Help me decide- Rent vs. Sell

[Ryan Haliburton]

Currently reside in Midland, TX where the market fluctuates heavily depending on price of oil. My family has outgrown our first home and we are trying to decide between renting the house out or selling it for more of a down payment on our next home.

Our current home is about 3 years old, carpet in the bedrooms and stained concrete elsewhere. Here is what I have come up with.

RENT SCENARIO:

After deducting umbrella insurance and our current mortgage at a 3.25% interest rate we would have cash flow of $1697 a month. That's $20,364 profit a year.  I came up with a budget for repair of about $2,000 a year so $18,364 profit yearly.

SELL SCENARIO:

Right now if we sold our home, after realtor and closing fees (10%) we would expect to profit ~ $70,000.

If everything went accordingly it would take 3.8 years of renting to break even with the $70,000 profit.

Q1. My wife wants a big new home. We plan on putting right over 20% down (more if we sell) on our new home regardless.  My biggest question is, would it be more beneficial to roll the $70,000 profit from selling our house into a bigger down payment or rent out the home and hope the housing market stays as hot as it is? 

Q2. If we do plan to rent out the house, can I use the $1697 a month profit to pay towards the mortgage of my new home since the interest rate would be higher? 3.25% vs 4.9%?

Q3. It scares me to think of the debt (mortgage) of our new home  + rent home.  I flipped a home about 10 years ago and have always wanted to get back into real estate.  I see this rental property as my first chance. On the other hand, listening to Dave Ramsey I think he would say sell the house and have less debt on the next one. What would you do??

P.S. The Midland market is super hot right now and definitely a sellers market.

Thanks!!

[Chris Rendall]

@Ryan Haliburton welcome to BP! 

Since you are planning to buy the second home I would either sell the current house or do a cash out refi and then rent it out, my preference being probably to sell it since once you cash out refi the rent probably won't meet the 1% rule on your new refi appraised value since the market has appreciated so much. Selling also limits your market exposure to a single house in an already inflated oil-driven market. 

I wouldn't put 20% down on your new home, I would buy it FHA with 3.5% and invest your money in other markets that have more stability, diversity of industry, and future appreciation ahead of them. Then if anything happens to the oil market you have minimal cash in the property and can move elsewhere and rent it out until the market comes back. And you would also have cash to invest in Midland for the next down-cycle which will happen again at some point.

I would also consider options other than upgrading to a larger home in Midland. I know you stand to make $70,000 profit on the sale but since you are upgrading your home in the same location you are essentially realizing no gain since you are going to sell at the top and buy right back at the top on the second home. But I understand you have to keep the wife happy!

Good luck!