converting primary into rental, do the numbers work?

Question

Hi,

I am fairly new to BP, and first time post. I really enjoy real estate and would love to move into full time down the road. First things first, we are planning on moving to KC, from Chandler, Az. We do not need the money from this house to purchase a new house with 20% down. We currently purchased our home in 2010 for a really good deal. put 20% down and did a 20 year mortgage. Question is do I convert this to a rental here in chandler, to start my portfolio?

mort = $1450 (taxes, insurance included)

hoa = $55

purchase price = $229K  (estimated value is $315K)

owe = $140K

typical rent in my area for a 3br/2ba = $1400 ish.

our SFH is about 2100sf with a tandem 2 car garage which equals extra storage for possible renter. tile throughout the house and would not need to do anything to fix/repair to turn into a renal. Its ready to go!!

this above would give me negative cash flow. would it be beneficial to just sell this, and take all the equity/appreciation and purchase a rental in KC when we eventually move?

or should we refi for the remaining balance, which would give us a lower mortgage and such would have a positive cash flow?

anything I am missing? let me know i can provide more details

Craig His · Answer

this is exactly what I am going to do! I got some time to learn kc and the underlinings of the areas to make a good investment. Thanks for the response!

Daniel O. · Answer

@Craig His this is a no-brainer. Sell tax free and take the money to put to more productive uses in your new home area. You have a relatively brief window in which to do that (3 years before the benefit decreases, 5 before its gone). Your scenario doesn't take into consideration the problems of being a landlord from a long distance. You would need to have some sort of property manager, which would probably cost you 10% of rents received. That alone makes your cash flow even more negative if you hold onto your primary.

Take the money and run, but really take time to understand the area where you are relocating and the market there before diving in.

Aaron Morris · Answer

I'm not a CPA so my recommendation is to consult with a CPA strong with real estate before you do anything. The reason is this: if you sell your AZ house before you buy in KC the proceeds from your AZ home should be exempt from cap gains since it's your primary residence. If you buy a principal residence in KC and eventually sell the rental in AZ you'll get hit with long term cap gains taxes. You could use a 1031 exchange but your basis would still be lowered and you'll have to pay recapture taxes. I agree that you should sell and if your goal is cash flow I'd buy closer to home, save the management money, get a 30 year note, and grow from there. Timing is crucial. Sell the AZ home, buy the KC residence, then buy the rental(s). Like I said I'm not a CPA so talk to a CPA.

Craig His · Answer

we originally financed $181k for 20 years, that's why our payament is higher. We also have been in this House for the last 7 years.

Sounds like almost a contentious to sell, take the tax free money and I invest in a better cash flow property, and that a refi will eat into the equity and take time to recoup.

We were leaning towards that direction and now can consintrate on the kc market in addition I would rather be in the same area as my rentals, since I am unsure if I will manager or have a pm do it for me. Any other calc or ideas please let me know. Thanks for all the responses thus far!

Billie Miller · Answer

I think it probably depends on what your goals with real estate investing are. If you want to build up passive income through rentals, then sell and buy up some rentals in KC that actually cash flow.

If you want to try and bank up some more equity through appreciation, then wait and rent it out. However, the extra expenses you would have to cover (since your unit wouldn't be cash flowing) would eat into your equity build up. Also, counting on appreciation is more like gambling than investing.

It sounds like you have lived in this place for 2 years and have owned it for at least 5? If that's the case, you probably won't have to pay capital gains tax on the sale, which makes selling even more attractive. You should talk with a CPA about this strategy though, everyone's situation is different.

Doug McVinua · Answer

Closing costs for a rate and term on an owner occupied home should be very reasonable, a few thousand at most.

You could probably do one for zero out of pocket, the rate might suffer some.

I'm not a lender!

Maxwell Lee · Answer

No doubt you want to sell. KC should offer much better cash flow, you get to have your first rental nearby, and you get to cash in on your good purchase from 2010. The only way you should hold on is if you confidently anticipate continued STRONG appreciation. I don't know the Phoenix area well but I'm guessing it's hard to bank on that. Good luck!!

James Bird · Answer

Hi, First off I am a rookie so my inexperience may get some backlash (also my first reply) but there are better options than losing money each month and that doesn't include vacancies, repairs or management. The cash you would get from selling (either no capital gains or exchange) would allow you to be quite flexible and invest in something that will cashflow and make more sense. Say you sell and walk away with 100-150k you would have a lot of options to pick where and what you want to invest in and if you do it right you wont be far from your second acquisition, then more :) If you rent your house now it may hold you back, so if your investment goal is single family homes I say refi. Are you thinking LLC or Owner held, because that will change your closing costs. ? If you want something closer to you, and/or multi family, sell and use that money as a spring board.

Good Luck!

converting primary into rental, do the numbers work?

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