Should I Rent or Sell?

[Devin Duval]

Hello BiggerPockets family!

I am new to real estate investing and frankly I am not sure where to start.  I listen to all the BiggerPockets podcast and I have a friend who has been wholesaling for years and just started getting into pretty house investing.  He has been mentoring me for around two months now.  I plan to continue to learn from him and hopefully land a deal one day.  The question I have is one that I desire other peoples opinion on because I am not sure the best course of action (there are probably multiple solutions).

The home I currently own is a 30 year fixed and I owe $160,000. The homes value I estimate is around $185-190,000. It is in a really nice neighborhood with an HOA that is $600 a year. It is 4 Bed/2.5 Bath. My monthly payment is $1100 a month. I am considering either renting the house after living in it for two years or just selling it to get some extra cash. I figured I could possibly rent the home out for $1750-1850.

Now the reasoning.  I currently work a 55 hour a week job for $66,000 a year.  I have $20,000 in student loans, $20,000 in personal loans, and $8000 in credit card debt.  Also I am married with a 3 year old and a 1 year old.  I was thinking selling and getting a smaller home would help me save money and pay off some of my debt.  My line of thinking is that if I pay off debt then I can finally start investing in real estate.  So I was thinking I could just do the extreme and sell the house to get out of the large payment each month and then focus on paying off debt.

I appreciate all responses and opinions.  Thank you for your time!

[Cory Carlson]

Devin,

Here is an attempt to answer your original questions: 

1. Should I sell? 

- I will just start by quantifying that decision. Assuming you used a broker to sell and the property sold for $180,000 closing costs would look something like 5% broker fees, 1% title/escrow, 1% excise tax [If applicable] giving you $167,400 minus current loan amount for a NET of $7400. Considering you put over $8k down a year and a half ago, this decision appears to be moving your situation backwards? 

2. Should I rent? 

I am using pretty round numbers here but wanted to plug and play to see what happens. Take this with a grain of salt as you are HIGHLY leveraged at approximately 89.5% Loan-to-value assuming the property is worth $180,000. Knowing this, the percentages are skewed a little because your returns are using your "invested equity" as the denominator in the calculation. Any amount over $18,951 (your equity) is easy to pump up the numbers when looking purely at percentages. 

Expenses are without talking in more detail on what you would offer for a potential tenant. I generally do not like doing this - Garbage in, garbage out but this is an ILLUSTRATION. Variables could include any owner paid utilities (water/sewer paid by you for example), lawn maintenance, if you plan to self manage, etc. You asked a question about reserves. This is accounting for capital replacement items down the road so if the place needs paint in 5 years you have accounted for $5000 of that cost. 

Your year 1 projections in this sample analysis look something like this: 

(1) Pre-tax Cashflow (Also known as Cash on Cash) $2891 (15.25%). 

(2) After-tax Cashflow (Based on provided effective tax rate of 13%) $2789 (14.72%)

(3) After-tax Cashflow + pay down on principle $5579 (29.44%)

(4) Total Return (After-tax+paydown+appreciation-2%) $9179 (48.44)

Disclaimer: I am not familiar with your market. According to your valuation of the house you had an annual compounding appreciation of 3.1% but I used a projected annual value change that's a little more conservative of 2% that is reflected in your Total Return. 

Here is the analysis. Its a screen shot so not the best quality. Click on it to get a better view: 

Thanks,