Rent or Sell Primary home?

Question

Hi everyone. Looking for some feedback and help on this topic...

I own my personal residence that was purchased in December 2020 in Knoxville, TN. Used my real estate license and used the 2.5% commission + 2.5% of my own money for a 5% down payment. Builder paid all my closing costs. Mortgage insurance falls off off in the next couple months. Interest rate is 2.75%... We also have a HELOC through a credit union that is for 100K, interest only payments for 10 years if we use it with the ability to lock a rate.

Long story short, my husband and I are trying to decide if we should rent or sell. It's not designed to be a rental, this was our forever home but we are now moving out of state. Using the BP calculator with property management and all expenses factored in, my COC is 58% and my net monthly proceeds would be around $850. If we sold we would net about $150K.

What are your thoughts? I'm much more in favor of keeping the house. My husband is worried the market is going to dip too much that we won't be able to rent it long term and then we won't be able to sell either if prices go too low... I think we bought really well and smart, so the numbers work. I'm also worried we won't like the state we are moving to, and this would be reassuring for me to come back to.

Scott E. · Answer

You shouldn't look at your cash on cash return in this situation. Look at your return on equity.

If the deal cash flows $850 per month and you have $150k worth of equity, then your real return is 6.8% (not including appreciation, principal pay down, and tax benefits)

I don't know anything about the sub-market but if you believe that Knoxville, TN is set up for growth over the next 5-10+ years, then it probably makes sense to hang onto this property.

Bruce Woodruff · Answer

Hang on to it. a) What @Scott E. said, b) this is not a good time to sell.

Every house is a good rental....

Kyle Nolen · Answer

Hello, Amanda.  Congratulations on your home and good luck with your transition to Florida!

I would agree with using Return on Equity as a measuring stick for this situation, but I would disagree slightly with the conclusion to automatically keep the home.  In my opinion, you should weigh the Return on Equity for your Knoxville house against alternative investments that you might be considering.  In other words, it would only make sense to sell your home and take the equity if you felt your could generate a rate of return on alternative uses/investments of your equity greater than 6.8%.  For example, if your new mortgage in Florida was 7% or higher, then your $150,000 is best served by paying down the debt on the new home.  Or, lets say you have another property that is a "fixer-upper" where investing your $150,000 would result in significant forced appreciation greater than 6.8%.  That would seem to be a better deal as your cash is best served to grow your balance sheet in that way rather than the current deal you're in.

A couple of other factors can come into play that address both concerns from you and your husband.  By selling now, you would most-likely be protected from having to pay any gains tax because it is your primary residence and you seem to have occupied it long enough.  If the Knoxville home becomes a secondary home to your new residence in Florida, it is possible you might lose that protection.  Also, your expectation in the movement of future rent prices (the numerator in the ROE formula) compared to the movement of future home prices (the denominator) can alter your calculations.  For example, if you expect rents in Knoxville to continue to increase while home prices remain flat, then your Return on Equity would grow.  This increase would make the Knoxville home more compelling to keep, as it would be more challenging for an alternative investment to outperform.  On the other hand, if you expect the market value of your home to increase while rents remain flat (or you fear having vacancy), then this would decrease your Return on Equity lower than the 6.8% your currently enjoy.   This decrease in the projection of rent revenue compared to market prices would be a stronger reason to sell as alternative investments look more attractive the lower your ROE calculation drops.

Simply put, using the ROE formula in this way helps you and your husband make a more informed decision on various options that might be in front of you for the $150,000 of equity that your good decisions have produced thus far.  If your projections are accurate and you're happy with a 6.8% rate of return, then you should keep the house and rent it out.  If you have another opportunity in front of you that's more lucrative, you should sell.

Either way, it's a great problem to have.  Good luck!!!

Scott E. · Answer

$850 x 12 = $10,200 net cash flow per year

$10,200 / $150,000 = 6.8%

Samuel Eddinger · Answer

I always advise my clients in this market to sell anything you don't want to hold long time and buy/rent anything that you do.

The market is definitely softening but from experience will be higher 5 to 10 years from now.  If you aren't willing to wait 5 to 10 years (or possible consider moving back in at a later date), I'd sell and use that money somewhere else.

Amanda Chandler · Answer

We are moving to Florida. The house is really nice, high end finishes, larger lot than a traditional rental. We are already qualified to buy the new house without having to sell this one or rent, closing tomorrow! Thanks for your response.

Amanda Chandler · Answer

Yeah, my landlord policy is about the same and property tax in TN is stupid low to begin with, both factored in though.

Drew Sygit · Answer

@Amanda Jarrett have you factored in higher insurance cost from switching to landlord policy?

How will your property taxes be affected by moving out?

Bruce Woodruff · Answer

@Amanda Jarrett Don't know if anyone else has asked this... but could you STR this? Hire a PM and rake in the $$...

Nicholas Coulter · Answer

@Amanda Jarrett You got yourself a sneaky rental. I would keep any asset that provides me a 50% COC return and be able to use the heloc to buy you next property if needed! Rents historically dont decrease in a recession because people cant afford a house driving the demand for rent up. It sounds like keeping the house gives you options. Selling takes those away.

Rent or Sell Primary home?

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