Buying new primary residence, What to with current paid off home?

Question

I have SFH in Jacksonville FL. Paid off that home around 2017. With new home purchase, what would be best strategy to go? If i sell this home it would be around 480k. I already have down payment for new home so i really dont need this 480k go there. There are couple of options i have from here. 1) Rent this home. Current area rental is around $2500/Mo. 2) Sell Home and put more down payment towards new home. It also make sense as Interest Rate is 6.8% and Mortgages are front loading, means very high interest in starting years. 3) Sell this house and get 2-3 smaller rental homes. This is good option too.

I thought option 3 may make sense. I started to find good cash flow deals on rental homes. Reading all day how to do it, Listening pod cast 5 hrs a day. When i started to see rental properties its totally heart breaking. Find a deal in Florida is very difficult. How you guys do it? Am i making bad decision here? Is it totally wrong market to find rental?

Please help anyway you think. I am also ok if i need to get some help/ paid service to move forward.

Carlos Valencia · Answer

Hello Anant,

I would also suggest option 1. You already have a property paid off and you have the down payment for your next property. Yes you can maybe buy 2-3 more units if you sell the property your mentioning but why not cash out refi and then use that money to invest in other properties? If you say you found some really good cash flowing deals make sure to really look at the bigger picture and run the numbers on all 3 scenarios you mentioned above. This way you can come to a better conclusion and see which makes the most profit. Good luck on your decision and investing journey.

@Albert Bui @Matthew Kwan

Steve Kenney · Answer

Hi Anata,

I would suggest trying to pull out some of the equity from the house to use as a down payment towards other properties. Are you only focusing on single family homes right now? If so, doing a midterm rental (traveling professionals) or a short term rental (airBNB) will allow you to maximize cashflow. Typically, a long term rental on a single family won't cashflow all that much compared to a three or four unit building, for example.

If you want to grow the number of doors you have and get the largest return on your equity, investing in a multifamily is the route I'd suggest. Obviously this comes with more work - taking care of maintenance issues and managing more tenants, but it also comes with more cashflow. If you combine the equity you have now and borrow from a bank, you could build out a nice size portfolio.

As far as analyzing deals, when I first started I would look at every multifamily property that got listed in my area. If it was something I was interested in I would run it through my analysis spreadsheet and if the numbers met my criteria, I would setup a showing. That's how you have to do it. Just analyze deals, go look at them, and then when you find one you like put an offer in. It can be a tiresome and frustrating process but if you stick with it eventually you'll find something!

Good luck and let me know if there is anything I can do to help.

Basit Siddiqi · Answer

I don't like option 2 or 3 because that would normally require you to lose about 8% of the home value upon sale via seller fees.That is a hurt to your net worth and would take a new investment a long time to recoup.8% of $480,000 is $38,400I like renting it out or doing a refinance and buying a property with those proceeds.

Jassem A. · Answer

How about option 4, owner finance the home above current mortgage rates with 10% down. You will make more in the long run than leasing or selling outright.

Preston Dean · Answer

I think you have a few options you can work this.

I would say first see if you can KEEP the property and pull out some equity & purchase a multifamily property. With the house already paid off you are making some significant passive income my friend. I would do my best to keep it if at all possible & use the equity. Then in 5 years do that again.

Bill B. · Answer

How much did you pay for it and what can you sell it for after 10% in selling costs?

Let’s pretend you sell for $480k and pay $40k in commissions and closing costs, so you get $440k. If you paid $340k selling now saves you about $25k in federal taxes. How long would it take for the rental to make $25k in profit so you can be even with selling today?

Ps, that doesn’t count the 6.8% interest on the $440k so you really need to make $30k/yr on the rental to be even for the year and THEN earn another $25k to break even overall.) so unless it cash flows $2,500/mo PLUS a reasonable return towards that $25k you should sell

Would you buy your current home for $440k in cash to make it a rental? If not, that’s also a sell sign.

Good luck either way.

Adriana Stockel · Answer

IMO, I think option 1 is best. The home is already paid off and you'll have extra income in your pocket w/o having to pay a mortgage, unlike if you would have bought 2-3 rentals if you went with option 3. However, it all depends on your area and where the home is located. Is it close to stores, major highways, schools. etc.

I worked with a lot of rentals over the summer and in my area (Northern Virginia) there were two things that always stuck out to the tenants: schools and accessibility. I always knew if a rental was located near the malls, highways, stores and the schools; it was going to be rented very quickly. Many times there were bidding wars over the rental ad it ended up being rented higher than what to was advertised for.

Plus, we are soon to be heading into a spring market and with interest rates going down, competition is coming back up. Since your home is already paid off and you have it rented for about $2500/month, you can use some of that cash flow for your new mortgage payments and putting some money aside in a HYSA for another rental property.

This is just my input, but I think it's great that you have your house paid off and potentially using it for your investment!

Buying new primary residence, What to with current paid off home?

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