Convert Personal Residence to Rental

[Nate Byers]

Hello Real Estate Analysts!

I have $50,000 to invest in real estate.

Question is: What if I rented out my personal residence for at least the next 3 years? Then used the $50k toward downpayment to buy a new personal residence.

When analyzing this situation, it seems like MIRR is the best calculation. If you don't agree, please tell me the better calculation. If you agree…

Should my “Initial Investment” for the calculation be the $50,000 I earmarked to invest in real estate? Essentially ignoring all the equity in my current residence?

If I use the $50k to buy a new personal residence it is not going directly into the investment property. If I rent out my current residence, I want to buy a new personal residence. 

The alternative is to sell my current residence, use some of those funds plus my current savings to buy a rental property + new residence. Which I would run the MIRR on that decision to compare it apples to apples.

Question is… am I thinking about the use of this $50,000 correctly? What am I missing?

Here is my situation:

• Cash to invest: $50,000
• Personal residence: $300,000 Zestimate 
  • This seems high to me, needs a new roof in 1-3 years, Water heater/softener, and HVAC is 14 y/o but it’s a hot market in a hot location so who knows!
    
    • Loan balance is $175k at end of year 3.
    • Assume sale price is $300,000 in year 3. 6% commission paid.
• Projected Gross Rent: $2,000 per month
• Projected CF Y1: $6,000 (DIY PM, 0% vacancy)
  • 0% vacancy is to keep this simple. Will beat numbers up later.
• CapEx: ~12,000 for roof in year 2 (quoted); HVAC ~8,000 (estimate); Water ~$3,000
  • Total $23,000 w/in next 3 years
  • Not considering tax benefits of these. Yes, there is recapture in year 3, but TVM for the immediate expense under the new law should add more value TBD later.
• Calculated MIRR =

Thanks for your help!