Seeking Advice on Investment Property Strategy: Cash-Out Refi, Raise Rent, or Sell?

Question

Hi, BP community,

I'm looking for some guidance on how to handle my current investment property. Here's the situation:

I own a tenant-occupied property, which is paid off and cleared. The tenant has lived there for almost 25 years, even before I acquired the property. When I took over, I raised the rent by 15%. However, due to rising insurance and tax costs, I'm starting to feel the financial pinch as the tenant currently pays rent 60% below the market average.

My long-term goal is to acquire more properties, and I've considered doing a cash-out refinance to access equity for reinvestment. However, I'm hesitant because the rent wouldn't cover the new mortgage, putting me net negative monthly. Selling the property has also crossed my mind, but I'm mindful of the tenant's situation.

I plan to raise the rent again by 15% in May when the lease renews, but I'm unsure if that's the best course of action.

So here's my dilemma:

• 1. Given the current rent situation and potential equity, should I sell the property?
• 2. Is a cash-out refinance a good strategy right now despite the risk of a negative cash flow?
• 3. Are there other approaches to balance my goals of reinvesting while being considerate of the long-term tenant?

I'd greatly appreciate any advice or strategies from those who've faced similar situations. Thanks in advance!

Jevani P. Barron · Answer

Thanks for the feedback, Taylor!

At market value, the property would generate solid cash flow. I’ve been doing well since raising the rent this past May—looking back, I’m glad I made that move, as it’s helped me stay afloat financially.

I currently have a few potential buyers who’ve submitted offers around 85-90% of the property’s recent appraisal value. Selling at that price would allow me to walk away with a six-figure payday. My plan would then be to diversify by partnering with my mother-in-law on fix-and-flip projects for a year or two, which would increase liquidity. Once that phase is complete, I’d transition back into long-term holds.

As for the cash-out refi, without at least doubling the rent, I’d be in a net-negative position each month, which doesn’t seem like a worthwhile trade-off.

On the tenant side, I agree with your point about the business aspect—it’s something I’m working on coming to terms with. I’m also considering advising my tenant to look into Section 8 assistance, as it could help support their financial situation while allowing me to adjust the rent closer to market levels.

Taylor Dasch · Answer

I battle with this a lot! First of all, if your at 60% I would raise to at least market value or even slightly below market at this point. When you are at market value does the property cash flow well? The real way to answer this question is to do a detailed break down of the numbers.

How much will you net if you sell the property? Then with that net, if you reinvest the $ into other real estate would you cash flow more / have a higher ROI?

With the cash out refi it would be the same you would just factor what you would cash flow with the new monthly payment.

As far as the tenant goes, it sucks to have to raise rent but its still a business and its likely that if they try to find another place, they will be stuck paying even higher rents than what yours is at if you increase it to 90% of market value.  Also, I personally wouldnt cash out refi right now just because the interest rates are high but thats just my opinion and it really just depends on the numbers if you want to make a calculated decision.

Wale Lawal · Answer

@Jevani P. Barron

From my experience, selling a property can free up equity for reinvestment but might disrupt tenants or result in losing a valuable asset. A cash-out refinance can provide liquidity while keeping the property, though it carries risks. Gradually raising rents, exploring lease buyouts, or selling with tenants in place are balanced alternatives. Always evaluate your options based on ROI and the impact on tenants to find the best path forward.

Good luck!

Taylor Dasch · Answer

I think the HELOC is the way to go if you can - However after reading your post, if you are talking about a 6 figure pay day, how long would the property take to generate that 6 figures in cash flow? It could make sense to just sell the place.

Jevani P. Barron · Answer

@Alecia Loveless Thanks for the feedback!

Do you have any insights on HELOCs that you could share? I am considering one because it allows me to leverage my equity without refinancing. A cash-out refinance would mean taking on an entirely new mortgage, which may not be necessary at this time. The HELOC option seems the most practical, especially given my current rent level. It would enable me to access the equity in my home whenever needed, allowing me to take out a smaller amount, such as enough for a down payment on another home.  @Taylor Dasch - Any thoughts here?

Alecia Loveless · Answer

@Jevani P. Barron I would only consider selling if the gain would allow me to buy a better property with considerably more cash flow.

Long term rentals typically require much less work than a fix and flip. If you’re looking for a more full time job I’d consider that. If not I’d consider staying with the rental and raising the rent to market rate at lease renewal in May.

I’ve had about a 60% turnover on units that were under and I’ve brought current. The other 40% realizes it will cost a lot of time and effort to move and that they’ll likely be paying even more afterwards.

Since the tenant has been there a long time your market rent will be less than market rent for a newly renovated place which should be a consideration of the tenants.

For instance I’ve got a building that still has 3 unrenovated units. Fair market rent for these is $800. The other 4 similar units that have been renovated fair market rent is $950.

Seeking Advice on Investment Property Strategy: Cash-Out Refi, Raise Rent, or Sell?

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