Turning my PR to a Rental?

[Terron Winn]

Hello all, 

I am new to BP and even newer in this real estate business; however, I have been highly interested in learning the ropes. I have spent about 8 hours a day for about 3 months (over 720 hours of learning) listening and reading about buy and holds but I cant seem to find much about turning your primary residence into a rental property. 

Here is my story: I have purchased a single Family home in 2011 in San Diego California for 209K Under FHA. Now this home is worth about 385K and I owe about 180K. My payments are 1430 (compound account) with an HOA payment of 105 per month. As we speak, I am in the midst of refinancing to go conventional to get my mortgage down.

a. Shall I rent my first home out for 2000 per month. (other homes like mine rented for that much) Pull out equity to satisfy the 20% DP requirement?

b. Stay in my home then pull out equity to purchase another home in another state. (buy and hold) 

Which option would make more sense? I am at a loss and I need educated guidance . 

Thank you in advance. 

[Rob K.]

If you can afford to keep your family home as a rental and independently or with cash out of your family home purchase a new primary in San Diego, that is a great way to get started on a buy and hold investment strategy. That is how I got started in the early 1990s. You get to lock in these low rates at more favorable owner occupied rates, build additional equity over time, and gain experience and hopefully some income as a landlord. You should recheck your income and expense math on based on your new mortgage payment if you are planning on taking cash out.

But if you need to move out of state to make it work financially because of San Diego's high prices, that is a more personal decision beyond just the investment analysis and you would have to manage your first rental from out of state, not the best way to start on your first rental.

Also, you should be aware that you would be giving up the $250,000 single/$500,000 married capital gain exemption if you did not sell your primary within three years of moving out. Not necessarily a problem if you are planning to hold very long term. 

This is not just a financial decision, it is a personal lifestyle decision that only you can answer.