Keep current home as rental?

Question

Would love some advice!

My husband and I purchased our current home in June 2018 for $160k. We were planning to downsize, but I am pregnant so we are building and upsizing again - we both work from home and this will be Us plus three kids in 1500sq ft. Just can’t do it.

So, husband wants to rent the house out. Mortgage is $1150 and we could rent for about $1300 per month so not much extra there. The house is in great shape! Roof is about 8 years old, but Ac will need to be replaced soon (about $4000) as the unit is undersized for the house so it struggles in the GA summers. Anyway, the house is in an incredibly desirable school district and would stay rented! Likely no down time between tenants.

The market for our price point is strong, though and we could probably get $200k for the house if we sold it. However, we would owe capital gains taxes if we sold since it hasn’t even been a year.

We have had rentals before and I’m a real estate agent so the ins and outs of being a landlord don’t scare me. Just the lack of cash flow. Any advice about which route to take would be greatly appreciated!

Nathan Gesner · Answer

Not a good investment.

How do you know? Go to the BP Rental Property calculator and put in the numbers. You'll see this is a bad investment. Sell it and put the money into an investment that produces a positive cash flow.

Steve Hall · Answer

@Cindy Harney

If you have $20k for a deposit on a new home, and your DTI works, then keep this one as a rental... It's a positive cash flowing rental of passive income, and your tenant is paying the mortgage and you're building equity!

If you don't have the money to put down on another primary residence then you'll obviously need to sell it and use the equity as a down payment on a new house.

Another idea is to wait another 13 months and then sell it. The property might appreciate another 5% or 10% and you can sell it with a section 121 exclusion (no capital gains tax!)

Last but not least, you could wait another 13 months and then rent it for 3 years before selling it. You'll still qualify for the section 121 exclusion and your property could appreciate 20%-30% in those 3 years.

Theresa Harris · Answer

@Cindy Harney  As you will incur capital gains, it might be worth it to rent it for a year and hope the AC doesn't go in that time.  After that, you could sell it and see if you can reinvest the money into a rental where the numbers are a bit better.  In addition to the mortgage, you will have other expenses such as property taxes and insurance meaning your costs will be more than $1150 per month.

While you are renting it (and taking care of a newborn!!), take time to research options for rentals in the area where you might get a better return.  You've done well for the price to go up $40K in less than a year.

Keep current home as rental?

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