I need EXPERT advice on strategy.

[Blair Boan]

This will be a long post so I apologize in advance, but I want to make sure to get all the details in as not to miss anything.

My wife and I found a house we both like and want to purchase it. (I am a Realor in Greenville, SC)  But in a perfect world, I don't want to have to sell our current house because I owe so little on it, the mortgage is so cheap per month, and think I should rent it out to help supplement the mortgage of house #2. 

My question, in its purist form, what am I missing from these two scenarios:

Scenario 1

Sell current home - Buy new home

Sell current home realistically for 335k with 10-15k in closing costs = 320k

320k

-55k mortgage

-48k home equity line

= 217,000 at closing.

Put 100k (25%) down on new home. Keep the rest (117k) for savings/additions/whatever else/maybe pay the monthly mortgage??

Per the Mortgage Calc:

Purchase price of new home is 400K

100k downpayment

at 3.375%

30 years

annual taxes of 2,454.85

annual insurance 1,000+/-

Monthly mortgage $1614.20 - now for me, that is too big of a bill to cover at this time.  Could do it, but would really rather not.

Scenario 2

Rent current home - Buy new home

Purchase price of 400k

20k downpayment as opposed to 100k as used above in scenario 1

at 3.375% (would this change with such a low downpayment?)

30 years

annual taxes - SAME

annual insurance - SAME

Monthly $1967.87 - this is really too big of a bill to cover, but not if I could supplement some funds from a renter of my current home.

Current home costs me $480/month and that includes taxes and insurance - with increase to a 6%tax rate lets say it now costs me $600/month

I can get a reasonable $1700/month in rent for my current home.

minus $600 for mortgage on current home = 1,100/month, leftover/cashflow/whatever you want to call it.

New homes mortgage of 1967.87 - 1,100 (from current home rental savings) = 867.87/month out of our pocket. - this is a number that we would really love to work with each month.

Scenario 1 minus Scenario 2 = a savings of 746.33/month (8,955.96/year)

Now with this scenario, obviously we have the mortgage of new home offset by the rent of current home, but we don't have the money up front to do any renovations right away either. We would slowly chip away at current homes mortgage and try to pay that off sooner rather than later. And then obviously, you would need to compensate for vacancies (average of 1 month a year? - this area rents to mainly families for 1-3 year leases) and repairs. (by the way, I have never rented a property in my life and thats mainly the reason I am bringing this to the experts!)

Recap

Sell current home - buy new home - 1614.20/month out of our pocket -

Rent current home - buy new home - 867.87/month out of our pocket 

There is obviously things that I have not thought of, and of course nothing is ever set in stone from a renting standpoint, but it just seems to good to be true that I can keep my current home with a lower downpayment on new home and our out of pocket mortgage on the new home is SO MUCH CHEAPER. What am I missing here folks, what am I not factoring in, has anyone else been in this situation, is there a better solution to offset the expense of a mortgage of $1900? My main goal is to get the new house at a monthly bill of around $900. And, it also is very tempting to rent my current home because the mortgage vs rent ratio is so lopsided that its there for the taking. Isn't that called ROI or cash flow percentage in the investor world?

Thanks for any help and I salute the brave souls that try and understand this and read it in its entirety..Thanks again!

[Mike Dymski]

$1,700/mo in rent for a $335k house may be a good buy and hold investment in certain cyclical markets at certain points in the cycle but it likely is not a good investment in suburban SC. There are pockets in Greenville that could experience good rent and property value appreciation to compensate for the poor ROI on your existing house as a rental but you have to be in one of those pockets (downtown, etc.) and this strategy should be intentional and data supported rather than accidental. I'd recommend determining your true return on your existing house, including $1,700 rent, less vacancy, management fees (should include whether you self-manage or not), taxes (will increase in SC more than your calculation), insurance as a rental, maintenance and cap ex (often ignored or under-estimated). There are rental calculators on BP and other sites that can help you run the numbers. You are going to be surprised at the accumulation of these figures and that surprise could be catastrophic to find out when you can't make a mortgage payment because you have a vacancy, have to replace the HVAC or you have an expensive tenant turn due to damage. Your financials are too tight to not have predictable cash flows on this property.

You also could lose the home sale exclusion if you convert your former residence to a rental.  Not sure if you have a gain in it now.

My recommendation is to separate the decision of your former house as a rental and deciding to move. Determine if you want to move based on housing needs and wants. If that suggests moving, sell your current house, purchase another, and either put 20% down and use the extra proceeds to purchase a rental property or keep a low LTV on it, take out a HELOC and use those proceeds to purchase a rental. If the personal decision suggests staying, you can do the same on your existing home...refinance or get a HELOC on purchase a rental.

In many cases, your existing personal residence does not make as good of a rental investment as many other properties would and limiting your potential investments to one property (i.e. your existing residence) is, well, very limiting.

Good questions and nice work on kicking these items around.  Keep us posted.