Rent my house and move?

Question

Greetings BP and friends,*Should I rent out my house and buy another property to live in?*The context:Currently located in a strong housing market, South Knoxville, TN. 2 years ago I was able to buy my current single family residence with very favorable terms with custom lease purchase option. Since then, home prices and rent prices in my neighborhood have started to rise.The purchase price of my home was $87,000 and I showed up with a 20% down payment at closing putting me in a strong equity position from the day of purchase. Today the property is valued conservatively around $120,000 with a potential rental income of $1000-$1250 per month. My monthly payment is $507 on the 30yr/3.5% conventional mortgage. (nice cash flow opportunity)Given my income and low expenses, I have found myself with a 6 month personal emergency fund, and an additional $20K in cash that needs to find a "home."I'm excited about the world of real estate and compiling next step options.Currently I'm considering a few strategies and I'm open to suggestions as well.Option 1. Buy a ~$100K home in the area with 20% down and move in. Then rent my current property for premium rental income. Re-evaluate in 1 year.Option 2. Buy a straight up rental for $~100K and stay in place in my home. The perk is I don't have move, however, rental income will not be as impactful to my monthly cashflow vs renting out my current residence.Option 3.Buy an upgraded home to live in at ~$160K, and rent my current home. This would be a nice lifestyle upgrade, but I'm uncertain whether or not this will be the shortest route to building wealth.I could really use some insight into my next steps. The goal is to buy and hold rentals to create a passive income while I'm working full time. Then transitioning out of my day job and into real estate and business investments.Thank you for your insight!Greg

Darren Lenick · Answer

Hi Gregory,In my opinion, it’s never a good idea to risk your personal residence as part of your investment strategy. You appear to be set with where you are regarding equity and finances, so why risk it?If we see a correction in the current market, which will inevitably occur, you could be risking your investment property and your primary residence.This is especially risky if you are just starting out and this would be your first rental property. If it sits vacant for any length of time, you will see your cash reserves deplete rapidly.If it were me, I’d stay put in your current home, relish in the equity you built without risking it, and invest in something that will generate cash flow even if moderate compared to your first option.

Nik Moushon · Answer

Personally if I where in your shoes I would rent out your current house and find a new one to house hack. Look at a 2-4 unit if possible. This would let you get a cheaper house and build equity into it and at the same time increasing your cash flow even more. The cash flow from your current house will help you with a lot of the repairs. The one thing I would NOT do is upgrade your personal residence. With the market today and a correction over due its not a wise choice to spend the extra money to upgrade just for the sake of upgrading. Its one thing if you NEED too. i.e you have 4 kids and a 2 bed house doesnt cut it anymore. And definitely do not upgrade based on your income + the cash flow from the rental. Thats how you quickly put yourself in hot water.

Vinay H. · Answer

I am partial to Option 3 - upgrade yourself and rent out the current house. I think if you have worked out all the kinks with your current residence, you will know all issues and how to address them.

Rhonda Blue · Answer

Account Closed - Should you rent out your current home and buy another property to live in! I would consider looking into other rental options rather then just the normal LTR. I will PM you.

Derek Tellier · Answer

Account Closed In reality options 1 & 2 Should cash flow similar unless the new property just won’t rent for as much. But you get depreciation on the rental so I’d much rather have more leverage on my rental than my primary. I’d go with option 4, stay put, buy a rental with your current reserves then take out a Heloc on your current and buy a 2nd rental. Assuming this does leave you with enough reserves needed for the unknown.

Account Closed · Answer

Thank you all for your diverse opinions and suggestions. I'm currently leaning toward the upgrade my primary residence and rent out my current home option. The idea of buying two rentals, one with cash reserves and another with Heloc sounds like too bold a move for my taste. The risks feel too great when paired my inexperience.My goals for the next 3 years are to own 2 rentals and a primary residence and to produce a reasonable cashflow that will allow for more investments at a metered pace while I continue to work a full time job.

Account Closed · Answer

Thank you for your assessment Darren. You make a great point about considering the risks involved.I certainly don't want to find myself in a cash poor situation after all of the work I've put in to eliminate all debt from my life except for my current mortgage. Looks like you're suggesting option #2 for me. So I guess its time to do some analysis!

Daniel Dawson · Answer

Another option would be to sell the property and pull the money out to reinvest without having to pay cap gains. The true answer depends on what you really want to do. I would personally prefer to buy another property that needs some work and move into that property while renting the other out.

Curt Riffel · Answer

I'd stay where you are and purchase a separate house to rent out, not live in. If you are set on moving, I would sell your house and keep the appreciation tax free. Then look into purchasing two houses or paying mostly cash for one house. The tax aspects of depreciating your house for the years that you rent it out can be complicated when you have built in gains. Here on BP you won't hear much about interest charges, but you will hear of the more sexy word leverage. Leverage cuts quickly in a downturn and interest is real money.