Will my primary residence make a good rental property?

Question

Hi everyone: I'm a brand-newbie with a lot of things on my brain, but I might as well begin by asking about the primary reason I stumbled onto Bigger Pockets. Recently, I've been trying to understand if my primary residence (4 BR townhouse in a very desirable neighborhood) would make a good rental property. I had always wanted to get into rentals, and seeing as my family may be moving on to a SFR later this year anyways, I thought it sounded like a "good idea". But as we, and I now know, there has to be a whole lot more to the situation than it just being a "good idea". I'm trying to find a more mathematical way to predict if this would be a good investment, if you could even call this strategy an investment? We've owned the place for several years and already have equity in it that would have been spent regardless of whether or not we choose to rent it out. Has anyone come up with a good way to analyze your own home?

To give you a few more details, the townhouse is well maintained, relatively new (2007) and in an attractive rental market. Great schools and proximity to local businesses, shops, etc. I don't predict it would cash-flow very high though, if much at all, and refinancing doesn't seem like an option there because the interest rate on our mortgage is already quite low and close to today's current rates.

It seems to me like this might be a great first step in getting familiar with renting and landlord life. However, I do want to make an informed decision. I'm OK with breaking even and having someone else pay down our loan. I'm not OK with losing money. Has anyone been in a similar situation?

Thanks for your input!

Antoine Martel · Answer

You have to look at the return on equity for your home. How much cash do you have in that property and how much can you make on a monthly basis in terms of cash flow and then look at that return.

How does that return compare to buying rental properties out of state for 15% returns?

My parents just sold their home in CA last year and bought 20 units out of state!

Amanda Penna · Answer

@Kevin Sobilo great tip on the tax break, I hadn’t thought about that. As you and @Michael Tripp mention, the townhouse may not lose money but the equity in it would probably do better invested in a different market all together.

Thank you for your recommendations, I’m still happy to hear additional opinions!

Michael T. · Answer

@Amanda Penna there are still quite a few details that are missing before anyone could tell you if it would be good to keep it as a rental.

As long as all of your costs are included in your cash flow of $150 a month then it's not the worst deal, however, unless your property is going to continue to appreciate at a strong pace or you're going to get more cash flow it seems like the $215k in equity could be better used somewhere else.

Amanda Penna · Answer

Thank you @Dylan Vargas! I appreciate those thoughts and encouragement. I haven’t explored the idea of fixers or more serious rehabs, mostly because I’m new to all of this and thought it might be biting off a tad bit more than I am willing to chew. I’ll keep it in consideration though, because you never know...Maybe the right deal for something under-market would turn out to be less overall risk, as you mention. Have a great weekend!

Dylan Vargas · Answer

@Amanda Penna Welcome! First of all congrats on the decision to buy and get some home equity. You can go a few ways here. I was thinking would you be willing to buy a fixer in your area? Maybe not a rebuild but a fixer that could get you instant equity from paint, flooring, updates etc? You can use your equity and put into another home but would be protected from the market going down because you would be purchasing a fixer that is under market. Make sense? Very good chance of adding even more equity to your financial future. You can also pull equity out to buy another place but because you have such a good loan on your current property you will have principal pay down.  There is always the argument for taking the money and run. Good luck and keep us posted. Remember, either way you have out you and your family in a good position.

Antoine Martel · Answer

No you're 100% right. You need to sell that thing, rent a home to live in, and then use that cash to buy some rental properties out of state to pay for your rent where you live!

Kevin Sobilo · Answer

@Amanda Penna, some other considerations. If your property has appreciated during your ownership, selling would create a profit. As your primary residence you would not pay income tax on $250k for a single person of $500k for a married couple.

https://turbotax.intuit.com/tax-tips/home-ownershi...

However if you rent it out for a few years then you will lose that tax break because it has to be your primary residence for 2 of the past 5 years prior to the sale.

In addition those cash-flow numbers are sad... You could take your $215k after a sale and use it as down payments to buy 10 - two family homes in my area. You would probably have positive cash-flow after expenses of $5-6k per month!

Amanda Penna · Answer

Thanks @Antoine Martel...that’s just where I’m stuck because I keep coming up with a return on equity that is less than 1%. Could that even be right?

Let’s say my cash flow per month would only be $150 (California taxes and HOA KILL my monthly income potential!). I have $215,000 in equity as of right now....

$150 x 12 = 1800

1800/$215,000 = 0.008

Am I missing something? I’m trying to figure out now why the heck everyone around me is saying this would be a good idea. Is this in any way worth it just for loan pay down and appreciation?

Will my primary residence make a good rental property?

Most Popular Reply