The Idea of Renting out Current Home to Buy a New Home

[Kathleen Park]

I was wondering if any real estate professionals like you can prove this to be a good move in terms of investing. If you were me, what would you focus more on?

I live in the West Town area of Chicago. I’ve recently been thinking about renting out my current primary home (built & moved in 2019: value $550K: have a mortgage loan of 2.65%) and buying a new primary home (built in 2020: value $700K: thinking 20% down +80% loan to purchase) in the same area. However, I have a few concerns:

Pros:

• Living condition: 1400 sqft → 1700 sqft with some boutique features
• The rental market seems good in this area.
• Another property is added to my existing real estate portfolio, which currently includes two other properties.

Cons:

• Interest rate: 7% - No guarantee of decreasing the rate, which means there might be no opportunity for refinancing in the future.
• The current home is too new to be rented out.
• People often say not to buy property in Chicago due to high taxes and low appreciation.
• There’s no necessity of moving since I have a decent primary home.

Any professional advice would be helpful. I really appreciate your time!

[Jo Bradley]

I have done this before and for me, this worked out very well. I never regretted keeping my first house as a rental because it cash flowed very well from the beginning and as years passed and rent increased it became an outstanding decision .

However, our home was significantly less expensive than yours. I live in an area with a shortage of rentals and a strong rental market but the homes at the price point you are talking about do not rent nearly as well as the less expensive homes. In my area, there seems to be a ceiling on what people will pay for rent and if they have enough income to rent a $500,000 home, they will just buy one instead. So my advice would be to verify the rental market for homes in the same price point as yours. If it were me, I would probably list my original house for rent to gauge the interest before pulling the trigger on buying the second house you have selected. 

Also, how will you feel if a tenant destroys the high-end finishes of your existing home? If you are okay with someone painting over your original woodwork (even though the lease says they can't) or ruining your marble countertops when they dye their hair (true stories) then you may be emotionally hardened enough to rent your original home that you have lovingly designed.

Consider, also that at times you will have to carry two large mortgage payments and decide if you are willing to do that. Sometimes it takes a long time to evict a tenant for non-payment of rent and remember that not long ago (during Covid) landlords could not evict someone for non-payment if they were currently making less than they were in the previous year.

Depending on your answers to the above, you may be better off keeping your real-estate transactions in two different "lanes".  Sell a primary to buy a primary.   Then buy lower priced rentals if being a landlord is something you are interested in. Two starter homes in a modest suburb may cash flow better than a higher-priced one and it is easier to offset the cost of a vacant rental with the rent that the other property is generating.