Moving. Should I rent or sell my current home?

Question

Hello,

I really enjoy this website and the insight everyone gives. I was hoping that y'all would have an opinion on our situation.

We are moving to another state in August and just closed on our new home. Our current home in Central Florida was purchased for $265K in 2009 and market values somewhere around $380K right now. We own the home outright with no mortgage. We had enough funds (and other investments) for the 20% downpayment on a $395K house we just purchased in another state. We have no other debt.

Couple options I'm thinking about:

1. I think I could rent this home for $2,500/MO, and after running it through the pro forma, I could clear $1,410/MO, including management fees. I've always wanted to start real estate investing anyway, and this could be a nice first step. We have about $300K total in this home, but the return doesn't look great at 5.6%. The home, however, is in a great neighborhood and area and should continue to appreciate in value.

2. I could sell this home, refinance my new home when the Central Florida home sold and plow the equity into the new home to reduce my payment or even pay the home off. I would then either sell stock or save up to purchase a $75K or so rental in the next year or two. However, I would lose about $35K in transaction costs (realtor commission to sell my current home and closing costs on another investment property).

My idea over time would be to buy up rental properties for long-term holds.

Thanks for the input you all have, and I look forward to hearing your expertise and insight.

Luke Schrotberger · Answer

Hi @Jon C.

If your goal is to build a rental portfolio, then plowing any equity you get from selling your home to reduce debt does not get you closer to that goal. To achieve that goal, your fastest route is to use leverage in an intelligent way.

If you just bought the place, then I'm guessing you got an interest rate at or below 4% fixed for 30 yrs. That is a historically low rate. So from a strategy of maximizing your ability to leverage, this allows you to keep as much money as possible free to buy more investment properties.

A couple options not listed above would be:

1. If you want your investments closer to new home, then sell the Central FL home and use the $350k as down payments buy multiple cash flow positive investment properties in whatever market you deem the best area close to you.

2. If you want to keep the FL home as your first rental, then do a cash out re-finance in an amount that ensures the home is cash flow positive. Use the money, (I'm estimating you could pull out at least $200k) to buy multiple other rental properties in whatever area you determine would be the best rental market for your situation.

The more rental properties you have, the more you mitigate your risk.  If you have one property and it goes unrented then your occupancy is 0% and paying the mortgage is difficult.  If you have 4 properties that are all cash flow positive and one goes unrented, then you have the cash flow from the other 3 properties to pay the mortgage on the 4th.

If I was in your situation, I would use the equity in the FL home to fund more rentals and diversify my risk. ( and lock in more historically low interest rates).

Maverick Wade · Answer

Yes, I agree with Mr.Ayodeji Kuponiyi's suggestion. Still you don't clear about your actual goal. So I think you should sell your home as if you want a permanent residence at your new address. If you still have plan to return your old address then you may give rent your house. One of my friend also changing his house to a new address and he liked to sold his current house to a home buyer company as "Whitestone Acquisitions LLC". So I think better to sold your house.

Adam Bartomeo · Answer

Although I own investments out of the state that I live in I would not suggest starting your real estate empire by living more then a couple of hours from your investment. Even with a management company in place you would still want to visit the property periodically.

Ayodeji Kuponiyi · Answer

@Jon C. What is your goal? Are you trying to achieve passive income? Are you trying to eliminate debt? If cash flow is your goal then run the numbers. If eliminating debt is your goal, then sell the home.

Bobby Musser · Answer

Hi Jon, I am a Realtor and investor in Orlando. If you want to PM some more details about your home I can do a little more formal analysis for you. Owning the house free and clear gives you a lot of wiggle room if you decide you want to use it as a long-distance rental.

If you go the rental route do you have a property manager in mind already? What are you budgeting for PM fee, vacancies, cap ex, general maintenance costs, tax increase from losing homestead and save our homes?

If you decide to sell you are going to be spending some money in closing and realtor fees, but that is money that you will have to spend eventually anyway. And if the value of your Central Florida home increases, those fees increase right along with it.

Scott Weaner · Answer

I can't imagine that you could cash-flow $1400/month after ALL expenses. I would sell and start investing where you will be living.

Moving. Should I rent or sell my current home?

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