Sell or rent out primary residence?

[Steve Manoa]

Hi, we own a condo in an upper middle class suburb of NYC and we are trying to decide if we should sell it or rent it out. We're around 40 y/o with 2 young kids and have lived here for the past 5 years. The building and unit was brand new so there is minimal upkeep needed. We purchased it for about $1.2mm and have a current mortgage balance of $830k. The mortgage/taxes/maintenance payment is about $5700 a month. The going rate for rent right now is between $6300-6500/month. The units are in high rental demand and usually rent out within a few days of listing it. I could likely sell it for at least $1.25mm (potentially up to $1.3mm), but that will be offset with $50-60k of real-estate commission and closing costs. I hate spending so much cash on paying an agent but it's difficult not to. We've lived in it for 5 years, so we have 2 more years to sell it with tax free profits.

I have a 7/1 ARM at 2.75% that can adjust up to 4.75% in March 2025, up to 6.75% in March 2026, and a max of 7.75% in March 2027. That means the payment can move up from $5700 to $6560, to $7465, and to $7930, respectively. But this assumes mortgage rates stay elevated through this time period and I have no ability to refinance. If I can refinance to a 30y fixed at a <5% rate in the next few years, I would do that. We should be able to deduct a decent amount of interest/tax/maintenance expenses plus depreciation, which should get a decent tax benefit of 8-12k a year. This leaves the rental option producing a gain of around $1500 a month, less any expenses that come up and dealing with any time it is unoccupied. I'd likely build up an emergency fund for any property expenses, and then start putting all profits into principal payments on the loan.

We purchased a house to live in farther away and plan on doing a $300k renovation to it. We have some cash, but not enough to do it all without some sort of debt or borrowing. We could get a construction loan to handle it, or I could take a 401k loan, or a heloc or home equity loan from this property. The rates for this are not easy to stomach right now though.

It does feel like selling the place is the quick common sense decision here, but I would really love to keep this property and own it as we get older. We're emotionally attached to the place as well. At some point it will be paid off, and it's still an asset in a high demand area, that we believe will continue to be a high demand area forever given its proximity to NYC and easy commute, great views, and easy lifestyle for young professionals.

What would you do in this situation? Are there other things I haven't thought about? Thanks. 

[Josh Young]

@Steve Manoa thank you for providing details. If you sell now you will get about $370k tax free, so we should calculate the return you will get on that money (Return on Equity).  The return will be made up of cash flow, principle paydown, tax savings, and appreciation. 

Rent at $6400 minus expenses for vacancy 4%, cap Ex 4%, maintenance/repairs 4%, and property management 8%; you said it's new, rents easily with great tenants and has a maintenance payment built in so let cut this back and say 15% of rent instead of 20%. That means cash flow wise it will lose $250/month, so negative $3k per year.  

Based on some assumptions I made about your mortgage, the principle paydown should be about $2k/month, so $24k per year. 

Tax savings you will be able to deduct the entire payment $5700 minus the principle paydown $2000 plus expenses $950, this equals $4650/month, so $56k plus depreciation (assume 90% improvement value on $1.2M basis /27,5 years) $39k, with rental income of $77k this equals a loss of $18k per year against your income, so lets call that $10k value.

So far we are at $31k on $370k is an 8% return. plus appreciation of maybe 2%, so $24k, that brings us to a total of $55k which is a 15% return. I'd keep it as rental, but only do a 12 month lease at a time because you want to re-calculate in 2 years to see if doing the IRS section 121 exclusion is worth it or not, you really don't have much of a gain, but I'd still want to do the math especially since the rate adjusts at that point too and if you do decide to sell in 2 years you will want it to be vacant when you list it. 

Build up your emergency fund, but DO NOT pay extra towards the principle, you can make a better return and keep your money more liquid by investing in pretty much anything other than additional principle payments.

As far as borrowing money for a rehab just compare rates, unless you are tight on cash flow then consider the HELOC as that will likely be a higher rate, but interest only payments during the draw period.

I hope this helps. Good Luck!