Rent or Sell Current Primary

[Jacob Schurer]

Hi all,

My wife & I sold our duplex in 2020 and used ~ $60k of that as a down payment on a town home for our growing family (purchased for $345k, 30yr @ 3.5% in 2022).  With 2 kids and a third in the near future, we're looking to move again in the next 2-3 years.

We have around $15k savings, $45k traditional IRA and $20k in other investments. We also have access to a $30k HELOC, fixed 8.5%.

The current mortgage is $1600 and exact units in our block are renting for $2600+/mo, but the property doesn't pass the 1% rule.

We want to start investing in RE again.  I know there are other financing options, but the question we cannot seem to avoid is whether or not to hold (and rent) or sell the town home.

It's tempting to leverage the current equity, move out and rent it - but from what I've read / calculated, it might not be the best return compared to other options.

Ideas on how we can get into another home (larger but cheaper) while also (re)starting our REI journey?

Thanks,

[Kevin Sobilo]

@Jacob Schurer, I'll try to give you a few items to consider. 

1. The 1% rule isn't relevant for renting your current home. Its more of a screening tool so that you don't have to deeply analyze deals that likely won't cash-flow.

2. If you rent your current home, how quickly can you acquire more units? I ask this because it SUCKS to have all your eggs in 1 basket or even 2 baskets. If you have a BAD tenant experience on this property as a rental and lose several months of rent and incur substantial tenant damage that is all coming out of pocket whereas if you had even a handful of rentals the performing rentals and the monies budgeted for capex/maintenance/vacancy will carry that sort of loss.

So, whatever the strategy, I would make a goal to get to at least 4-5 rentals within a reasonable amount of time ESPECIALLY if it would be a hardship to handle a bad tenant situation.

3. You have lived in your townhouse for ~4 years? How much do you think the value has gone up? If you sell now you won't be paying tax on that profit! If you rent it for a few years you will eventually lose that benefit. Tax free money means there is MORE of it to deploy elsewhere.

4. Perhaps do a case study. Compare how you would expect this home to perform as a rental with reasonable assumptions about cap ex, vacancy, repair etc and then figure out what kind of rental or possibly RENTALS (multiple) you could purchase if you sold this property and how would they perform.

There are a lot of variables involved so its hard to see unless you run the numbers especially since you might replace this home with 2-4 units and where the loans on those new properties would be at a higher rate.

If you do a case study also consider what market appreciation and mortgage paydown would occur in both scenarios. If you were able to buy 2 duplexes as replacements then you would own MORE property so that any market appreciation is magnified and you might have MORE loan principle to pay down further building wealth that you don't see just by looking at cash-flow.