Purchasing new Primary Residence, keep current or rent? Thoughts?

[Michael Kaminski]

Currently we are looking at a new Primary residence around $700k. Current primary appraises around $625k and I owe $100k on it. We currently have one significantly cheaper rental that has been working out well and has put this idea into my head. I've got at 2.29% rate on the current primary and a mortgage payment all in of about $2600. Not many comp rentals in the area of this size to compare to but I'm expecting I can get around $3,500-3,800 in rent.

The flip side of having to take a 7% rate on the new home with only a $100,000 down is weighing heavily on me. I'd imagine the appreciation on my current house over the next few years (if I rent) will wash a lot of that interest away? What would everyone do in this situation? 

[Bill B.]

More important than what you owe on your current home is why are you moving and what did you pay for it.

If you’re moving for a lifestyle upgrade or other non-financial reason go ahead and move. (Since it sounds like the new home is more expensive.)

Now the important question is what did you pay for it? If you have a gain over a couple hundred thousand I’d’ pry sell. Every $100k in gain up to the limits, $250k (if single) or $500k (if married) will save you $15k in federal taxes and I’m guessing $5-10k in state taxes?  So if you have $200k in gains you’d have to make $50k on your rental NET, after expenses. So you can pay $10k in taxes and be back to where you would be today by selling. Except you’d also have to make up the interest expenses on that extra $500k you borrow, so you have to make that plus $2,500/mo profit (another $30k) to pay the interest. 

So if you think you can net say $45k/yr in profit it will take you 3 years to break even if you ignore income taxes. Most rentals won’t bring in $4k/mo in profits. (Not rent, profits after expenses.)