Should I turn my primary into a rental if it doesn’t meet 1%?

[Mike Geier]

We plan to move in the next 4 years to a better school district. We purchase our townhome for 251k. If we keep it as a rental we can get 1750-2100 per month in rent. This violates the 1% rule. The mortgage rate is 4.5%. The place is in good shape so I think the cap ex would be low. Should we do keep it as a rental or sell it and invest the money elsewhere?

[Samantha Miller]

@Mike Geier Definitely use the BP calculators and run these numbers, but as an example, I might say: $1377 PITI + 130 utilities (remove if tenant pays) + 45 HOA + 5% of gross rent ($2100) for vacancy + 5% for maintenance, repairs, capex + 7% for property manager = 1909/mo of expenses. This gives a profit of $191/mo.

I'm less familiar with sale profit calculations, and not familiar with 10/10/80 loans, but I found a calculator here. Just plugging in an estimate, it would cost about $26k to sell the place for $267k, then once you pay back the loan of $185 you'd have about $82k left. Then subtract any amount you plan to use towards down payment for your next place to know what you're working with. Also, look into any tax implications - you could have to pay taxes on profit, unless doing a 1031 exchange or I think if you've lived in the property for 2 years.

So the question is, $191/mo or a lump sum of $82k (or less if using some for next place)? Again, do these calculations for yourself as you know the specifics, and I am not an expert, but just to demonstrate the thought process. Of course, you have to look at all the other factors. The $191/mo will increase over time as the loan is paid down, home appreciates, etc. and you'll continue gaining equity in it. When it's paid off someday, your monthly profit might go up to $600-700 or more. However, with the $82k, you'll have to think about what you could do with that. Could you put $20k down on 4 different properties, each cash flowing $191/mo, instead of having just the 1 with your current home? Which would be awesome, if you have the time/knowledge to find 4 cash-flowing properties. It's definitely something to think about. It's not a decision I could make for you, but I hope the general thought process is helpful! Curious to know what you end of deciding! Best of luck!