Lots of equity and cash flow...what should I do?

Question

I have a side by side duplex I have been house hacking for the last 4 years and I am unsure if I should keep it or sell it. I want to move to a single family (maybe build the house) but I don't have a ton of money saved (only 15k) because most of my money has been going into fixing it up. I bought it for 265k and I could probably get 450-500k. But I have been looking into splitting the duplex into two condos (yes I know it is a lot of work) and I could probably get 325-350k for each, netting me 650-700k.

Number:
* Mortgage interest 2.5%
* Mortgage principle 240k
* PITI $2100/month
* Rent 2200/month (current tenant on a two year lease)
* Potential rent on my side $2400/month
* 100k HELOC at 11% (fixed) (not currently being used)
* est additional cost to split the dueplex 75-100k (conservative, probably less)
*new siding 30k (just put on a new roof this year)
*legal 10-15k
*fire proofing 15k
* 15-40k for stuff I am not aware of or underestimated on

* some of the appreciation is external from the home
*big grocery store put in 3min away
* newly paved road in front of my house
*a building that was falling down across the street has been torn down
* Still a vacant lot with the foundation exposed and fencing around it (so more local improvements are on the way)

Part of me wants to take the money and run but man I love that 2.5% interest rate and the $2000/month cash flow (including taxes and capx)
I have thought about 1031 exchanging into more rentals, but I would like to pivot into storage units. Let me know if I am missing any numbers that would be helpful.

Noah Bacon · Answer

This is a great dilemma to be in, Brandon. Congrats on your success to this point in your investing career!Thank you for sharing the numbers, as I'm sure a lot of investors will have a lot of different ideas for you based on the outline you provide. When you move out of your duplex it looks like a homerun of a deal. But what if you did move out and keep the property as a rental, what would you look to do next? If you continue to house hack, I see no reason why you should sell the property.If you did a 1031 exchange, are you able to cashflow greater and/or target a better an area with higher appreciation rates? It really makes sense to me to hold onto the duplex or condos if you decided to split them for the long term and keep your focus on scaling with your HELOC and $15k saved, but again I am not sure what returns you are seeing if you do a 1031.

Jay Hinrichs · Answer

agree not sure sacrificing 250k tax free just for a low interest rate is really worth it.. once you grab that tax free money your off and running ...

Chris Lopez · Answer

@Brandon Bell Congrats on a great house hack!You're missing one factor: That you can sell your property and probably not pay capital gains since you've lived in the property for 2 our of the last 5 years.I'd split, sell and take the money (or most of it) cap gains free. Then you can deploy the proceeds as you see fitting without the 1031 constraints. You may have an amazing gift from Uncle Sam.

Logan Moir · Answer

Hi Brandon, I'm looking forward to hearing the responses too! Do you enjoy the security of your cashflowing duplex that doesn't need much maintenance? I had similar numbers with my first house hack (8 bed/4 bath duplex). I compared the cashflow + appreciation + loan paydown + tax deductions against those of the other properties I was considering a 1031 exchange or Section 121 into. I decided that in addition to the great return, I prefer the security of a property that can more than cover all expenses and savings with just one of the units. When rates drop to around 5%, I'll cash-out-refinance to redeploy all the money I put into the property. Until then, I can use a HELOC to tap the appreciation to rehab the next BRRRR. I used a HELOC on another property to rehab the duplex and loved the results.P.S. In the Seattle market, condoizing costs around 15K (survey, site plan, recording fees, legal fees, HOA creation and coaching from lawyer, setting up utility sub-metering if required). The lawyer usually also takes care of all of the coordination and coaching the new HOA in the first year.

Ken Buck · Answer

Coming from someone who's owned 7 duplexes, and about to build another (pm me if anyone is interested!)......If you don't keep the whole thing, I'd keep one side! someone else's money in your bank

Marina Sorbie · Answer

Thanks for sharing, Brandon, and congrats on your cash flow property! If I were you, I’d keep the duplex for the next three years. The appreciation and extra income are great benefits, and by holding onto it, you can take advantage of the 2.5% interest rate and $2000/month cash flow while avoiding capital gains taxes. Instead of selling or converting the duplex into condos, consider using your HELOC or a home equity loan to buy or build your new single-family home. The duplex is appreciating nicely, and area improvements (like the new grocery store and paved road) should keep that trend going. The $2000/month cash flow and the low 2.5% rate are tough to beat! You can leverage the equity in your duplex through a HELOC or home equity loan to help finance your new home without selling the duplex. With the ongoing improvements in your area, the value of your duplex could rise even more, giving you a bigger return in the future. That 2.5% interest rate on your mortgage is a huge advantage in today’s market. So, my suggestion is to keep the duplex and use a HELOC or home equity loan to get into your new single-family home. This move maximizes your benefits and sets you up for future opportunities. Good luck!

Eric Cheung · Answer

I'd sell and buy the single family that you want. Yes, the 2.5% rate is great, but that's 2.5% on $240k not on the $450-500k value of the house currently. You could potentially buy your house with cash and skip the mortgage. You can cash-out refi when rates drop and potentially buy another rental property. I'd skip the build process as it's timely and you need a construction loan and your overall financials appear tight for that. Selling and then buying likely makes the most sense.I don't think the Condo numbers feel right. There is also a lot of work, but the numbers for the buyers don't really work out. Buy for $325-350k what would rent for $2,400/month. The gross rent is roughly 8% before factoring in property taxes and insurance. With mortgage rates in the 7%+ area the buy vs. rent calculation doesn't make sense for a condo buyer.

Andrew Syrios · Answer

It's really hard to justify selling a property with a 2.5% mortgage. You can get homeowner loans even if you already have a property (you just can't have more than one FHA or VA loan at a time). Could you hold this one and try to buy a SFR for yourself with a bank mortgage?When I bought my house, I got a 5% down loan that was just from a local bank. It's worth looking into at least.