Upgrading to new home, keep existing?

Question

Hello!  I am new to this forum so please bear with me.

I am 31, married with 2 children and we are currently living in a 1100 sqft 2 story home in a residential neighborhood.  We are planning to move to a larger house to make room for our family.  My current home is valued approximately $115k with $86k remaining on the mortgage.  The house is old (1918) but completely updated and has no major issues other than an old furnace which still in perfect working condition and the need for a new roof soon.  We have a large cash payment ready to cover 20+% on our new home.

I have been debating with myself whether to sell this house for the little bit of equity we have, or to make it a rental.  We live in a lower income area (Johnstown, PA) but plan on staying here based on my current employment situation.  My wife and I have our first rental property in our 3 year plan, but are not sure if it should be this home.  I am currently reading the beginners guide book but am not complete with it yet.  It has been some great information but I am hoping someone can point me in a good direction for my current situation. Thanks!

Sarah Brown · Answer

Depends on your goals and ultimately what you guys want to do.  I would start with doing the math to see if it will even be worth renting out and then go from there.

David Lao · Answer

Jesse, I have rentals in Richland, Conemaugh, Southmont, and Ferndale. I suggest keeping the existing home, and purchasing a duplex or triplex using an FHA loan, putting 3.5% down -- that is, if you would still have at least six months of reserve plus additional for something like a leaky roof or busted furnace. Hopefully, your duplex or triplex can cover most or all of your mortgage in the event you are between jobs.

I've made most of my purchases with Jeffrey Nider from RE/MAX. In my experience he's quick and cuts down to the chase. He also owns investment properties himself.

Jesse Fatula · Answer

@Michael Lewis Lee Hi Mike, thank you for sharing your story.  You are one tough SOB for sure!  Brain surgeries are definitely nothing to scoff at.  My father had a brain fistula operated on shortly after his forced "retirement" (police officer for 32 years) about 12 years ago.  He had non stop complications and passed in February at 69 from an extremely fast acting Alzheimer's.  Life is definitely short and has its twists and turns and ups and downs.  I envy your support system and your will power through it all.  I also want to thank you for bringing up these points because it puts some new light into the thought process that doesn't fit the on-paper mentality.

I am fortunate enough to have a great employer that values my work along with a good support system in my wife.  I also have a small business backup that could be possible to work on full time if needed.  It would be a time until its making the money I am now though.

Thank you!

Michael Lewis Lee · Answer

Hello Jesse!  I just went through this situation on my house when my wife died from cancer.  In the beginning, my brother had me convinced to lease my house out, which was free and clear and had an ARV of about 400K.  He thought my return would be over 20% with the money borrowed for the needed repairs.  One thing I did not anticipate was his heart attack.  Thankfully, he survived but spent a couple of months in a hospital and I was handicapped and could not even walk.  Since I could not count on his assistance, I ended up selling and "walked" away from closing with $224,000 after all debts were paid.

The bottom line is that you can never count on the future or that it will be good to you and it is hard to predict.  At 54, I never imagined that I would have a brain anneurrism and a stroke two days before my planned surgery to correct my problem that my head surgery would correct.  That was almost 10 years ago today and in some ways I am happy and in some ways I feel cursed.  I still cannot walk and have not worked since 2010 when I owned my own business.  I'm lucky I paid off my mortgage in 1996 but was unable to be involved with my daughter who was in high school.

I was not able to see her graduate at The University of Arkansas.  The good thing, was that she turned out fairly intelligent and graduated with zero debt as a chemical engineer.  She now works for a Ft. Worth company that prints US money and she cleans their air and water.  Just to give you an idea, is that the employ about 1000 people and they are very busy right now.  I was lucky that my wife took care of me for 9 years and her employer was so good to both of us.  She was a computer programmer and made pretty good money.

Again, you cannot predict the future and you need to try to prepare yourself for anything that may happen.  If you can have a positive cash flow that covers all it's expenses including the debt.  You can zlso profit from its' inflation and where it is at.  Is it be in a growth area, a good school system,  in a low crime area, nearby amenities, its' ability to be used as a new virus change that is allowing for office or exercising.  What is the demand in that area?  Can you keep it leased out?  Can you build maintenance reserves for minor and major repairs?

Can you afford any out of pocket expenses that may come up with repairs or debt payments?  My intent is not to scare you but you need to consider everything to take that extra possible burden.  It might just be better to walk away and forget about it.  Does your present employment easy or hard to get away from?  There are many things to consider.  Is the possible maintenance cost look good or bad?  You are hearing from a person that was a licensed broker and into construction for about 30 years in Dallas, Texas.

Good luck to you!

Jesse Fatula · Answer

@Keith Leckey thanks for the input.  I am located in Richland, you are correct. We are house hunting and have missed two due to how quick they are selling and not much input from our current realtor in a timely fashion.  Gut feel on the property is to sell and use my equity on another potential duplex we know of at this point, but I wanted to use this as an opportunity to introduce myself on this forum and also get input from other with more experience than I have.

Do you have any recommendations on other realtors to talk to for purchasing locally?

Keith Leckey · Answer

I also agree with @Sarah Brown and @Jon Reed.  I'm assuming your home is located in either the Richland or Westmont area's based off the stated home value.  If you did decide to rent it and it was in one of those area's, you're going to have a better chance of getting a tenant that treats the property as their own vs something in Moxham or somewhere else within the city limits.  I will say that even though our local market is pretty flat overall compared to the ups and downs of other markets, this year has been more of a sellers market.  Properties are not lasting long on the market and look to be bringing in higher prices overall.  Every local realtor I know said they have been going crazy this summer.  The best thing to do though is to review your numbers and make the best decision based off your personal goals.

Jesse Fatula · Answer

Using the rental calculator on here it seems to not make sense to rent.  The calculator assumes part of expenses is all utilities though.  Typically I see most rentals in my area not include utilities.  Is this a good safety factor to practice in case of no tenant available?

Mortgage including taxes and insurance: $660

Utilities: $201

Rental Expenses: $120

Estimated rent (including utilities): $1,100

Cashflow: $119

Jon Reed · Answer

@Sarah Brown hit the nail on the head... it all comes down the numbers. What kind of ROI will you get based on the rent you can charge for the home? Can you get a better ROI by selling the property and using the equity to purchase a better property?

Upgrading to new home, keep existing?

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