Investment advice on renting current home

[Ryan Johanson]

We are building a new home and are trying to decide what to do with our current home. We don't need the money from the sale for the down payment.

Currently, we are thinking of renting it out. It would rent for about $2,500 per month in the Colorado Springs area. Mortgages is about $1,500.

We could sell it for about $500,000. 

We would like to purchase a STR in Hawaii (Kauai) somewhere down the road.

Should we keep the rental and then purchase some more? 1031 exchange for a STR in Hawaii? Can we do a 1031 since it has been our primary residence? Other ideas?

[Ben Rhodin]

Hey there @Ryan Johanson! Thank you for posting this question, it is one of my favorites to answer. The classic dilemma of should I keep, or should I sell. I have helped out numerous other clients with this exact same question and would be happy to run through the scenarios with you as well. 

First, for your questions, How long have you lived in that primary? If you have lived in it for 2 out of the last 5 years, you will be exempt from paying capital gains tax on the first $250,000 of profit ($500,000 if you are married). So that may take away the 1031 question entirely. If you haven't, then it is situation-based, and how much profit you think you'll make if it makes sense to do a 1031 or not.

As for the should I sell or should I keep the question, the easy answer is where will you get the highest ROI. I am always in the school of thought to keep any property, but if the question is should I keep this property or sell it and buy something else, that is another story. I am happy to run through this scenario, as it will depend on how much you could make from the sale of the property, and what you could get from that property. As well as how much cash flow you could produce from it as a rental, and if you could possibly refinance and take out enough cash to make your second purchase. It is very situational and I would need the whole picture to best guide you!

But let's just assume you would produce $500 in cash flow from your property as a rental (assuming roughly $500 in reserves). That's not too shabby and a pretty good amount. But let's say you were able to sell the property, get $200k in proceeds, and take that and purchase the STR that you wanted, which then produces $1500 in cash flow every month (probably conservative for a popular STR). Then clearly your money is going further with the STR. Or maybe you'd be able to get two properties from it, each producing $1500 (possible?). However, let's say you could do a cashout refinance on it, and still get $150k or so, that you go and buy that STR with, then maybe your primary is producing $300 in cash flow, and the new STR is producing $1500, then you come out on top, but you need to make sure your DTI can support the STR, the new primary and the cash-out refinance. I am assuming you would use a second home mortgage for the STR, so it may be very possible that you could pick up the STR, and another rental somewhere with the proceeds (I am guessing depending on how much you can get from the sale).

Of course, that was all hypothetical, but if you want to, I'll shoot you a PM and if you want to share with me all the details we can dig in and find the best course of action for you! I hope my long winded answer gave you some clarity!