Should I keep my house as a rental property?

[Robert Jimenez]

My wife and I have decided to move to a different city nearby so my daughter can attend a better school district. I'm considering keeping our current house as a rental investment. I already have a duplex that I bought 3 years ago and I enjoy being a landlord. We have enough cash on hand for a 20% down payment for our new house. The house we have now is in a gated community in good area of town. We do live on the Central Coast in California and things are getting pretty expensive. My question is, should I keep it as an investment rental or sell it and use the equity towards our new house? We bought our current house at the absolute lowest point in the market back in 2011 for $332,000 at 3.75% interest. We currently owe $297,000 and the current value of our home is $525,000. Our mortgage payment is $2003.00 per month including taxes and insurance. There is an HOA fee of $114.00 per month. A couple of houses down the street that are the same size as ours currently rent for $2400 and $2600 per month. My wife and I are both teachers with pretty good pensions. I would like to retire in 14 years and use my rental properties as monthly income and fill the gap of my pension. After doing the math on our new home purchase we would still be able to save $2000 per month and I would like to pay off the house before I retire by making extra payments. Can anyone give me some advise? Should I do it or not?

[Clayton Mobley]

Re: strategy, I think the safe bet is to sell and reinvest that tax-free cash in another market that isn't so boom or bust. 

With the $200k or so of capital you'd end up with, you could put down payments on several high-quality cash flow properties here in Birmingham and in other markets in the south and midwest. Assuming you're able and willing to use financing to leverage that equity, you could potentially get yourself a nice little portfolio of 6-7 properties, keep $20k or so as a reserve (it's always good to have a cash buffer) and start earning approx $5000-7000 a month in gross rental income (i'm using numbers from Birmingham, of course). 

Of course, net income would be lower because of all the expenses mentioned above, but depending on whether you wanted to DIY your investments (find the props, rehab them, find a PM etc) or go the turnkey route (one company does all that for you), where you invest and the people you work with, you could be still be netting $1500 or so per month while letting tenants buy you 75-80% of all your properties. If you don't need the income, use it to pay down loans faster and end up with free and clear investment props even before you retire. 

Once you have a portfolio of cash flow properties, you can use a number of strategies to leapfrog into more and more, it's a bit of a snowball effect.

All that to say, I think you've made a great return on this investment and it's time to cash in and redeploy into something better - more diversification, better cash flow, more flexible options for your investments down the line.

You're in a good position, so congrats on buying low and selling high!

Best of luck

Clayton