Should we rent or sell?

Question

Hi everyone! Hoping I could get your opinion on what to do about our current situation.

My husband and I have owned our home for just over 2 years now. During that time, we've done a couple renovation projects, including the kitchen, and have increased our equity quite a bit. Based on comps in our area, we could sell our house and make almost $70k, which is incredibly tempting. If we did that, we would use part of it as a down payment on our next home and the remainder as a down payment on a rental property. This is ultimately what my husband would prefer to do, but I, on the other hand, think that keeping our house and using it as a rental could be more beneficial for us in the long run.

A little background on our house: It is a 3 bedroom, 1 1/2 bath bungalow with a finished basement and detached 2 car garage. A newly renovated kitchen, new A/C, new electrical panel and meter, and a large, fenced in yard. It's located a mile from our downtown, which is the most rapidly growing city in the area with young families and singles moving here based on its location and commute to the larger city, Detroit. So the quantity of first time home buyers and renters are huge right now.

If we kept the home as a rental, I would like to try to do a Cash Out Refinance and use that money for a down payment on our next residence, which we've found a home that we would like to put an addition on so we would try to do a FHA 203k standard loan for that, which in itself has quite a few complications with it and makes us both a little concerned about all the complications that would come with that. If we sell, we'd easily have enough for the FHA 203k down payment with money to spare.

Any help you could provide with any of it to make sense of what to do would be greatly appreciated!! Thank you!

Catina Willis · Answer

Buy low, sell high! This is everyone's goal right? News article was published today about prices at an all time high. The highest in last 2 decades.

Catina Willis · Answer

Buy low, sell high! This is everyone's goal right? News article was published today about prices at an all time high.

Teah Schoenle · Answer

Thank you both for your replies and advice! There is so much information here for me to sort through and it's all incredibly helpful! @Russell Holmes I honestly hadn't thought about the cost of sale (this is our first home so I'm not super familiar with all the processes involved), which makes me a little more hesitant about selling. But you're right, the first step would be to check in with a lender or mortgage broker to get a better understanding of what closing costs would be and how much we would realistically be able to pull from our equity and use as a down payment on another residence. To @Timothy Moore point, there may be a lot more potential for appreciation and I'd hate to sell too early and lose out on potential equity. I think we could easily get our mortgage and expenses covered on the house through renting with money leftover to set aside for capital expenditures; but if we do rent, we will need to refinance given that we have PMI on our mortgage so we need to understand what that entails if we were to keep it. @Timothy Moore, to answer your questions, my long term goal is to build a successful, profitable real estate portfolio that provides at least enough horizontal income that would allow me to quit my full time job and put all of my efforts into starting my own business doing architectural design, as well as real estate investing (whether that be flips or buy and hold). With that being said, I know that single family homes aren't necessarily going to get me there, so I'd love to get one multi-family property at some point this year, if not more, but I think I would try to partner with someone to make that happen (I've had several people tell me that they're interested in partnering. I just need to find the right one and figure out the ins and outs involved in partnership). Renting out our current home would be more or less a foot in the door and first hand experience into rental properties. We love our area (Royal Oak, if you're familiar), but want to start a family and the house isn't necessarily ideal for a growing family. We found a property that has a small house on a waterfront double lot, that would be a dream location for us to move and put an addition on it, which is where the 203k loan or homestyle renovation loan would come in. I don't think house hacking would work with my husband. Renovating the kitchen in our current house was enough for him, I think. All-in-all, it sounds like there are a couple of preliminary conversations that need to be had with lenders and realtors before making a decision one way or another.

Timothy Moore · Answer

There's a lot of factors at play here but the biggest two in my opinion are: What are your short & long term investment goals and what is your risk tolerance?What are your plans for your next primary residence?You can pull out more funds by selling (ARV less roughly 8% sales fees) compared to doing a cash out refi (typically pull out up to 75%). However, between the two of you, you could potentially use both homes as primary residences and some banks like Huntington I've seen do cash out refis at 80-90%. HELOCs are an option too.I don't know the exact location but if you're within a mile of downtown and 70k margin, it sounds like your home is in a very steady area right now. There may be more potential for appreciation but it's likely also a lower ROI as a rental as compared to investing in riskier areas or in multi-family. Not necessarily a bad thing, i started investing only in class A and B areas in the suburbs before investing in Detroit but it is a factor. Your primary residence plan is a factor as well. Do you love your current home? If so, stay there and focus on building out your rental portfolio using that equity and other funds. Do you want to move? There's the possibility of doing a 2-4 unit with 3-5% down and living in it while renting the other units. You could sell and buy two properties, one to live in and one to rent.

Russell Holmes · Answer

@Teah Fink that sounds like a great problem to have in that both solutions likely have pros and cons. One thing to consider is that selling a house is quite costly. If that $70k you mention is your equity figured by the market value minus what you owe, you'd leave the sale with a net proceeds check significantly below that. All states are different both in process and what are standard seller-paid items, but here in Florida I tell my sellers to figure on a 8-9% cost of sale including 6% commission. That commission is negotiable depending on agent, but most buyer's agents would expect to be paid at least 2.5% in my market, so 5% is typically about as low as a standard sale commission would go. You've then got property tax prorated amounts, owner's title insurance, recording and doc stamp fees, title company closing fees, etc. Outside of Realtor Commissions you're looking at about 2-3% (again, in FL...your mileage may vary). That could vary widely since I'm not familiar with selling Real Estate in MI, but 8-9% of the total value of the house is very likely double or triple what you'd pay in closing costs on a refi (again, just a guess). If you owner occupy your current home and have for two years, you won't pay capital gains, but you also won't pay them if you sell in three years and have lived there the last two since the rule is "two out of the last five". If you can buy the next and rent the current out, even for up to three years before selling, you could have the best of both and still avoid capital gains.....or continue to hold long term.203k and Homestyle Renovation loans are great products that do take some time and extra paperwork. 203k has a limit on how much rehab can be done while I don't believe Homestyle does. However, needing to sell your home first before having the money to put down, and then start the 203k loan process might mean you're without a place to live for several months between longer escrow period and rehab before move in on top of burning some of that equity in the cost of sale. Sure you could rent in between, but that's more money leaving your 'pocket' in cost.What I'd suggest before doing anything permanent is to talk with a local lender or mortgage broker to compare your closing costs and funds available between doing a HELOC on your current primary or a cash out refi and then talk with a local Realtor or Title company to find out what a ballpark cost of sale will be. With those numbers in hand, see if you can swing the new purchase borrowing against your current home instead of selling it. Your time line will be much more flexible since you can simply hold off on putting yours up for rent until the new one is ready to move into. Trying to time the sale of one and purchase of another is tough. Obviously if you must sell to free up enough for the next you can, but keeping both will keep more equity in your side of the balance sheet.