Refinance - am I making a mistake?

Question

First time poster, long time reader.

Not sure where to post this.

We have a home in Sherwood Oregon that we bought in 2005, it's appreciated nicely and we have been told that we could easily get 365k or above in this CRAZY seller's market right now, netting us about 165k.

Here's the rub - we tried to sell in 2015, and because we only have one bathroom (house was built in the 1950's, completely renovated in 2005 to a traditional Craftsman style, but because of the unique footprint no extra bathroom was added and it would cost 100k+ to add a bathroom) the house did not sell. We have been advised by someone we trust that it would be a fantastic rental. We do plan to move in the next couple of years as the house has become way too small for us.

So we decided to refinance and do some home improvements; we have a huge lot and we're planning on doing some landscaping infrastructure type work. To do this, we planned on refinancing -we have a TON of equity, and would also clear up roughly 1800 a month in cash flow by paying off a few bills here and there. Our mortgage would only increase by about 400, and our interest rate would be better.

Here's where I get stuck - I'm still learning about all of this. But this market is bananas. I'm wondering if we should try to sell again and sit on our equity? Or just keep the house for the long haul, and then in a couple years rent it, pull out some $$, and get another house. Of course a long term investment is always a better option. Right?

Peter M. · Answer

Overall it is a great problem to have. I can't tell you one way or another since nobody knows what the market will do in the next few years but one thing to keep in mind are the tax implications for both situations. If you sell it, the gains are tax free since it was your primary residence. You could then take the whole 165k to invest with or hold on until the market cools. The other option is to rent it out like you said and you still have 3 years to use the tax exclusion before you would have to pay capital gains on the proceeds since you will have lived in it for 2 of the past 5 years. After that you would either have to pay the tax or 1031 exchange it into more investment property. If you have never been a landlord before, learning the ropes on a home you have lived in and know inside and out can be a big benefit. Either way just keep in mind that nobody knows where the market will go. If you wait a few years to do anything you may get more or less than what you are predicting now. I, like Hunter, also prefer buy and hold, it is the best way to accumulate wealth but it is slow and boring not flashy and cool like flipping.

Michael Swan · Answer

I would keep it for another year and sell next summer. Refinancing to pay off debts and home improvements is a logical game. However, the better game would be to get your finances in line, get a part time job or two to pay off that bad debt, sell next summer or the summer after. Live like no one else for a year or two, so you can live like no one else later. Sit down with the family, make a T-Chart of wants and needs, cut down to bare bones on wants and tear into that bad debt that is holding you back. They are starting to give loans to people again with under 600 credit scores again. This will artificially prop up the housing market for a few more years.Swanny

Hunter Latta · Answer

Hi Wendy, I work with investors that do both fix and flip as well as buy and hold. Personally, I like buy and hold. If you can do some renovations, clear your mortgage and make some passive income that money you could be using to pay down your mortgage at another house. All the while, your equity in both properties (in ideal markets) would be going up, giving you more opportunity in the future to either sell at a higher point than now or refinance some cash out. Best part about this method, your tenant is paying for this strategy. Just gotta pencil out your options. I'd start by looking up your property on zillow and see what they predict the value to appreciate over the next year or two and start to project out those growth rates (being conservative is always better than being over ambitious and being disappointed later). Then on the same sheet of paper, project what you think you can get for rent. (test out your hypothesis by making an add for the amount you think you could get, if the phone rings off the hook, maybe think about increasing your asking rent). Subtract your expenses (Taxes and Insurance, property management and some small reserve for maintenance) from your projected gross rents and subtract your mortgage payments over the year and get your net cash flow. My guess, the buy and hold will start to look really good at this point.

Lisa Thoele · Answer

Totally understand about the hype Wendy! I think it depends on your goals and how you would use the proceeds. We rehabbed and sold our Sherwood house almost two years ago because we needed the equity to hit other goals and we had an opportunity to buy the property we have (a house and a fourplex) but if I could have held on to it I would have. I had so much equity I could have rented it out in a heartbeat and even two years later I would have been able to sell it for $50k more - however I don't regret taking advantage of the opportunity we had because its a better long term play for us (sfh vs. 4 plex). I think a lot of your value increase will depend on how much land they bring in on the other side of 99W and whether or not they ever get Brookman figured out but I'm guessing as a long term hold you are going to be fine as long as the schools stay strong in Sherwood. Most families or people with kiddos would pick your house to rent over an apartment any day! Just don't over improve it if you are going to rent it!! I'll FB message you! I love chatting investing! I sure don't have all the answers but would be so fun to see you!

Wendy Boswell · Answer

@Lisa Thoele HI! So good to hear from you! I agree with you about the high school coming in, if anything that has impacted our decision to hold on to it more strongly, I think Sherwood values are going to increase like crazy because of that. And we do have a huge lot, it's about .25 of an acre with a good size house on there too. I'm going to be pulling out a bit of equity to get better cash flow and do some home improvements. It's hard not to get swept away in the current house selling hype, know what i mean? I would love to get together with you btw! :)

Lisa Thoele · Answer

@Wendy BoswellHey Wendy!! I didn't know you were on BP! Its Lisa from CFA! I think Sherwood is such a great market to be in and there are very few rentals there that aren't apartments! I would hold on to it - if you buy into the hype on what the school district is doing I think prices will continue to be strong - even if there is a correction in the market if you have enough equity it won't impact you. You probably have a low enough mortgage - even with the re-fi that you could adjust even if rental rates went down a little. Having a big lot in Sherwood is so unusual - maybe its something you hold until development in Sherwood max's out and then you divide your lot? So many ways you could go! If you ever want to grab a coffee and chat investing just let me know!! I'd love to see you again!

Nels Norquist · Answer

great problem to have! I would guess if you listed it in 2016 it would have sold, and this spring has a similar feel. Hard to beat selling and get that big chunk tax free. You could put a down payment on a new place and a rental if you wanted.If you are going to keep it as a rental I would not put a bunch of money into landscaping ect. Use rentometer.com or Craigslist to figure out rent price and compare it to refi PITI and management fee, any other expenses you might haveI don't think 1 bathroom would keep from selling right now, check pending offers around you on redfin, see if any are moving.I'm trying to make the same decision for our house in west linn, can't complain about equity though haha