Selling a rental property to pay off my primary residence

General Landlording & Rental Properties
5yFollow

Selling a rental property to pay off my primary residence

Roger E Terry
Member since 2021 · 2 posts · 0 votes

Considering selling a rental unit to pay off my primary residence.  I have 2 townhouses in a very good area about 4 hours from my primary residence.  From the outside the two combined look like a duplex and share a common yard even though they are 2 separate properties.  They are worth approximately $250,000 each.  I owe $74,000 one one and $96,000 on the other.  Currently renting for $915 and $880 respectively although I will raise the rents by 8% in one month.  The interest rates are 5.25% and 4.5%.

My primary residence is worth about $250,000 and I owe $99,000. I have a "mother-in-law" apartment over the garage that I rent for $635/month.  Currently in the process of refinancing my primary mortgage but will terminate the process if I decide to pay it off with the equity of one of the town houses (after paying capital gains tax of course).  

Do you think I should sell one of the townhouses to pay of my primary residence or continue as is and continue with the refinancing process?  It is nice to have "control" of both properties as they are essentially a duplex with a common yard.  The yard could easily be divided with a fence.

0Reply
24 views

4 Replies

Jump to latestLatest
  • Patrick M.
    Rental Property Investor · Red Bank, NJ · Member since 2017 · 1k+ posts · 1k+ votes
    5y

    What are the terms of your refinance? I am assuming you are going in for a better rate, shorter term?

    There is equity to be had in the "duplex" I think I would be more interested to see how the numbers worked considering:

    1. Pulling the equity out to add a new rental property and moving forward with the refinance.

    2. Pulling the money out to pay off the mortgage. Not my choice... just burying money in the dirt.

    I am not into the idea of selling if these are income producing properties... there are a lot of variables that are missing.

    0Reply
  • Justin Phillips
    Lender · Phoenix, AZ · Member since 2018 · 440 posts · 256 votes
    5y

    If you plan on keeping one of the properties, and they're essentially connected, I'd say keep them both. If one was 2 hours in one direction, and the other was 2 hours in the opposite direction, that would be different. It probably doesn't add too much extra hassle having both. 
    If you're looking to pay down debt, mathematically it makes the most sense to start with the highest interest rate. What I would recommend would be setting up a 1st position Heloc on your primary, and snowballing the debt from there. You could set that up to 80% LTV, so $200k credit line. Roll in the property with the highest interest rate, and allow all your income to go towards paying that debt down. As soon as there's room on your line, write a check and pay off the other rental from your line. With each property you pay off, it will get to $0 even quicker than the last with the added cash-flow freed up from getting rid of that debt service.
    That's the most efficient and cheapest way to get to 3 paid off homes, and you'll retain access to your equity for 30 years on the primary.

    0Reply
  • Roger E Terry
    OP
    Member since 2021 · 2 posts · 0 votes
    5y

    Wow, fascinating stuff.  Just from doing research from the two replies above I've learned a lot. Thank you.

    Here are the "rough" terms.  

    Primary:  Value:  $250,000.  I currently owe $100,000 at 4.75% (30 year fixed with maturity date of 10/2040).  Primary could use some renovations. Rental from mother-in-law apartment $635.

    Cash out refi at 80% LTV on a 15 year fixed would be approximately 2.875% (about $1300/month payment).

    Investment property A:  Value:  $250,000.  Currently owe $74,000 at 5.25% (30 year fixed).  Rental income $915/month.

    Investment property B:  Value:  $250,000.  Currently owe $96,000 at 4.5% (30 year fixed).  Rental income $880/month.

    Will be debt free other than mortgages in about 5 months (owe $5,700 on a car loan).

    A)  I did not look into a 30 year cash out refi but curious if that would be a good idea.

    B)  Looking for ideas/advice.  

    Thank you in advance.  I'm obviously a newbie when it comes to real estate investing but will be researching more intensely once I finish this refi so any thoughts are greatly appreciated.  Recovering Dave Ramsey listener.  

    0Reply
  • Heath Thomas Jr
    Lender · Baltimore MD · Member since 2015 · 202 posts · 67 votes
    5y

    Hey @Roger E Terry you certainly have multiple options which doesn't hurt. If you are a recovering Ramsey listener, I would assume you realize not all debt is bad. I would put mortgage debt in that camp if you are turning a profit (or it is your primary residence). If your goal is to still pay down that debt, I would recommend at least refinancing both your investment properties. Depending on how far along you are in the 30-year mortgages, you could lower your rate and payments without adding too much additional term. In my view, rates are historically low, so if you plan to hold these properties for the long term, refi them into 30 years again to lock in low payments. I don't know what your payments are, but you could also probably take cash out of both and still turn a profit. 

    On your primary, I would do the same thing so you can make renovations. Could also consider a 20-year term to lower your payment and not add much time to when you would originally have paid it off. But again, with rates where they are, why not consider a 30-year term too?

    TL;DR

    Option A: CONSERVATIVE - Rate/term refi both investment properties to lower rates (possibly significantly depending on your credit, DTI, etc); cashout refi for 15 years on primary to do renovations.

    Option B: AGGRESSIVE - Cashout refi both investment properties to 60-75% ltv (or whatever you are comfortable with to keep net income positive); cashout refi for 30 years on primary to minimize payment; buy another property or two with additional cash you now have!

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free