Next Purchase Rental or New Personal Home?

[James H.]

Well, I am taking a little time to recover cash reserves from my first rental property project and am contemplating my next move when the time is appropriate.

One option I have is to buy a new house to live in and rent out my current home.

I have lived in my current home for 3 years. My mortgage would be about 600 to 625 per month without a homestead exemption. 400 of that is P&I. Balance is about 57K and ARV about what I owe, maybe a little more. I would likely break even or lose a little to sell right now. I could rent it fair market for about 750, maybe 850 to Section 8.

Now, based on the 50% rule, I would probably break even to maybe even losing a little money. But, the house would not need any rehab (not even paint) and I will handle management and maintenance myself for at least the next few years. I think in all I would break even on cash flow, maybe pocket a little from maintenance and management.

The house was newly remodeled on the inside when I bought it 3 years ago and I replaced all the siding, soffit and trim with hardi products and added insulation and energy efficient windows all around. So the house is in tip top condition. Even the roof is only a few years old. The biggest expense I foresee is the HVAC (which could be a pretty big expense). It hasn't given me any problems other than the heater needing a cleaning, but its getting up there in age - about 15 years old according to the stamp on the Train A/C. compressor. I know this system was a retrofit b/c the house was built in the 50's. The electical system is upgraded to modern standards as well.

The thing is, the neighborhood is working class to lower working class and the house is only two bedrooms with one bath and one car garage. I am getting tired of living there and I see a lot of really good deals in other neighborhoods that I like a lot. Plus, we will need a bigger house soon, plan to have kids in 2 to 3 years.

In addition to all this, my experience is that, in real life, it takes about 20K-30K in cash to acquire a rental property (a decent 3/2/2 in a working to lower middle class neighborhood). This 20K-30K is either a combination of DP, rehab and reserves or DP and reserves for a rent ready unit. OTOH, I can use a MUCH smaller DP (3.5-5 percent vs. 20-25 percent) and possibly no money for rehab on a personal residence. I know I will still need the added reserves to support the new rental unit that the old house would become.

So, the disadvantages appear that I would brake even on cash flow and have marginal appreciation to show for that (not the best combination of cash flow/appreciation).

On the plus side, I would not have come up with as much cash, get to move to a nicer neighborhood, have more space and have an opportunity to see appreciation in the new house where I would live long term - but not forever. Plus, I would see *some* appreciation and get mortgage pay down on the current house.

What are your thougts, ideas, etc?