Moving, should I sell or keep and rent out my home?

Question

Hi All,

Quick backstory: I'm currently in the process of learning/preparing to be a buy and hold rental property investor. I've been reading, saving money to invest, etc, and had the goal of obtaining my first investment property in 2021. However, personal circumstances are requiring my family to move from our current home sooner than expected. Now, I'm wondering whether it would be "a good deal" to keep my current home and rent it out, or if it would be smarter to sell it.

Here are some details on our current home / things to consider:

• Purchase price: $106k
• Current value (approx): $180k
• Current mortgage: $65k, 10 years left, 15 yr fixed @ 2.875% ($599/m PI)
• Home is updated/remodeled throughout, with good bones, and some robust materials used (hardwood floors, porcelain tile, etc). Need to do a more detailed analysis here but I would expect relatively low cap-ex in the next 10 years.
• Home is in a good area (on a quiet street but still walkable to restaurants/bars/parks, schools are average to above average)
• Expected rent would be about $1500/m based on quick analysis of current listings
• Our new location we're moving to will be about 10-15 mins away
• I would like to manage this property myself but budget for property mgmt anyway
• If I get into this and HATE being a landlord, or decide owning rentals isn't right for me, I have 2 years to figure that out and at that time could still sell the home and not pay any LTCG tax on the proceeds

Short term goal: Since my personal situation will inhibit my time and ability to pursue scaling a rental property business in the short term (say 5-10 years), the goal of renting this property out will be to pay it off as quickly as possible and let it sit there providing good monthly cash flow, or possibly refi to lower monthly payment and increase cash flow if the payoff timetable isn't short enough.

Long term goal: I would tentatively like to scale into owning maybe 10 or so rental properties at my time of retirement (say 20 years from now) to provide good cash flow in early retirement, and to keep me busy. I rather enjoy owning/running a business.

Can anyone advise on whether making the move to convert our home into a rental makes sense?

Thanks all in advance for the help!

Jaysen Medhurst · Answer

@Christian D. a few things to think about here.

• Be very sure about your rent expectations. Homes with values above ~$150k rarely make good rentals because the rents don't keep up with values. Why? Anyone who can afford $1500/month rent can easily afford a $150-180k home.
• What are your taxes and insurance? My math shows you with $450/month BEFORE those bills are paid.
• The biggest issue is going to be your Return on Equity (ROE). Even if your house cash flows $250/month, which would be solid, your ROE on $115k of equity is 2.6%. That stinks.

Personally, I'd capture that equity now, while you can avoid the CG tax, and redeploy into a cash-flowing MFR.

Jacob Sampson · Answer

Sell.  There is too much value in the equity.  Plus people rarely purchase their personal residence for a price that makes it a good buy and hold, although in this case yours is pretty close.  Still, even if this thing cash flowes $200/month vs selling and clearing $100k you are getting nearly 42 years of cash flow up front.  Sell.

Nik Moushon · Answer

My opinion is it refi into a 30 yr fixed, while rates are still super low, and rent it out. This would bring in more cash flow that could help with any unexpected expenses with your mother. With your unfortunate family situation you have no idea what your short term future will hold. By the time you are ready to move again you would at least have a good place to fall back to or a steady source of income. If you dont refi you could potentially have a free and clear house to move back to as another option. I have a feeling a lot of people dont understand that you are not doing this to get into the rental business. You are doing this to bc of your moms medical situation and are trying to set yourself up for the best start in the future. Whether you refi or not, when you are at the point of being able to jump into the rental business full force I think you will be better off keeping this house. Ya selling it would be better if you were ready to start full time investing NOW but you arent.

Theresa Harris · Answer

@Christian D.  Sometimes houses that are bought as a primary residence don't make good rentals as you evaluate them differently when buying.  In your case you have a lot of equity in the home and if you can rent it for $1500, do a quick 1% rule, you should cash flow.  I would suggest renting it, even if you do it for 2 years (at which time, based on what you wrote, there would be tax implications) you can sell it in 2 years and move that equity into one or two new rentals.

Clint E. · Answer

Lots of guys talking ROE, XYZ, and ABC. This is rental #1 for you, what better way to start off than with a house you know well already, dont have to put 20-25% down, and since you know the rental market you know you'll cash flow. This property will offer you options down the road, especially if paid off.

Just find a good tenant and this property will be a good start to your business.

Jaysen Medhurst · Answer

@Christian D., if you hold until it's paid off and cash flow $750/month you'll have a property worth nearly $220k (assuming 2.5% appreciation) with a 4% ROE. Still not great.

If you cash out refi, it's very unlikely you'll cash flow with your new ~$670 monthly P&I payment (30-year). Go with another 15-year mortgage and you'll definitely be in the red. Plus you will have to leave 20% equity in the property, leaving nearly $40k off the table.

What's your real hesitation to selling?

Caleb Smith · Answer

@Christian D.

I’d agree with many of these people in the comments: cash out on the equity, especially because of the tax break.  Especially since you are thinking long term before going all in on rental homes. When you find a great deal, you can execute. Maybe a purchase every year with minimum down.

On the other hand, leveraging your equity with a HELOC will allow you a large revolving line of credit. Something that you can BRRRR into great cash flowing properties.

Good on ya for taking care of your family member; thats admirable.

Pesach Weiss · Answer

did you think about selling and becoming a real estate investor? you dont have to be as hands on and you can still keep learning about real estate (or you can partner up)

Bellman Tumasang · Answer

@Christian D. I suggest you keep your home and rent it out to provide you with a second income source.

Jaysen Medhurst · Answer

@Christian D., I'm very sorry to hear about your mom. I just lost one of my oldest friends to ALS three weeks ago.

As far as what to do with your house:

• There is no "math aside" when it comes to rentals. That is the first, second, and only point of holding an investment property.
• Your mom's illness is even more reason for you to make a move sooner rather than latter and redeploy your capital. A) You're going to want a steady income stream, B) Over the next 1-2 years you're going to have less and less time and energy to make any moves. Make the effort now to get yourself in a good position for when things start to get hard.
• Pulling out part of your equity through a refi probably isn't the best move since A) you will kill most (all) cash flow you have now B) The ~$40k of equity you leave in the house is essentially dead. It's not generating income, nor can it be redeployed. I actually see this as the worst of all choices as it limits what additional properties you can purchase and keeps you locked into a non-performing asset.

I think there is much more risk keeping your money locked in your current house than if you were to redeploy in a MFR or even just dump it in index funds. With a MFR, you have less vacancy risk, efficiencies of scale, and (if 5+) the ability to force appreciation. With index funds, you're completely liquid and can quickly change your position, if necessary.

Good luck, brother. Don't hesitate to reach out if you have any other questions or want to talk through options.

Moving, should I sell or keep and rent out my home?

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