Should I try to sell Rental prop or Refi to generate cash?

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Sasquatch
Posts: 291
Joined: Mon Apr 09, 2018 12:44 pm

Should I try to sell Rental prop or Refi to generate cash?

Post by Sasquatch » Sat Sep 22, 2018 8:03 pm

UPDATE TO POST 9/22/18 9:15 PST
denovo wrote:
Sat Sep 22, 2018 10:37 pm
I feel like we need more info,

what's your household income from employment, No longer employed, 72t / Roth ladder starting this December

value of all assets:Net Worth $3.1M ($2.25M 401k, $500k primary res, $380k rental, personal property $90k, total debt $148k,

rental cash flow, Flows $15k annually.

savings rate...Starting decumulation phase

Retirement ages desired for you and spouseNow, 52 & 50

Kids you need to pay for education?No
ORIGINAL POST BELOW
Hello to all,

I am very perplexed by this situation and I could really use some opinions. This post is a bit lengthy but I will try my best to bring things full circle at the end.

I have adequate 401k dollars but I would really like to have a larger post tax account heading into retirement. I do have a rental property valued at approximately $380k I could either sell or refi to generate cash. The goal would be to consolidate debt (refi), or eliminate debt with sales proceeds. This property is a product of a 1031 exchange that started 12 years ago. If I do sell fed & state taxes will be about $46k including recapturing depreciation according to my CPA. I would have to pay off a $120k note as well.

I plan on doing a 72t distribution starting this December. A roth conversion ladder has been suggested as a alternative so I am weighing that.

Here is a look at the debt I am looking to restructure or cash out.

Rental note: Bal $120,000 @ 4% fixed 29 yrs. left on loan $600 pmt (P+I)
Auto loan; Bal $7600 @ 2.9% 1.5 yrs. left on loan $373 pmt
RV loan: Bal $15,500 @3.75% 6 yrs. left on loan $227 pmt
Furniture loan: Bal $5300 @ 0% 4 yrs. left on loan $88 pmt

A unknown expense on the horizon.

City is talking about making us convert from septic to city sewer. Expense: about $25k

Our primary residence is going to need a new roof in 2 years or less. Roofing contractor was out yesterday should have bids flowing in next week.

I need to get a HVAC tech out to the primary res. for a furnace assessment. Seems like it would need replacing earlier than 10 years.

The rest of our primary res. has recently been gutted and renovated including new windows so I feel like I am covered there.


I have run several budget scenarios which are summarized below.

Refi Rental: New note balance on rental 30yr fixed @ 5.375 $200k. Payoff all debt listed above including the proposed sewer conversion and $30k cash leaves me with a balance of about $66k (which includes the Dec. 72t distribution less taxes)likely to be put in CDs. Spending budget wise I would need about $4k mo net living expenses. Add another $10k in taxes brings me in at $58k. The rental still flows appx $2.5k annually so 72t would be about $55k or 2.4% WR. A 25% market drawdown on 401k balance would bring me in at 3.3% WR. Since I am under the ACA Cliff. Healthcare premiums in budget are reduced in this scenario.

No refi: leave all debt the way it currently is. Leaves 30k cash. Rental prop flows $8400 net. Pull $73k from 401k to cover living expenses and taxes. Gross income would be about $82k. Since over ACA cliff I added $12k to budget for increase in insurance premiums. 72t draw is 3.3% WR. 25% drawdown 4.47% WR

Sell Rental and cash out all debt. Also allows for $25k sewer and $30k cash. Dec 72t distribution included leaves me with a cash balance of $170k which I could put into CDs @ 2.5% which would throw off $4k in interest. Budget needs are $48k annually net. Add 10k in taxes + CD income brings me in at $57k Gross. Under ACA cliff so premium reduction in budget. That brings 401k draw in at 2.6% WR. 25% drawdown 3.45% WR

I have no problem being a landlord but would like to be out of the business by age 60 anyway (8 years)

Rental property fails the 1% rule coming in at .56%

If you have made it this far my thanks. If you need clarification just ask and I will try to provide more information.

Sasquatch
Last edited by Sasquatch on Sat Sep 22, 2018 11:43 pm, edited 1 time in total.

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willthrill81
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Re: Should I try to sell Rental prop or Refi to generate cash?

Post by willthrill81 » Sat Sep 22, 2018 9:07 pm

I'd sell the rental. The cap rate is far too low for it to make sense to hold it.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

denovo
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Re: Should I try to sell Rental prop or Refi to generate cash?

Post by denovo » Sat Sep 22, 2018 10:37 pm

I feel like we need more info, what's your household income from employment, value of all assets, rental cash flow, savings rate... Retirement ages desired for you and spouse

Update your post, and put the numbers in one place.

Kids you need to pay for education?
"Don't trust everything you read on the Internet"- Abraham Lincoln

denovo
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Joined: Sun Oct 13, 2013 1:04 pm

Re: Should I try to sell Rental prop or Refi to generate cash?

