To Sell Or Rent Out: A Rookies Dilemma

[Conner Hitchcock]

Hey all,

Rookie here looking for opinions on my situation.

My partner and I live in a nice townhome in a desirable area of Northern Virginia. We want to move further west to get some more space but it leaves us with questions on what to do with the townhome.

We are currently discussing whether or not to sell or rent out.

Option 1: renting out town home and buying a new primary residence

This would be my first step into rental investments. I would be my own property manager. Estimated cash flow would be around $450 a month with an COC of 8%. We also only have an interest rate of 2.5% which is a big plus :)

If we are purchasing a new home while renting out the current town home, we'd have to put low money down and have to pay PMI which would negate the cash flow from the rental significantly. Along with that, not having extra money from the potential profit of selling the home will spread us a bit thin monetarily. Both of our jobs would be able to cover two mortgages if worst case came along and we loose a tenant but it's still not desirable.

Option 2: Selling the town home for a slight profit

So option two is easy in principle. Sell, hopefully make a decent profit. Use that to put the down payment on our next home, use the remainder to fund a better deal. But it would have to be done ASAP.

In our area, the artificial home prices from Covid and inflation are starting to normalize, if we don’t sell soon, we will likely be only slightly above where we purchased the home. By trying to sell now, we could keep profits relatively high but would force us to pay some hefty capital gains tax and any fees from selling the home. Along with that, I worry that I’m giving up an opportunity to get started in real estate investing. That being said, if home prices are going down, so to, would potential real estate investments which gives me more options.

All in all,

Option 1 is a first step into real estate investing and seemingly the path of least resistance with regard to starting to invest, but is the smaller return and lack of monetary protection worth the risk?

Option 2 seemingly gives my partner and I the most financial security, at least in the short term, but it pushes off the potential to begin investing sooner rather than later.

If anyone has any ideas or opinions, I’m all ears. I’m open to hearing different degrees of risk tolerance and feel I can articulate an opinion based of some knowledge from some vets!  Also let me know if I’m way off and if there’s other options you’d recommend.

thanks all, Conner 

[Basit Siddiqi]

Items to consider when selling a house
You may pay around 7% to 9% of the value of the home in fees(Realtor Commissions, Title costs, Title Insurance, Stamps etc).
The sale may also result in taxes(Federal taxes + State Taxes).
You might be able to avoid taxes by doing a 1031 exchange or QOF Fund.
You no longer have an asset that can potentially provide you cash-flow / appreciation.
Do you think you can make up the 7% - 9% in fees + Taxes over time by buying another property?

Items to consider when you rent the home
You will collect gross rental income and pay for expenses(Insurance, RE Taxes, Interest, Repairs, etc). Hopefully you are cash-flow positive on the property.
The property will gain or lose value over time.
Are you happy with the cash-flow and appreciation? Keep it
Do you think you can find another property that will Cash-flow / appreciate better and also cover the 7% - 9% fees described above? Sell it

Items to consider when purchasing a new home
If you are using financing, you pay around 5% in fees(Loan Processing fees, title costs, costs to record mortgage, etc)
There may be costs to have the property ready for rental use.