I purchased a home as a primary residence 11 years ago for $210,000. It is now worth $475,000. The mortgage balance is $85k at 3.75% fixed for 30 years (but I am 11 years in).

Three months ago, I moved and purchased a new primary residence. The new house was $370,000 with a mortgage rate of 4.125% fixed for 30 years and I took out a $120k HELOC against the first property to pay for miscellaneous fees and down payment on new property. $75k went towards a down payment on the new house so the new house mortgage balance is now $295k.

The market is hot in the first home's neighborhood so I decided to hold on to the property and rent it out for now. The rent is $2500/month. The tenants are awesome. We have a one year lease. My mortgage payment for the first house is $1000/month for now including taxes and insurance. I also pay a property manager $225/month. The house is only 11 years old and pretty basic so there is not much maintenance required at this point.

In the meantime, I just received word that the property assessments and subsequently, the taxes for next year will increase by $300/month. In addition, there is a proposed tax bill to increase the rate in the area even more by 4.1% next year! This makes me nervous as I am afraid to raise the rent and lose my tenants.

I have been thinking of selling to pay off a lot of debt including my awful student loans, or refinancing with cash out to consolidate everything.

My school loan debt is a cumulative $100k with fixed rates between 3 - 7%. I am currently enrolled in a REPAYE program which is income based which makes me terrified to report a huge increase in income if I sell and walk away with a huge profit as income. But I am basically paying 100% interest payments each month for these school loans and I am one year deep out of 20. After the 20th year, balance should be forgiven. I hate this program. It makes me uneasy. I like to pay my debt back the good old fashioned way!

Another factor that I am not happy with is the $120k HELOC with a 5.25% variable interest rate for 20 years. It has increased from 4.00% to 5.25% in such a short time and rates are not anticipated to go down any time soon. This scares me to no end.

So, I looked into a HE loan refinancing my initial mortgage ($85k), HELOC ($120k), school loans ($100k) and remainder of my car note ($13k). The total home equity loan amount would be $330k at 5% fixed 30 years paying down one point for a total closing cost of $13k to be wrapped into the loan. My monthly payment would be about $2300 but next year with the increased taxes, it will be $2600. This option allows me to hold on to my first property in hopes of increasing property values over the long haul... but now with a drastic raise in taxes in the area, I'm not sure if this is a good idea?

They are building million dollar homes across the street. Mine is slightly smaller in size. I'm also not crazy about the $13k in closing costs. How long would it take for me to break even paying that back?

My guess is that if I plan on selling this first property for whatever reason within the next few years, it would not be worth it to do the HEL and pay these closing costs?

On a positive note, my accountant says it is a good write off if I go with the HEL. A second option would be to sell the house to pay off existing mortgage balance $85k, HELOC $120k, and school loans $100k I am pretty certain it could sell for $450k on the lowest end. What would my closing costs on that be? I am guessing I would get hit hard with capital gains tax as it is an investment property.

This is where I would like help figuring out how much I would walk away with if I sold (if anything). Would I owe property, capital gains AND income tax? How do I shelter some of this income? I vaguely know about a 1031 exchange. Would that apply if I invested the money directly into a new investment property? (Which I am not opposed to doing)...but I then would still have the outrageous school loan problem.

I am also only two months into a new lease with these tenants with no specified time frame for notice of sale of the property written into our agreement. I am guessing they will not be happy to move out after they just moved in... I would prefer to sell soon as I think spring and summer is the best time and I know of many neighbors with similar houses on the same block also plan to sell come January when the new taxes kick in. January is also when the current lease ends and it was not fun looking for tenants last January during the holidays and winter storms. I believe I could have rented at $2700/mo if I had the ability to wait until spring to sign a lease.

I am trying to make the right decision but I feel as though I don't have all of the answers to some crucial questions. Any help is greatly appreciated!

  • 5
    TL;DR! Can you care for some formatting please? – Daniel Apr 11 '18 at 11:29
  • May have missed it in here, but what's your income like on $100k of student loans? It sounds like you're cash-starved if making only interest payments on student loans, but trying to figure out why. Also, what country/state/region are you in? Property taxes increasing by $300/month seems absurd. – Hart CO Apr 11 '18 at 14:39
  • Tip: Shorter, better-focused questions get more people reading, and may lead to more/better answers. – Chris W. Rea Apr 11 '18 at 20:41

I stopped reading about 1/3 of the way in... let's simplify things

Let's look at the net income for the property:

rent       $2,500 
interest    ($266)  (85K * 3.75% / 12)
prop mgr    ($250)
taxes/ins.  ($500) (est.)
Net        $1,484 

You are making about a 8% return on your original investment (210K), but only a 4% return on the current value of 475K.

The opportunity cost of this investment is what you are spending to keep it, which is the interest you're paying on your student loan and your car, is more than the 4% you're making now. It's not getting you anywhere.

If you can sell the home for $475K, pay off your student loan, your car, and most of your new house, you could be debt free in a very short period of time. Then start saving for your next investment, whether another investment property, or just invest passively in the stock market. You are COMPLETELY FREE to do whatever you want to do. You're free from worrying about increases in property taxes, about drops in property values (remember 2008?) and about losing your renters.

Yes, you may pay some capital gains tax. Yes, you may have closing costs. But you're going to have those at some point anyway. Is it worth all of the interest you're paying on these other debts just to avoid them now?

This makes me nervous as I am afraid to raise the rent and lose my tenants.

Then you shouldn't be in the landlord business. If costs are increasing that much for everyone, then everyone else will be raising their rents as well. You're not a mean person because you're having to adjust the rent due to additional costs out of your control.

I looked into a HE loan

The problem is that doesn't accomplish anything. You've just lumped all of these debts into one BIG debt over 30 years. Do you still want to be paying off your car and student loans 30 years from now? If you do go this route, it needs to be in a shorter-term loan (10 or 15 years), otherwise it's counter-productive - you'll be paying principal at a much slower rate, greatly increasing the amount of interest you'll pay in the long run.

On a positive note, my accountant says it is a good write off if I go with the HEL.

Your accountant doesn't pay your interest or tax bills. You're spending $1 in interest to keep from sending $0.25 to the government. (Plus, HELOC interest is not deductible anymore unless it's used to pay for improvements to the property).


You are very fortunate that this first house has appreciated and that you're able to capitalize on it. Don't let that blessing become a curse by borrowing more money to keep it going.

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