Sell or Rent My Started Home?

Question

We recently refinanced at 15 years on our started home that we purchased in 2014. I GC'd it and handled most of the grunt work. Spent $100K over the years on top of the $380K purchase price. Market Value is $550ish but my refi- appraisal was only $500K. We rolled 60K of debt in (cars & student loans) , took some cash and are just 2m months in on 15 year a 2.375. Monthly payment is $3450.00 ( incl. NJ prop taxes). We owe basically 400K on the house and gain $1,200 in principal each month and have zero other debt.

How would I compare the benefit of selling now at various prices vs renting at market ( which is $3,000-3,500 range) ?

How can I find someone who needs creative financing...find a Lease Option Buyer for my house? is this a good idea?

Thanks BP Community!

How would I compare the benefit of selling now at various prices  vs renting at market ( which is $3,000-3,500 range) ?

How can I find someone who needs creative financing...find a Lease Option Buyer for my house? is this a good idea?

Thanks BP Community!

Brent Coombs · Answer

@RJ Staats, I still reckon that, even at 0.5% higher interest, the savings of around $1000/m was worth considering a 30yr loan, rather than your current 15yr.

Because even at 2.875%/annum interest, debt is not your enemy.

Especially seeing as you're considering investing in real estate for the long haul.

Because, hey, you can make extra "principal-only" payments at any time to hasten free and clear, (if you're being nagged at from without, or within). Cheers...

Bradley Sriro · Answer

I really don't see the benefit to renting the property out if you are not going to cash flow at all and you still have your equity tied up in the home. From what you described, you would likely be cash flow negative if you rent it out. The only upside of having a tenant is the equity pay down on your loan. But what if you end up with a vacancy for a month or two? Or if a tenant stops paying and you are unable to evict because of the current eviction moratoriums in place nationwide due to the Corona Virus. Would you be able to comfortably carry 2 mortgages (assuming you buy a new place)? If you had a 30 year mortgage on your home, you would likely be in a better position as the home would provide positive cash flow if you self managed and you would still get the benefit of the principal pay down from the tenant... Plus you can always send additional principal to pay off the home faster if that is your goal. With the 15 year mortgage though, you are locked into having to make that large $3500 monthly payment every single month. The 30 year just gives you more flexibility.

Lease options are not as simple as they seem and do come with risks to both the seller and buyer. Especially if you are lease optioning your own home. One of the more common risks for you as the seller is that it has the potential to violate the due on sale clause of your mortgage. It rarely happens but if it did, would you be able to pay off the mortgage in full or refinance it yet again? You would also lose your Homestead exemption which would result in higher taxes and ultimately a higher monthly payment.

There are also insurance issues that you have to consider. The lease option agreement may trigger the termination of your existing homeowners policy and the tenant buyer would have to have their own policy in place with you and your mortgage company as loss payees.   Also, would the non-refundable lease option fee collected up front be enough for you to use toward the purchase of another property? If I were in your shoes, I would consider some other options because the benefits don't justify the risks.

RJ Staats · Answer

@Brent Coombs

A 15 year had a .5% lower rate and reduced my term from 24 (remaining years) to 15. Also we rolled other debt in and didn't want to pay that down for 30 years. We gain much more equity per month on the 15. And I want out of debt ASAP.

The compelling reason to move is to begin building a RE portfolio (or cashing out significant $$ in sell scenario and using that to a house hack ) . If we move out we can save $ and then get another property while the renters / leasees pay my monthly mortgage ( 1/3 of which was previously school and car debt pre-refi).

One advantage of selling via Lease Option ( I heard on BP) is a getting a higher selling price, as the buyers don't typically have access to convention loans and therefore most houses for sale.  For example The Buy Option is at $575K where as  I may only get $550K from realtor sales and then pay commissions of $25K.

Brent Coombs · Answer

@RJ Staats, why only 15 years?  Don't most folk go for 30?

ie. A 30 yr mortgage would really be much cheaper than renting.

If there's no compelling reason to move, why sell now?  Also, what would be the benefit of "creative financing" for you (vs a normal sale)?  Cheers...