Should I sell my house or keep it as a rental

Question

I have been lurking around this website for awhile now and been listening to the podcasts. Sorry if I put this in the wrong sub forum it looked like the right one to me.

Ok so I have been interested in investing in real estate for a long time and I finally feel like I will be able to within the next few months/years. I just graduated from college in December and I have landed a wonderful job! My wife and I currently own a house. We purchased this house for $112,000 in August of 2011, which happened to be pretty near the bottom of the market in the Phoenix, AZ market. We did a FHA 3.5% down and my wife is an agent so we actually made money on the purchase of the house. Any future real estate transaction costs will only be for the sale of the property.

On to my question… My job is about 35 miles one way from our current house so we would like to move a little closer to my job. My question is, should I sell this house pay off all the debts and move closer now and purchase my first rental in a year or should I keep the house and move closer when I have the money for a new down payment and have this house be my first rental?

Info:

Salary: $57500
Wife’s Salary: $36000

Debts:
Car 1: $9850 @ 5%
Car 2: $5376 @ 5%
CC: $2500 @ 0% until October
Student Loans: $6625 3% no payments until September
House: $105,200 @ 4.625% - Refi possibility to 3.5% if decide to keep it

The house is worth about $185k now (my wife can pull comps and I am positive of this amount the Phoenix home market has shot up dramatically) and we would probably move into a $225k house closer as the prices are much higher in town.

Rental analysis https://docs.google.com/spreadsheet/ccc?key=0AtNNyLLaQ_HjdEEwVm1yWE9hb01HZFZfS1hsTnByZGc#gid=0

Please let me know if there is any other information that you need. To help me with this question!

Joseph Lieberman · Answer

A side note is your spreadsheet doesn't have tax calculations. Between depreciation, income, and mortgage interest you're probably gaining cash on year end taxes, making it more cash positive than you're counting... then again, the best laid plans of mice and men :) It's just a spreadsheet afterall.

In the most broad sense I am with @Joel Owens- Odds are good that if you sell in Aug, move into an apartment while looking for a good 2-4plex, and then finance that 4 plex with another FHA loan you'll likely come out way ahead. Kinda depends on your goals though!

If you "Must move now" I would say the situation is opposite, rent it at the very least till after August (a 6 month lease?). 80k in taxes is not a pretty sight... then figure out what the market looks like some months down the road and if it's time to sell it and move those funds somewhere more profitable.

Joel Owens · Answer

If you wait until August 2013 then you could sell and take the money out tax free and then just live in an apartment closer to work.

Take the equity you pocket and leverage that to do more deals and grow your money at an exponential rate.

You could also sell August 2013 and then buy a 4 plex and live in one of the units. Really this is about the returns you want and how active or passive you want to be.

If you take all of that equity and then buy closer to your work then if that was your goal it will be worth it to you. I would personally want to take that large some of money and put it to work because with your jobs and salaries it would take a long time to save up that kind of money.

Joel Owens · Answer

Andrew between now and August take some time and go to eviction courts, investor meetings, etc. to get a flavor for managing a property and what it entails.

That should help you in figuring out what you may or may not want to do. Some people want more passive real estate investing versus active. You have to find out which type you are.

Andrew Garner · Answer

Leon Yang selling cost are considerably lower as my wife can list the house for us and we would only pay buyer commission. As Scott W. stated the taxes shouldn't be an issue if I just wait a few more months. You do make a point on the debt interest being pretty low and I am trying to figure out if the benefits are greater than those costs. It looks like it probably isn't the right property or time.

Mike M That is an interesting idea as well. The problem seems to be I wouldn't qualify for multiple mortgages. Maybe I would if they are smaller 80k or so mortgages which would probably be around the right price for rentals in my area. Something to think about for sure.

Again, I am the newbie so I could be way off base on everything!

Mike McKinzie · Answer

Owning a house worth $185,000 that rents for $1,150 is a losing proposition from the start.  Wait till August, sell your house, buy a newer house near where you work and find a better rental market.  Or you can rent near your work, and invest all your proceeds.  I did this last year here in CA.  I sold a house that was worth $365,000 and renting for $2,000 a month and bought three houses that rent for a combined $3,890 a month.  I also paid of a $1,500 a month payment and got a new $500 a month payment.

Scott W. · Answer

Leon Yang no capital gains if he stays there 2 years as is his primary residence. all of the profit is tax free.

he's basically breakeven on the rent & he has no savings. he'd have to rent a new home to live inas he wouldn't qualify for another loan cuz he can't include the rental as income & he doesn't qualify for 2 loans with their combined income.

Leon Y. · Answer

I wouldn't sell any real estate in this current environment. Selling costs are huge in any case (I wouldn't want to give up 6%+ selling costs) and there will be capital gains. Keep the house and rent it. The interest rates on your debt are pretty low. Compared with potential appreciation and rental income it is far more advantageous to keep the house than to sell it to pay off debts. In the meantime just save money to pay off your debts.

Andrew Garner · Answer

Thanks for your input everyone! I initially wanted to keep it but I think I am just a little to excited to get into the game. I will most likely wait until August and then sell it and start with a clean slate and save up for a rental.

Scott W. · Answer

After looking at the numbers, you gotta sell it, bro.

Michael B. · Answer

No question. If you aren't going to live in it sell it.

Here's the question I would ask. If I were living 35 miles away from here and wanted to invest in real estate is this the exact house that I would buy? The answer is probably no. It's probably further away than ideal, and usually nice residence houses don't make particularly good rentals.

Less transaction costs it's pretty much the same question that you're facing, just asked backwards. If this isn't the house and neighborhood you'd choose as an investment property then deal it and get the right one.

Here's what I would do. Sell this one and pay off all debt. If you have student / car / credit card or other debts they gotta go. Use the proceeds here to clean  them up. After that is done then start a fund to buy your first investment property. Your credit will be better (assuming there's other debt out there) and you won't have other payments hanging over your head.

Should I sell my house or keep it as a rental

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