Should we sell or turn it into rental?

Question

We made the decision last year to downsize and are in the process of building a new home (slated to be completed in June). Originally, we had every intention of selling our current home but now I'm not sure if we should sell it or keep it and turn it into a rental. What would you do?

Relevant information:

1. We own one other long-term rental but I wouldn't say we're "seasoned" real estate investors.

2. Home in question: 2,700 sq ft 4 bed/2.5 bath + den, 2-story. Built in 1979. Includes pool, large backyard (for the area and also a corner lot), great location, family-friendly neighborhood. Realtor says it should sell for $700,000 - but also that buyers may ask for some concessions.

Mortgage balance $455k at 3.99%. I'm waiting for our prop mgr to tell us what she think it'd rent for so I'm not 100% certain, but there's one house in our zip code that's similar (4/2 w/ pool- slightly smaller size but nice) listed for $3,200/mo

3. New home will be $562k - haven't locked in rate yet.

4. We are approved for the new home even if we don't sell the current and we have money to put down on it if we don't sell the current home.

5. Overall, my thought is that our current home is not an ideal rental - it's big, the pool requires constant maintenance, the yard requires regular attention/landscaping but I could be wrong.

Scenario 1: Sell current, buy new, use funds on hand to invest in other properties that might be better. We are snowbirds and spend half the year in the midwest so could look at getting some properties there.

Scenario 2: Rent out our current, buy the new, use funds to put down on new house

Scenario 3: Something I'm missing?

Josh Young · Answer

@Harley Emelia you might think the cash flow isn't great, but if you run the numbers on purchasing a different property at today's interest rates you will realize that what you have currently is pretty good.  You can also see the cash flow is the smallest part of the overall return, equity gain is where the big money comes from. And cash flow will improve over time, your rent should increase more than your expenses will.

Ernie Garcia and Verde Investments' redevelopment of the Fiesta Mall should be a tailwind. The fact that you are south of the 60 is more desirable too, so maybe push it to 4 or 5%, but I like to be conservative in my projections. I'm very confident in this area long term, we have population and job growth, and lots of development projects. I like the idea of never selling and just wait until you have more equity and then do a cash out refi, so you are getting tax free money to buy more properties

Bob Stevens · Answer

Its all about the numbers, nothing else matters.

Dee Ambler · Answer

Perhaps look into filling in the pool and see how much that costs vs maintaining it. My friend had to fill in a pool because she bought with a business loan for her nursing home and they wouldn't approve the pool. The numbers still made sense and she opted to fill it in  and turn it into a garden.

Josh Young · Answer

@Harley Emelia  You need to calculate your Return On Equity ((Cash Flow + Principle Paydown + Projected Appreciation)/Equity). Make sure you use net cash flow, so you are accounting for maintenance, repairs, cap ex, vacancy, and property management; based on the numbers you provided your net cash flow is probably $2k per year.  The 4% interest rate is an important part of this calculation because the principle paydown portion of your payment is significant, I'm going to guess it's about $9k per year. The projected appreciation is tough to assign a value to, but 3% is a good conservative number, so maybe $21k per year. So if you have $245k in equity and your return is $32k per year that's a 13% Return On Equity. So, you have to ask yourself, if you sold it, could you get a better return than that by investing in something else? There are also tax considerations, such as depreciation and IRS Section 121 Exclusion.

I would probably keep it as a rental for two years and then consider IRS Section 121 Exclusion; I would probably still keep it as a rental at that point, and if interest rates get below 6% I would consider a cash out refi to buy another investment property.

If you do keep it as a rental I would recommend you pay for pool service, this is something that should not be passed on to the tenant as it can cost you big time if not properly maintained. Landscaping can go either way, but I usually have the tenant pay for it.

David M. · Answer

@Harley Emelia

well, if you aren't really into being landlords, strongly consider selling.  The biggest advantage is taking advantage of the sec121 exclusion where you can take up to $500k of capital gain tax free as your primary residence.

One "mixed" approach is to rent it for a few years, then sell before the 2 of 5 year timeline is up.  I just find that messy..  Also, I'm not sure how your numbers work out..

Take a look at my post here, being a real life example why selling CAN BE much more cost effective than re-renting your personal residence:  https://www.biggerpockets.com/forums/48/topics/1169308-equit...

I personally wouldn't have a rental with a pool because of the liability.

As far as reinvestment, that depends on you strategy and goals.  This forum heavily sells equity investments, mainly landlording.  You might consider investing in debt as it can be much more passive with a completely different risk profile.

Good luck.

Sam McCormack · Answer

The pool sounds like a liability nightmare alone. I think with a property being worth that much it has a lot more value being sold than rented

Wade Wisner · Answer

You are right about renting with a pool.  That can get pretty expensive and you would need to have a lease clause that the pool is professionally maintained throughout the lease period and shut down for winter months if your climate requires that.  If you were free-and-clear on the property you could sell with a seller take-back and make good money on your equity, but with a loan you are limited. I would go for Scenario 1 and sell and reinvest in other properties are you go forward.  Good luck.  Wade

V.G Jason · Answer

It depends how you equipped you are to buy on the follow exclusive of capital gains. If you're able to buy comfortably without needing capital gains, not just barely but comfortably, I would aim to rent it. If you're unable to afford the new house more than comfortably, then sell it assuming you are able to capital gains it over. Rental liquidity for a 4/2 is likely low, but I haven't checked. That would make it quite compelling I would feel. I would get a few PMs feels on the rent, and trust the one with the best policies & rules not the highest price.

The pool aspect is the only reason I would consider selling it. That's it. Pools are a lot of work to manage, and I try to not buy with one anymore but it won't fully deter me like for example an HOA would.

Josh Young · Answer

@Harley Emelia lots of people who think it’s cheaper to rent than buy because they can’t plan for more than a year or two at a time. People who move here from out of state. Families with kids. Couples who work from home and need home office space. Older people who want a big enough house that’s their kids will stay with them when they come visit. People who just like having the space and can afford it. I will say the renter pool is probably a little smaller than it would be for a 3bed 2bath, but that just means it might take a few weeks to get it rented instead of a few days. Message me and I’d be happy to jump in a call with you.

Harley Emelia · Answer

@Josh Young You've got my wheels turning. Who exactly rents a 4/2.5 + den 2,700 sq ft house?

Should we sell or turn it into rental?

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