Do I sell my primary house or rent?

Question

Hi All,

Looking for some opinions on a situation i am in...

My fiancee and I recently bought a new home and i am trying to decide whether to keep my current primary and rent it out, or sell it. Here is some background on the property:

Description: 2,100sf(this includes finished basement), 1/4 acre lot, 4 bedroom, 2 bath, garage

Info: I bought the house in 2020, the week that the world shut down due to covid and have a rate of 2.99%. Before I moved in, I completely renovated the entire house. I got a market analysis from my Realtor and she is thinking that the house average worth is $700k. I owe $454k on the mortgage and after realtor fees/closing costs, i could net $200k with no capital gains tax.

My Thoughts If I Sell: I have another single family rental and my plan was always to keep this house as well to have (2) SFH rentals. However, i never expected it to appreciate so quickly. So now, i am considering selling it and paying off the majority of my first rental (I owe about $255k so i could payoff a big chunk and pay off the rest with added payments over a year or two), or put the money into stocks and grow it from there. My rental has a mortgage rate of 3.5%. If i paid off my first rental, it would bring in $2750/mn (before quarterly taxes/expenses) and then i would have a bucket of equity to tap into if i ever wanted to buy more property. If i did sell, i am not sure which way i would go, because the stock market would(hopefully) do better than 3.5% so technically i would make more by putting it into stocks, but it would feel really nice to have a property paid off.

My thoughts If I Keep: I could keep the property and rent it out for around $4,000 it looks like and would make approx $1400/mn before expenses/Cap Ex, assuming I manage it myself. The nice part is, I renovated the whole thing in 2020(new shingle roof, new siding, new heating system, new HW tank, new kitchen, etc.) so I dont foresee any big CapEx expenses in the near future. A couple concerns i have are, with buying a new home and renovating that, i wont have much money to make it rent ready like paint patching, cleaning, mortgage payments until renters move in, etc. Another concern i have is the backyard has a BIG hill which is pretty dangerous to mow and could be a liability, however i could always include lawn care as part of the rent to avoid safety issues. Down fall is now all of the equity i have is split into the (2) properties and would make buying another property in the future a little more difficult.

Any thoughts or opinions are appreciated.

Thanks!

-Pat

Jay Thomas · Answer

Hey Pat! , deciding to sell or rent your current home involves weighing key factors. Selling brings a substantial gain of around $200,000 after selling costs, freeing up cash flow and simplifying life without landlord responsibilities. However, you'd lose the $4,000 monthly rent and face market uncertainties when investing in stocks. Renting offers steady $4,000 monthly income, long-term property value growth, and potential tax benefits. Yet, it entails management responsibilities, upfront costs, and liability concerns. The choice depends on your priorities, risk tolerance, and financial goals.

David M. · Answer

@Patrick Chafe

What did you purchase the property for?  With a 454 mortgage, I'm guess no less than ~$485k?  A sale at $700k would still mean you'd be under the $250k sec121 exclusion (since it sounds like you arent' married yet).  But, good to double check these things.

While it might be "nice to have another rental," check your numbers.  Not quite sure how you are "making $1400/mo before expenses/capex."  What other expenses?

I am guessing you are on the younger side...  Taking the capital gain tax free is very powerful, if not the most powerful since other strategies can only defer the tax.

Holding the property free and clear maybe nice, but you are losing out on the so called "power of leverage."

Like you said, "...would feel really nice to have a property paid off."  But, you'd make more money leaving it in a money market fund at ~5.25%.  Nobody has a perfect crystal ball, but probably next year it MIGHT be 4% (or even still higher).  That beats your 3.5% with all the risks of being a landlord.  You could hold dividend growth stocks (like the PG and KO...) and still get a better dividend and growht (to account/offset property appreciation).

Don't forget that depreciation has to be paid back when/if you sell the real property to fully access your cash.

https://www.biggerpockets.com/forums/48/topics/1169308-equity-rich-need-advice?highlight_post=6659747&page=1#p6659747 check out my post here.  Don't get trapped into paying for your own money...

Does your current primary really well suited as a rental?

Funny, there was another thread just recently where the young investor wanted to payoff his mortgage.  Don't payoff the other rental's mortgage.  Don't "trap" your funds into the equity of the property.  I haven't found a way to use Title to a property to pay my bills.  Keep your capital around.  Like I said, it should be earning a solid 5.25% (maybe 5.0%).  Let is sit around/grow until you find something else you'd like to invest.

Hope this helps.  Happy to chat.  Good luck.

Daniel McDonald · Answer

Wow man sounds like I literally just read my bio. I have two duplexes in Beverly, so real close. Actually just got an offer accepted for a client of mine yesterday on a duplex in Peabody. We bought at the same time too. My first duplex has roughly 250k worth of equity and has a 2.9 IR. Totally agree that's super tempting but here is why I'm not selling it anytime soon. This market isn't going anywhere. While it's unlikely we will see such drastic increases YOY if it rents well, brings in a little money, and fits your goals, why sell? I am personally team buy and hold so maybe just bias but have you thought about getting a heloc on it?

Jaron Walling · Answer

@Patrick Chafe You need to sit back and objectively think why does it make sense to hold property. Did you intend to keep this a LTR in first place? The moment people sign a lease and move in it becomes a business. The mindset changes. What level of remodeling did you complete and do you care if it gets destroyed by tenants? On the flip side all the capex you completed is a listing highlight! Real estate agents will love you.

Numbers matter. You say it could cash-flow $1400 per month before expenses but as an investor you need more numbers. What's the ROI after vacancy, insurance, property taxes, maintenance, etc.?

Look at your property through the lens of a tenant. Does the property justify $4k per month? That's expensive for any market.

Splitting equity is never a downfall. You're just strengthening the fortress around each property. We did the same thing last year because it made more sense. We gave up a low rate and didn't look back and I decided to sell our primary residence. It could have been a cash-flowing rental but instead we "trapped" equity into another rental and our current primary putting down a 35% DP. Sometimes it smarter to take the win and run.