Refinance cashout and sell?

Question

HelloMy first home is a triplex (owner occupied ,20 percent down,30 year mortgage,3.5 interest rate) and it's been almost two years and it's positive cash flowing and I also see some appreciation,would it make sense for me to refinance and then sell?Appreciate your input.

Dave Foster · Answer

@Kumar Gaurav, Someone else said this in a forum the other day but it really resonated with me. The answer to your question lies in the answer to another question - "If you did a cash out refi and the property you own right now was available would you buy it with the new loan terms your anticipating ? If so then it' could be worth keeping and refinancing. If the answer is no then I'd question the wisdom of holding on to it now. In a refi you do not get access to 100% of the equity. So there's some limitations on what it lets you do in new acquisitions. The refi also will dilute your current cash flow. So you' need to get a really good handle on what your NOI will be after a refi in order to make a good decision. And while we'd love appreciation to always be there - It's entirely possible that in a long term hold with multiple refinances you could conceivably sell in a must situation with no 1031 and not generate enough cash from the sale to pay the tax. This is because while a refi isn't taxable it is a way of getting at profit (equity) tax free. So if you've drained that and the sneaky little thing called depreciation recapture hit you it can really hurt at a time when you're selling cause you have to anyway. FWIW you might be better served to complete your relocation. Get familiar with the market once your boots are on the ground. And then look at a sale/1031/redeployment of asset near you. It sounds like it's either on autopilot now or you could spend minimal time on it for a little bit and not get hurt.

Dave Foster · Answer

@Kumar Gaurav That was just a tongue in cheek way of saying - run don't walk to get it refinanced :)

Dave Foster · Answer

@Kumar Gaurav, that's a great catch by @Matt Devincenzo and what in my mind would be the game changer. If the triplex is not already a good investment it will be less so if you have to use an investment loan on it. So unless you are still in it and planning to stay in it That points strongly to sell. But here's the other side of it. If you're actually residing in one unit and it's cash flowing with two so you're not only getting NOI but also a free place to live then I wouldn't even leave the house to get a new loan. I'd make the lender come to you to sign the refi papers!! If you sell you will get 1/3rd of the profit tax free. No need to reinvest. Put the money in your pocket. And you can do a 1031 on the 2/3rds. So a really nice way to access tax free and tax deferred money and shuffle your portfolio a bit.

Matt Devincenzo · Answer

@Kumar Gaurav it is 2 out of the last 5 years. You have currently met the two year requirement, if you move out you will start a 3 year clock where after the 3 years passes you no longer meet the two out of five standard.

Matt Devincenzo · Answer

Two other considerations here. 1) you said OO meaning selling within the next 3 years will generate a tax free 'gain' for the owner occupied portion of your property, so that could influence your decision process. 2) If you refi you will have fees to pay, so the question is are those fees worth it. My guess is if you are already considering selling you will lose money on the transaction costs of a refi because you won't own it long enough afterwards to justify the expenses. A Heloc may be a better option since the rate is higher but the loan costs tend to be lower, and on OO you can (generally) borrow a significant LTV (around 85-90%)

Wayne Brooks · Answer

@Kumar Gaurav For a refinance you can get loan up whatever ltv they offer for an owner occupied duplex, maybe 80-90% of current value.....subtract your current loan balance and closing costs....that is the cash you would get in hand.But, it makes no sense to refi if you are going to sell soon....you’ll get All the equity when you sell, with no refinance costs.

Kumar Gaurav · Answer

@Dave FosterThank you so much Dave this will help me make an educated decision.I am also somewhat confused on what exactly is equity in the context of refinance,"is it the principal amount paid as part of loan payment so far"or"Difference in appreciation since the property was last bought"

Kumar Gaurav · Answer

@Dave FosterThanks Dave.How can we make the lender come and want to sign the refinance papers?I guess I will have to somehow demonstrate to the lender that I have strong cash flow?

Kumar Gaurav · Answer

@Matt DevincenzoThanks a lot Matt,I thought the stipulation for"Tax free gain for the OO portion" is 2 years (which is already the case for me) did that change to 3 years recently?

Alan Grobmeier · Answer

@Kamal Pandey, you will be taking off depreciation expense every year. If you sell and do NOT do a 1031 exchange, you will have to pay tax on depreciation recapture. It doesn’t matter if it’s 1 year or 20 years. But there is another way out: Die and leave the property to your heirs. Depreciation expense is wiped out and a new cost basis is created. ;-)