Buying a new home. Rent or Sell current home?

Question

I know there have been many discussions on this topic but looking to see what advice you guys have for my unique situation. I'll try to include as much info as possible. My current home was purchased for $56k with $45k owed. I've slowly rehabbed it over the last 5 years and recently had it appraised for $130k. I have a mother in law apartment behind the house that I currently rent for $900 per month which has paid for most of the repairs on the home so I'm not going to include those costs in the scenario. I'm in the process of purchasing a new home and have a decision to make. Do I rent the main house (Average rent is $1300/month plus the $900 for the apartment) or sell the home for $130k? The home is in a suburb of New Orleans that is pretty stagnant and I don't expect home values to rise much. The other issue is it may be difficult to keep both units rented. My main goal is to gain financial independence with cash flowing properties which is why I'm so torn on this decision. This property produces excellent cash flow but selling could give me some much needed capital for other investments. The other option would be leveraging the equity in the home. I have plenty of options and I like having options but I'd like to hear your opinions on the best method to reach my goals. I know everyone has a different opinion but my main question is for a guy who is trying to break into investing is it more important to have a little cash flow or build up some capital?

Jeff Kehl · Answer

@John Lewis You can 'build up some capital' either way as you yourself pointed out by selling or refinancing. So really the question is, if you refinance is the remaining equity left in the property the best use of your dollars. I find it best to always just compare potential investments to current investments. It produces $2400/month for a $130k value. That's a pretty darn good rent/value ratio. Can you do better on another property? Also, if you sell and do not 1031 exchange/have an exemption from living there you're looking at a hefty tax bill.One final point, you know that property pretty well at this point so you have a good idea of potential future capex repair costs so it's a known investment.If it were me I would hold that all day long and get an equity line to keep investing.

Michael Lee · Answer

Hello and welcome to this site! It depends on several things that are in and out of your expenses. Do not forget the maintenance and Capital Expenses as well as property tax and insurance. What is the die of the house? Are you sure you can get a new place that you can afford and will it build equity and where is it? How long are you planning on staying there? Is it better to not have the worry of hanging on to it? Is that house in a good place? Is it likely to gain or lose in the future?I am 60 years old now and I have about $200,000 in home equity but in Dallas Texas and your job still as near where you want to stay? We were lucky to move to a suburb of Dallas and do so well in equity but we still have quite a bit of property taxes and Capital Expenses in the older house. If you are planning on staying in your new house for at least 7 years? How long have you been living there? Will you incur any expenses to do that you will have to do to lease it out? It is a tough decision. Good luck to you!

Tony Ayoub · Answer

If you know that your property is not going to appreciate more , better to sell now and use the seeds to buy in a better area.you can't perdict the market

Thomas S. · Answer

"The other issue is it may be difficult to keep both units rented". If you are not confident you can keep it rented the appeal of this property financially drops to half at best and maybe worse. Contrary to the others my opinion is that this is not a good investment to hold. Having a property that you know will be difficult to manage and likely not consistently show returns is high risk and a bad choice. for a guy who is trying to break into investing is it more important to have a little cash flow or build up some capital?What is most important is having consistent cash flow when starting out.I would sell and move the money to a better location.

Vic Stezin · Answer

Keep it. Excellent strategy for long term capital growth. Plus fantastic cash flow..... Great start. Keep up the smart investing.

Patsy Waldron · Answer

Doesn't seem like much of a dilemma here.... The numbers all point to keeping it and renting it out! If you have enough for a down payment on your next home or the HELOC/ refi will give you enough for any other investments you may want to get into, it's really a no-brainer. :)

Braden Smith · Answer

I also agree with Jeff. Best of luck to you!

Will Pritchett · Answer

I second Jeff's opinion verbatim. Good luck!

John Lewis · Answer

I should have included that info. I have owned the home for 6 years as my primary residence so would have a tax exemption. I think I would have a hard time finding a better cash flowing property. Repairs have been pretty frequent but I'm at the point where the home is almost completely rehabbed. The good thing about options is I can always try renting out both units and if it's not working out I could sell and if it is I could use the line of credit.