Moving: Sell old house and invest equity, or keep and rent?

Question

Hi, I'm currently not a RE investor, but have poked around the forums a bit on occasion.

I'm expecting my 2nd child next July.  We will move to a slightly larger house soon and I'm trying to decide whether my current house will make a good investment rental, or whether it's best just to sell and invest my equity in index funds. After reading a bit in the forums, the fundamentals seem marginal. I'm really just looking to maximize return here.

I have a very comfortable savings/investment balance of $100k+, so secure financially.

I am not handy and not looking to "buy a job." I plan to use property management/handyman services when needed. I might try the 1st year without property management just to understand the nature of the work so I can properly manage my property managers in the future.

Property:

• built in 2000
• 1836 sq ft., 2 floor, 3br/2.5ba
• updated/modern interior paint and white cabinets, likely tied for best appearance in my modest neighborhood
• dark espresso engineered wood floors, glued down - (bad for a rental?)

My assumptions - My projections for what I can get for sales price and monthly rent are only my best guess looking at other properties.

• Sales price - $200k-$210k
• Current mortgage - $136,500 owed @ 3.8%
• Monthly PITI: $866
• Vacancy: $108 (1 mo/yr @ $1300?)
• Short + Long term Maintenance: $130 (10% rent?)
• Property Management: $130 (10% rent?)
• HOA: $54

Above assumptions would yield: Cashflow: +$12/mo @ $1300

So I'm breakeven after expenses. I might be able to get $1400 a month in rent if I can leverage the wood floors and new paint / kitchen to increase the perceived value to renters.

Are my assumptions good?

Is it worth it to do this for just principal paydown + appreciation with only moderate leverage?

What about my wood floors? This doesn't seem ideal for a rental. One bad renter could mess these up.

Thanks for your opinions!

Jake Saliba · Answer

Steve, agree with you 100%  I'm still considering NOT moving.  I still might pay a few thousand to seal up our loft into an additional bedroom.  It would save us thousands over the next few years.  We basically don't have a back yard, but so far, stopping by the park regularly for our 1.5 year old seems manageable.... Since this house feels like a "starter home" for our area, convincing my wife to do this long term could be difficult.  I'm sure all my peers would think that I am crazy, not that it matters what they think.  I forsee us moving next to a good elementary school in 3 years anyway when my first goes to kindergarten.  The prevailing logic seems to be that we should move now and take advantage of low interest rates....

Steve Vaughan · Answer

You're right @Karyn T.  No family ever has been able to fit a baby in a $200k 1800+sqft 3/2.  I stand corrected.

Scott Carder · Answer

I hear ya. Growing up our house was 1300ft, with 5 people, and I shared a room! Nowadays they would call that child abuse. Somehow my wife thinks our 2880sq ft is too small for 3 of us.

Steve Vaughan · Answer

Completely tax-free gains do not happen often.  If you've occupied at least 24 months, sell and invest those tax-free proceeds!  Great point @Aaron Montague!

I don't have the fanciest, biggest house by any means.  You don't have to 'move up' in house.  I would rather have an average house and a bunch of investments, than a fancy house and fancy cars I work and work to make the payments on. We live right next to 'that' neighborhood.  They work 60 hrs a week x2!

Aaron Montague · Answer

@Jake Saliba

Yup, sell.  This is a long term loser from a finance point of view.

PLUS you'll be selling your primary residence, so any capital gains will be tax free assuming you've lived there for 24 of the last 60 months.

Scott Carder · Answer

Those numbers are not very good. You wouldn't buy that house at those numbers to make it a rental, so it shouldn't be a rental be default. You'll get 50k net to seller, take the money and move on.

Elizabeth Colegrove · Answer

Everyone has their own opinion. I personally have done very well turning our once personal properties into rentals. We self manage which helps on the costs and are able to keep our vacancy at almost 0. I personally have kept all of our houses for 3 reasons

1) place holder in the appreciation - if the house goes up in the market i can capture them.

2) tax shelter- any "book" loss because depreciation helps me with my taxes, and gains are shielded by depreciation

3) principle pay down- Your tenant is also paying down the mortgage.

The key of course is expenses. We have bought new houses so our expenses like roofs, etc have been low.

Michael Henry · Answer

One of the best investments you can make is living in your home for 2 years and taking that equity (assuming that you have some) and using that cash on a new house tax free. And the fact that your equity if protected from bankruptcy (amounts very from State to State) is an added benefit.

Steve Vaughan · Answer

Lol me, too @Scott Carder.  Little 1 bed farmhouse with 5 of us for a few years until we added on.

@Jake Saliba the interest rate argument makes sense.  In addition, any gain in your current home's value will probably be offset by a gain in price of your new home anyway.  Do you have some gains that would come to you tax-free if you did sell?

I would just caution you from trying to keep up with the Jones's and buying that $500k dream house.  You may not be thinking that, but I do live right next to a large neighborhood of those.  Somehow the bus stop dad's I see aren't ever available to go fishing or golfing with me, ya know.  Always working.  I'd rather have just a decent place with all the extra in cash-flowing rental property.  Best wishes to you either way!

Moving: Sell old house and invest equity, or keep and rent?

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