Post by denovo » Sat Sep 22, 2018 11:55 pm

Sasquatch wrote:
Sat Sep 22, 2018 8:03 pm

Sell Rental and cash out all debt. Also allows for $25k sewer and $30k cash. Dec 72t distribution included leaves me with a cash balance of $170k which I could put into CDs @ 2.5% which would throw off $4k in interest. Budget needs are $48k annually net. Add 10k in taxes + CD income brings me in at $57k Gross. Under ACA cliff so premium reduction in budget. That brings 401k draw in at 2.6% WR. 25% drawdown 3.45% WR

I have no problem being a landlord but would like to be out of the business by age 60 anyway (8 years)

Rental property fails the 1% rule coming in at .56%

I vote for selling rental. You don't want to keep it long-term anyway. Cash flow isn't good. You seem set for retirement as long as health insurance remains stable. No need to get rid of 0 percent loan though. I assume you'll have SS on the way in your 60's.
"Don't trust everything you read on the Internet"- Abraham Lincoln

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Nestegg_User
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Re: Should I try to sell Rental prop or Refi to generate cash?

Post by Nestegg_User » Sun Sep 23, 2018 12:00 am

based on the numbers for your rental... I’d sell it, especially if done before the need for the conversation from septic. (it will take quite a while for that to pay back, even in nominal dollars)

that you are considering a 72t says that you are a ways from 60+ (see on edit that you’re 52), the funds received may help you delay beyond 59 and not lock you into that 72t requirement... you would have flexibility in the future to either take or not take distributions ( likely better maximizing tax considerations with more optimal withdrawals)

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Watty
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Re: Should I try to sell Rental prop or Refi to generate cash?

Post by Watty » Sun Sep 23, 2018 12:34 am

Sasquatch wrote:
Sat Sep 22, 2018 8:03 pm
I have no problem being a landlord but would like to be out of the business by age 60 anyway (8 years)
I didn't crunch the numbers but this would tend to make selling the rental more favorable.

Most housing markets are pretty strong right now and if it is priced right I would think that you could sell it pretty quickly.

If the housing market is slow in 8 years when you want to sell it then it could take a very long time to sell the property.

With a rental you would likely need to have the renter move out and have the property empty while it is for save. If it takes six months or longer to sell the property you would still have a lot of the expenses but no rental income.

euroswiss
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Re: Should I try to sell Rental prop or Refi to generate cash?

Post by euroswiss » Sun Sep 23, 2018 8:22 am

Agree with others: sell the rental

For more detail, post the question on www.biggerpockets.com (free real estat investor forum)

Topic Author
Sasquatch
Posts: 291
Joined: Mon Apr 09, 2018 12:44 pm

Re: Should I try to sell Rental prop or Refi to generate cash?

Post by Sasquatch » Sun Sep 23, 2018 2:56 pm

Thank you for the reply.

I agree selling is the right decision. I have been watching the local market and things are softening slightly. I don't know if that is due to heading into winter here=snow or a overall economic shift.

Exact same floor plan is for sale one street over for $380k. My lot is twice as large, has central air, oversized patio, and RV parking. I would probably undercut them by $10k just to move the property. Heck, I will save that just in ACA subsidies next year not to mention the tax paid to get the $12k. Speculation is still pretty nuts here by investors. The market is too hot IMHO. My home has increased by 8.4% in 9 months. However,like picking stocks "what do I know anyway" I sold another one of my properties to a investor last July and they kept the tenant in place. Thats my ultimate goal. I have great tenants that really care for the home and have solid employment, it would be good business to keep them IMHO

euroswiss
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Joined: Sun Oct 25, 2015 4:40 pm

Re: Should I try to sell Rental prop or Refi to generate cash?

Post by euroswiss » Sun Sep 23, 2018 4:01 pm

Sasquatch wrote:
Sun Sep 23, 2018 2:56 pm
Thank you for the reply.

I agree selling is the right decision. I have been watching the local market and things are softening slightly. I don't know if that is due to heading into winter here=snow or a overall economic shift.

Exact same floor plan is for sale one street over for $380k. My lot is twice as large, has central air, oversized patio, and RV parking. I would probably undercut them by $10k just to move the property. Heck, I will save that just in ACA subsidies next year not to mention the tax paid to get the $12k. Speculation is still pretty nuts here by investors. The market is too hot IMHO. My home has increased by 8.4% in 9 months. However,like picking stocks "what do I know anyway" I sold another one of my properties to a investor last July and they kept the tenant in place. Thats my ultimate goal. I have great tenants that really care for the home and have solid employment, it would be good business to keep them IMHO
Have you considered offering the property to the tenant? Perhaps with some sort of seller-finance incentive.

Topic Author
Sasquatch
Posts: 291
Joined: Mon Apr 09, 2018 12:44 pm

Re: Should I try to sell Rental prop or Refi to generate cash?

Post by Sasquatch » Sun Sep 23, 2018 4:20 pm

euroswiss wrote:
Sun Sep 23, 2018 4:01 pm
Have you considered offering the property to the tenant? Perhaps with some sort of seller-finance incentive.
I would rather have the cash and just move on. In review of the tenant application I dont think they make enough to have a $2300 house pmt even if I do kick back $20k to help with 5% down. I dont know what their debt load looks like though. I will probably run it by them anyway. Just sent e-mail to prop mgr to see if they have any investors looking to add a property.

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