Valuing Current Residence As Rental

[Andrew Holloway]

I own a small SFR and need to upgrade to a larger home as my family starts to grow. As such, I have been evaluating keeping the current residence as a rental property. I am trying to figure out the best numbers to use in terms of evaluating the potential of keeping this property vs. cashing out and using the equity as an additional down payment on a new home. Typical estimates for rental properties use cash outlay to calculate things such as Cash ROI, total ROI, etc. Any down payment money put towards the property as well as closing costs are in my opinion sunk costs and should not be included in this calculation.

So that leaves us with two numbers - cost of repairs to convert in to a rental property and opportunity cost.  By not selling the home and cashing out the equity I lose the opportunity to put this money down on another home.  Say repairs are $5,000 and I would walk away with a $10,000 check at closing.  I would term my cash outlay here as $15,000 and use that for evaluation purposes.

Please let me know if you agree with my logic or if I am way off.  Thanks as always for the help.