Rent our paid-off house or sell and purchase a rental property?

Question

I am 37 and  currently live in a home that is worth 500k and is fully paid off.  I am planning to purchase and move into my next house of $650k.  We have more than enough for the down payment.

Would it be better to:

-keep the house which is fully paid off and rent it.  Use the rental income to help pay off the mortgage of the new house.

-sell the paid off house, pay off the new purchase then purchase a different house and have a mortgage on the rental?

I am getting stuck on the taxes and deductions weighed against interest rates and which would make more sense?

What should I be thinking about?  Which is smarter?  Other ideas?

This would be my first rental and I am generally a pretty conservative investor, and planning a buy and hold strategy.

Also, does anyone have a good accountant referral in MN??

Thank you so very much!!

Jack Faysash · Answer

Laura, great question. I’d suggest selling your primary residence within 5 years of moving out to make sure you can claim the IRS publication 523 exclusion. To the point of taking out loans or using cash, that’s more of a personal question. Of course you can take out loans and buy way more, but you’re also taking risk, and paying interest. But it all comes down to your situation. I personally really enjoy the power of cash. Interest rates are only going up from here for the foreseeable future so I’d suggest getting the ball rolling if you will need a loan.

Nathan Gesner · Answer

The best thing you can do is purchase a book that teaches the basics of real estate investing. You need to learn the power of leveraging your money. If you pay $600,000 cash for a house, you benefit from a $600,000 asset. If you buy four $600,000 houses with $150,000 down on each, you benefit from $2.4 million in assets. Your tenants make your payments, you get tax deductions for the mortgage interest, and you will accelerate your wealth significantly.

A couple examples would be The Book On Rental Property Investing by Brandon Turner or The Unofficial Guide to Real Estate Investing by Spencer Strauss.

James Hamling · Answer

@Laura S. I believe the answer lies in the foundational question of; Do you want to be a Landlord?

If the answer is "no", well then it's easy, sell now, done. If the answer is "maybe", sell now, done.

If it is "Yes", and a direct YES, then next question to give direction is; Do you want to be a landlord of many, or just 1?

If you'd like to have a portfolio some day, then it's simple, sell now and properly deploy the capital to make use of leveraged capital to best put that $ to work. When a person operates free-&-clear real estate as rental properties, there loosing about 75% of the benefit of it all, if not more. The magic in it all is LEVERAGE, which is via performing debt. It's a simple math equation of having other people pay mortgages for you.

If you want to stay the pinnacle of "conservative" and have accountants applaud your genius; sell, use the capital to leverage properties specific for rental real estate at 60-65%LTV. Ideally townhomes (the HOA and nature of it takes all things exterior off your plate thus mitigating those risk exposures), in an area with strong growth such as the NW suburb expansion area, and where median home prices exceed the state median home price by greater then 20% as this drive a strong market demand for TH by very good tenant class.

There is just no doubt, none, as a person in this market who does luxury rentals as well, it's just a no brainer, the benefits a proper re-deployment with leverage can bring is massive. That capital position could easily land 4+ fantastic properties, we are talking A class properties in red-hot demand areas with amazing growth and expansion, best in class schools etc., and produce minimum $6k in monthly tenant paid mortgage service, plus the ~$1-2k monthly net.

In comparison if rent the home as is, you get 0 tenant paid mortgage service and as much as $4kmnth cash flow, which by the way is not only fully taxable BUT it also may adjust your tax bracket up as a whole, raising your taxes entirely there in muting that $4k net to being even less. If it raises your total tax impact, say $24k per year, now it's just $2k.

The math is simple when play out the scenarios. Heck, we are doing buys on new-construction that's doing little cash-flow but equity accrual, holy-cow, strong 5 figures annually. X4, we are talking well into 6 figure annual equitable gains. Can't do that just renting the paid off place.

Power of leverage, nothing compares, just ask any bank.

Steve Vaughan · Answer

Most  primaries are too nice to be good rentals unless you're about 80-90% of the median home value for your area.  Does $500k represent upper crust or medium blue collar?

I'm a huge believer in the primary home sale tax exclusion also, but you need to sell within 3 years of moving out.  Must occupy for 2 of the previous 5 years.

Theresa Harris · Answer

I was going to suggest what Jack did. Rent the house out for 4 years and then sell it to reduce the taxes you have to pay on the sale. You can then use the money to buy a rental (or more than one rental).  Not all houses make good rentals, but if your house is paid off you don't have the mortgage payments to worry about.

Rent our paid-off house or sell and purchase a rental property?

Most Popular Reply