Moving and keeping old house as a rental

[Michael Brunner]

Hello,

I apologize if I'm posting in the wrong spot. 

My name is Mike. I'm 27 from Madison and new to REI. I see a lot of long term potential and I hope to start soon!

I've owned a home for about 2 years in Madison. It has a nice, low 3.5% rate, but it does have PMI at roughly $225 per month. I'm considering keeping this home when we move into a larger home in the next year.

Has anybody else converted their old primary residence to a rental? Or do most people keep their personal homes separate from investments by just selling when they move?

Should I get rid of PMI (by putting ~$25k into the loan)? Or just leave it.

My payment (including prop tax and PMI) is about $1,525. One rental company I contacted said he thought I could rent the house for $1,700. My uncle (30 years experience on the banking side) thought $1,500 on the low end and $2,000 on the high end.

Is it customary in Wisconsin for the renter to pay electricity and water? If not, there doesn't seem to be much room for cash flow.

Thanks,

Mike

[Dave Foster]

@Michael Brunner, The greatest gig going is what the govt. gives you in sec 121 the primary residence exclusion.  Once you've lived in that house for 2 out of the previous 5 year period you can sell take (with your wife) the first $500K in profit tax free.  And you can do this once every 2 years.  Simply by living in a property for two years you increase your return by the tax of as much as 25 - 30%.  This absolutely needs to be part of your investment strategy.  

If you want to try renting it out for a while to capture some more equity build then keep an eye on the calendar so you can still consummate your sale so that you have lived in the house for 2 out of the previous 5 years (in other words don't own it more than 3 years after you move out).

Many investors work hard to go the other direction and convert investment real estate into their primary residences for the incredible tax break.

Couple this strategy with 1031 exchanges on your investment real estate and you will enjoy some nicely enhanced returns.