Quick Question - What would you do?

[Austen Sweeten]

Hi all - 

I own a little condo/townhome in a booming part of Pleasant Grove, Utah. Currently very actively trying to decide if I should sell, or try to keep it as a rental. I keep getting conflicting advice. My wife and I are ready to get a new place and move into something larger with a backyard. We are also interested in having some rentals long term, which is why we are here. Would love your thoughts!!

Option 1) Sell it  I've lived in it for the last 3.5 years as my primary residence, so the gains would be untaxed obviously (which is awesome!). I honestly think that the market is stronger than ever for sellers in this cheaper price range, and I know I could get top dollar for this place since we have added multiple improvements and it's a great find. I bought it at a great deal almost 4 years ago. After commissions and costs, I would make at least $85,000+ from this sell. 

This option would allow me to purchase a new primary residence and put 20% down and lock in a great interest rate of around 3.25%, or lower, on my new primary residence. I would buy a place that looks as if it could be turned into great rental down the road when we move out of that house. 

** We are currently eyeballing a place that would make a great rental down the road. It's $363,000. For my mortgage, taxes, insurance, etc. my monthly payment would be only $1460 per month on this place with no HOA. I would put down $72,600 (20%) and have $12,000+ left over to build up savings or use as a future investment. Not a bad option at all. Especially considering this particular place could rent for $2000+ monthly in the future. (I am also exploring purchasing a place for $450K that has a mother in law / basement apartment. But we haven't found anything that's not super old).

A couple pros to doing this option is that 1) I have some money left over to put into savings (for future downpayments or investment). 2) I would have 20% down on a new place with a super low interest rate. And I could get out of my townhome HOA. Perhaps if we purchase a single family home, with the low interest rate and no HOA, it would make a better rental down the road anyway. 3) This option helps me get ahead a bit as I will build up my savings, have a low monthly mortgage payment, no PMI insurance, have equity my new home from my downpayment, and be in a better spot to invest down the road.

Option 2) Keep it and rent it out. I pay $1020 per month for mortgage plus HOA. I could rent it out for $1450 per month give or take.

This option would allow me to get into the rental game. It would also allow us to hold onto this property which is in a growing part of Utah county. Would be a great thing for us long term to have a rental or two at least, and this helps us start now. 

The strong negative of this option is that my wife and I still want to move into a new home, and we don't have a ton of money sitting around for a 5% downpayment, unfortunately, without completely draining our emergency funds and savings. So we would need to take out a HELOC for most of the downpayment on the new place. Also my monthly payment would be much higher on our new place we move into since we only would put down 5%.

** These are some rough numbers. Let's say I factor in 10% each month for vacancy + repairs, and I rent it out for $1450. That's $1305 rent each month, and I pay $1020. So technically speaking, I would be making $285 cash flow each month. If I kept this rental and went for that same $363,000 home I was talking about in option 1, that home would cost approximately $1950 per month for mortgage, insurance, taxes, etc. And let's say I get a HELOC to help with some of my downpayment on the new place, and it costs $150 per month.

• - $1950 monthly payment on new home ($363K home that I put down 5% on).
• - $150 HELOC
• - $285 cash flow from rental
• = $1815 monthly payment, give or take, for me to keep my rental, get a new $363k home, cover the HELOC, etc.

We know the positives from having a rental. But some of the negatives in this scenario are 1) I'm definitely "poorer" each month as I have higher monthly mortgage payments, PMI insurance, a HELOC to pay off, vacancy to worry about, and not much savings. I go from paying $1460 in option #1 (and having savings and lots of extra cash), to paying approximately $1815 each month with possibly unexpected expenses, not much savings, etc. 2) If I decide to sell it in 5-10 years for whatever reason.. I would have to pay capital gains tax. And who knows if the market will be super high like it is now. 3) I do have this AC dual blower thing that is on it's way out in the coming years.. and it's pricey. So I would have to probably tap into my HELOC again down the road to fix and repair that. 

Summary

What would you do if you were in my shoes?? I would sincerely love some expert advice. Any other options or thoughts you can think of? I know I'm in a decent position either way.. but I would love to hear what other investors or experts have to say. Thank you!

[Becca Summers]

Austen, 

I think you've done a great job sinking through all the scenarios. I do think we are in a great seller's market for that price point. I know a lot of people regret selling properties that would make a good rental down the line however being able to sell it without capital gains is a huge benefit. 

I would want to know what community it is in before I made my final decision because some aren't as landlord-friendly as others. If you did keep it you could get a home warranty on the property for $500 a year which would cover when your AC goes out.

Houses with basement apartments for $450 are few and far between they do happen but they sell quickly. 

Angie if you were to buy a new house I would try and stay under the $330 mark because then the numbers work even better for rental rates down the line.

I help investors buy properties like that often.