest on the proceeds of your refi are deductible by the smoothie business, and conserve your personal savings as much as possible.

3) If you don't need any capital for the new venture, then yes, a HELOC is a good idea for liquidity. Again, close it before the smoothie business impairs your balance sheet (which it likely will, initially). New entrepreneurs are very risky to lenders.

That's the tight path I'd navigate.  Once the dust settles, re-assess your overall situation and see if the property still makes sense.  But my answer allows you to lock in the tax benefits and access the equity while being tax-efficient with the additional interest costs.  

Good luck!