Selling Home vs Cash-Out Refinance??

Question

Hi everyone, if I need cash for an investment project, which is preferred way to get it: selling a current property to get the cash, or keep the property, rent it out, and do a cash-out refinance? A few conditions are listed below:

- The existing property can be qualified as primary residence, and there will be no capital gain tax if sold.

- The existing property has a small mortgage left.

- If I rent out the property at the current market rate, the income is no enough to cover the refinance payment and the cash flow will be negative, assuming the refinancing amount is 75% of the home value and an interest rate of 3%

- There is a chance I won't get my rent income on time given NYC has suspended rent payment

- Given this apartment is in NYC and close to subway, there is a chance for appreciation over the long term.

Some insights into the pros and cons of the two approaches would be highly appreciated. Thanks in advance!

Ryan Elblein · Answer

I agree with @Brenden Mitchum on this. You have a whole lot of potential negatives if you hold the property. One additional thought to what Brenden said would be what is the potential of the new investment project? If the potential of the new investment project is even worst than holding this property then maybe you have a tougher decision. However, in my mind if I can get rid of a property that will have negative cash flow, without paying capital gains, and use that money for another investment that will have positive cash flow then it is a no brainer. Either way make sure you run the numbers several times and are comfortable with them before you make your decision.

Brenden Mitchum · Answer

Hey @Darren Chang

Okay, so if you refinance your cash flow will be negative? Then, if home values plummet you will be stuck with a negative cash flowing property that is underwater..

I would say this is a no-brainer, but hopefully someone will hop in with a counter-argument. I do not think you should ever refinance and rent out if you will have negative cash flow. That is not an investment, it's a liability. I also would never invest for appreciation alone because then I might as well invest in the stock market - at least then I can distribute my risk a bit more.

No capital gains tax is further reason you should sell the property because you don't even have to worry about a 1031 exchange. This is the route I would choose.

Hopefully this helps a bit but don't just sell because some guy on the internet told you it was a good idea. Sit down and run the numbers on both situations and decide what works best for you and your family.

And if you have other questions or just want to chat, please feel free to message me anytime!

Darren Chang · Answer

Thanks @Brenden Mitchum and @Ryan Elblein. I think these are sounds advises.