Rent current house or sell and invest?

[Anonymous]

Anonymous wrote:

Anonymous wrote:Similar, 2.5% mortgage on our old house and we decided to keep and rent it out although we just bought a new house.

Pros:
- the house itself is an ok SFH for rental because it is small, walkable to a lot of amenities and to metro, small yard to maintain but also enough bedrooms for young family and good schools. So it can work for multiple demographics (young couples, young or small families, older people)
- DH really wanted to keep our $$ in real estate instead of adding investments in stock market. We know that house and it’s maintenance costs so it is easier than buying other investment properties (but for sure not as good an investment as apartments would be)
- we are planning on keeping the house for a very long time, hopefully even passing it on to our kids

Cons:
- I don’t think we would have done it with a house that needed a lot of investments. You need to calculate your return rate based on the rent you plan on charging. Our current house PITI is 2500 we are renting it at 3500 (based on comp we thought rent for that house could be anywhere between 3250 and 3800). We are not planning to make a profit on it, just be able to maintain the house for the coming 5/8 years with average 12k positive cash-flow. Then with rent increase maybe it will start to provide some cash-flow
- we would not have done it if we didn’t plan to keep it for long term because then you lose the tax benefits linked to selling your primary home (you need to have lived in your home 2 out of the last 5 years to be exempt of taxes on profit -up to a certain amount that I forget now). That to me was a key factor.
- we will be living nearby which will save us money on property management. Planning to do it ourselves


All in all it wasn’t a clear cut smart choice. It made sense for us based on specific house, being able to get 1k a month to reinvest in house and the fact that we wanted to keep more real estate and are ready to hold it forever

OP. Thanks so much for this thoughtful response.
Characteristics of the house are similar.
However, the difference between our PITI (2300) and potential rent ( ? 2800) is much smaller and I think that's the most significant point.
In theory, keeping and renting out sounds great, but then I think about the "issues" associated with an older house and it sounds like a headache.

This does not sound like a good real estate investment-- you are not figuring in vacancies, costs of reviewing tenants, insurance costs, regular maintenance not including the bigger issues etc. You have to approach it much more like a real estate investor for it to work out. Ask yourself: Would I buy this property right now on these terms as a rental investment?
I would sell unless there is a long term reason you really want to hold onto this specific property.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Similar, 2.5% mortgage on our old house and we decided to keep and rent it out although we just bought a new house.

Pros:
- the house itself is an ok SFH for rental because it is small, walkable to a lot of amenities and to metro, small yard to maintain but also enough bedrooms for young family and good schools. So it can work for multiple demographics (young couples, young or small families, older people)
- DH really wanted to keep our $$ in real estate instead of adding investments in stock market. We know that house and it’s maintenance costs so it is easier than buying other investment properties (but for sure not as good an investment as apartments would be)
- we are planning on keeping the house for a very long time, hopefully even passing it on to our kids

Cons:
- I don’t think we would have done it with a house that needed a lot of investments. You need to calculate your return rate based on the rent you plan on charging. Our current house PITI is 2500 we are renting it at 3500 (based on comp we thought rent for that house could be anywhere between 3250 and 3800). We are not planning to make a profit on it, just be able to maintain the house for the coming 5/8 years with average 12k positive cash-flow. Then with rent increase maybe it will start to provide some cash-flow
- we would not have done it if we didn’t plan to keep it for long term because then you lose the tax benefits linked to selling your primary home (you need to have lived in your home 2 out of the last 5 years to be exempt of taxes on profit -up to a certain amount that I forget now). That to me was a key factor.
- we will be living nearby which will save us money on property management. Planning to do it ourselves


All in all it wasn’t a clear cut smart choice. It made sense for us based on specific house, being able to get 1k a month to reinvest in house and the fact that we wanted to keep more real estate and are ready to hold it forever

OP. Thanks so much for this thoughtful response.
Characteristics of the house are similar.
However, the difference between our PITI (2300) and potential rent ( ? 2800) is much smaller and I think that's the most significant point.
In theory, keeping and renting out sounds great, but then I think about the "issues" associated with an older house and it sounds like a headache.

This does not sound like a good real estate investment-- you are not figuring in vacancies, costs of reviewing tenants, insurance costs, regular maintenance not including the bigger issues etc. You have to approach it much more like a real estate investor for it to work out. Ask yourself: Would I buy this property right now on these terms as a rental investment?
I would sell unless there is a long term reason you really want to hold onto this specific property.

Renting rarely is a good idea for the owners long term. Only time it can work out better is if there is no mortgage, but even then once you factor in the "lost investing of the value of the house in the stock market" you likely could do better by taking the cash value of home and investing elsewhere. So unless you are renting because you plan to eventually live in the home again (in the short term), it's usually better choice to sell. I've heard too many horror stories of rental issues---no renter takes care of your home the same manner you would. Rent for 2-4 years and you will need to refinish the cabinets, the floors, repaint, replace carpets, and possibly much more. They may not notice a leak or frozen pipes as soon as you would. They may flush stuff down the toilet and cause future backups and huge plumbing bills---once again you likely wouldn't do that. And these are all things you have to pay for and manage. Hire a manager to handle the maintenance management, and you can expect to pay 10% monthly plus 1 month of the lease amount when signed (and you need this so that you can ensure your lease is written to protect you to the greatest extent the law allows). I personally wouldn't want to be responsible for managing issues in the home---what if you are traveling for work or on vacation and the furnace breaks or a pipe leaks or the fridge stops working. You have to manage it now (legally) and work to mitigate any extra damages. Add in lawn maintenance or nagging to ensure your tenant actually does what they are supposed to do, and you will only have $200 of that $500 "profit" before anything even happens each month. Go 1-2 months in between tenants and you are behind for the entire next 1-2 years.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:I don't understand why you would not put the proceeds from the sale toward the new house when mortgage rates are 6 percent.

This. Being a landlord, supervising major renovations where you won't be able to have a tenant (nobody will rent a place while the roof and HVAC are being redone), losing the capital gains exclusion and the homestead deduction...there are easier ways to make money, like having a smaller mortgage payment on the house you live in.

We are in MD. I thought you were exempt from capital gains if lived in house for >2 yrs and make less than 500K off the house? Also wouldnt we get homestead deduction on new house?

You lose the cap gains exemption of you haven’t lived in the house 2 of the last 5 years— so if you rent more than three years it goes away (also you will have to deal with depreciation recapture for the time it is rented).

The cap gains exemption and the problems of being a landlord are the two biggest reasons not to rent it out, imo

[Anonymous]

How old is the house, OP?

[Anonymous]

OP, have you ran the numbers in any detail? I think it's unlikely that you will even break even.
Mortgage
Property tax
Insurance
HOA
Maintenance (5-10%)
Tax increase is likely
Vacancies

[Anonymous]

Anonymous wrote:OP, have you ran the numbers in any detail? I think it's unlikely that you will even break even.
Mortgage
Property tax
Insurance
HOA
Maintenance (5-10%)
Tax increase is likely
Vacancies

Note that insurance is also higher when you're renting the property out--so your current PITI goes up potentially for both taxes and insurance.

[Anonymous]

Losing the cap gains exclusion and wanting to move equity to new house (higher rates) would be my reason to sell.