Should I turn my house into a rental property and buy another?

Question

Hi all,

I'm currently 29 and I've owned a house in Central Austin for about 2.5 years now. Being in Austin, it's appreciated very well over the last two years and I've just refinanced, which makes my monthly payment lower than what I could reasonably rent the house out for. I've been considering turning this into a rental and purchasing another one with the hopes of doing the same process in a few years.

I'd love to get any feedback or thoughts on this idea and see if anyone has a better idea of what to do with my extra funds.

Thanks!

Neil Narayan · Answer

I would rent out the current place and purchase another home as you will get lower rates on your new home as it will be a primary residence and not an investment property loan.

Joe Scaparra · Answer

The obvious question is do you have the 20% to put down on another rental property.  If not, then yes rent out your current property and use owner occupant rules to buy the next one.

The second question is what is your goal and what is you WHY?  Look at my profile to get more clarity.  In many cases a personal home does not make the best rental.  I don't know many facts about your home, your goal, your why and your financial situation.  Without those it is difficult to give you direction.

Joe Scaparra · Answer

I like Brandon who is founder of this website is all about POSITIVE CASH FLOW.  That does not mean breaking even.  He is also about using leverage but being smart about that.  I strive to ht 12% cash on cash return and I personally use the 1% rule as a guide.

I do believe using real estate in some form is one of the best ways to build wealth.  Since I am a CASH FLOW investor I use small multi-family properties to achieve my GOAL and WHY!  You can do it with SFH but I think small multi-family is easier and the risk is reduced.  One could say well how about 4 plex or small apartment complex or larger commercial bldg.  They can work as well, to each their own. I started out with duplexes and got very comfortable with them and I have done well so for me I am content.  At 65 I have the football game one.  No need to pass on fourth down and 1, up by 10 points and less than 10 mins left in the game.  I am at a point in life that I can punt and watch the clock tick down.

Now if I was 35 starting out rather than 50 when I started I might be more aggressive but as a grey hair I will tell you real estate will get you wealthy over time but chasing the get rich quick usually results in a crash and burn.

We all learn the secrets to winning when we young.  Let me remind you of three memories of your childhood.

1.  Three little pigs.  Live for today and forget about tomorrow and the wolf will be at your door you whole life long.

2. The race:  Tortoise and the Hare.  Who won the race.  Not sexy but slow and steady wins the race!

3.  The game of Monopoly:  How do you win?  Buying properties and then enhance the property to increase rent!!!  Houses and then Motels.   But it is all about CASH FLOW.........YES!   Cheers!

Daniel Tisdale · Answer

Hi @Joe Scaparra I don't currently have 20% to put down on another property, which is why I was going to turn the current house into a rental and put down less than 20% on a new primary residence. I'm realizing that this current property might not be the best rental as I would be breaking even after all expenses.

Joe Scaparra · Answer

Yes I am an investor in Austin, but I began buying duplexes in the area in 2005.  I am buy and hold and have yet to sell any of my properties.  I agree Austin is very difficult now to find 1%.  Back in 2005 no one wanted duplexes and so 1% or better was every where.  Even up to 2012 you could easily find 1% but now is more difficult.  You have to open up to out and about to find 1% but it can be found.    Elgin, Manor, Bryan College Station ect might be the places to concentrate.

Christopher H. · Answer

@Daniel Tisdale

The alternative is just buying another rental and staying where you are. Unless of course you don't want to live there anymore.

Your financing, investment, and tax strategy should be a factor here as well.

For me I would just keep an open mind when I'm looking at deals.  I'd be looking at both scenarios and comparing the numbers to see what gets me the best roi/value.

Ian Walsh · Answer

It really depends on your long term goals and how that fits into them.

Eric Malone · Answer

@Daniel Tisdale your in the same boat I’m currently in.

I think the best option would be take advantage of someone else paying off your mortage and rent it even if it just covers the expenses, and build that equity. Your young you’ll have it paid off by the age of 60 if not sooner.

Buy a new primary with a FHA 3.5 percent down save your cash money. Refinance 6months/year.Do it again. And keep doing it.

Jordan Moorhead · Answer

@Daniel Tisdale make sure you have accurate, not overly conservative numbers. Can you refi and lower the mortgage?

Daniel Tisdale · Answer

@Joe Scaparra thank you so much for the detailed answer! Just curious if you are an investor in the Austin area? It seems even hard for me to find something that would hit the 1% rule in Austin at this time, which is making me think that I should look elsewhere at this point in time.

Should I turn my house into a rental property and buy another?

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