Opinion on Selling or Renting Current Home

[Tyler Hill]

Hello everyone, 

First post. My wife and I are looking to move into a bigger home over the next year or so and I need some advice on whether or not to sell or rent out our current home. I've read the book on Rental Property Investing and crunched the numbers based on the info in this book. 

Turning our current home into a rental includes refinancing our current home at today's rate, about a 12% down payment, closing costs, costs associated with prepping for a rental, all in a 30 year loan. Our lender has already agreed to the refinance package. So here's the breakdown...

CoCROI = 5.5 %

Positive monthly cash flow of about $172

The property is in a highly desirable area and most rentals in my area have long term tenants (15+ years). We don't have any other rental properties so this would allow us to break into rental property investing, which is what we ultimately want to do. Now those numbers aren't that great but it seems like it might be difficult to find a good cash on cash return in the Portland, OR area in this sellers market. 

The question is should we sell this house and put our money into a new house instead, and purchase a different rental property in the future? Or rent this one out and have less of a down payment for a new house? In either case we are committed to investing in rental properties in the future. 

Thanks for your suggestions and expertise. This is a new thing for me so I apologize if I'm leaving something out. 

[Mike Nuss]

@Steve B.

 I'm failing to see how your Laurelhurst example is relevant to the question at hand. When did you buy that property? How much did you pay? When you moved, how much was it worth and how much debt did you have?

If what you've  stated in  other posts is true (you don't use leverage and you invest in Oregon outside of Portland), this is a significant house sale in Laurelhurst. That probably has very little to do with the OP's current situation. The "law of diminishing returns" tells us that a big expensive home (in Laurelhurst of all places) will create less cash flow than the alternatives that you're suggesting (multiple smaller units, maximizing rent/SF). The problem is the OP doesn't  have long term ownership in a high priced, free and clear, Laurelhurst home. 

It sounds like the OP is probably in a position more similar to you, back in the day,  when you decided to keep that house and rent it. Having some equity to work with is different than having a free and clear sfr that you can trade for multiple units. I've never heard of turning your first house into a rental being called "accidental or semi-accidental landlording". Was it called that back in your day too, when you decided to keep or sell? Did you run your numbers based on rent to ARV ratio or rent to equity ratio? It seems a rent to equity ratio would be more applicable to that scenario.

Just my opinion but it seems your perspective may not match where @Tyler Hillis at in his career. 

Tyler, you have spelled out some numbers. Is that 5.5% cash on cash return based on your entire equity and investment to make rent ready? Or is it on just the cost to refi and make rent ready? Does that $172 net cash flow include fees for property management and reserves for cap ex + vacancy? If you sell, what % of your equity will you lose from the fees associated with said sale? What alternative properties are you possibly considering? 

It sounds like you really need to decide if you're willing to have "less of a home now", in exchange for building a portfolio that helps you have a "much nicer home in the future". I think many people have started building wealth by turning their first home into a rental and acquiring another personal residence. This gives you more favorable borrowing rates on those two properties, than if you should buy a new personal residence and then a new rental. Plus your mortgage may possibly be less than renting. 

I hope this helps and good luck making your decision.