Keep my primary house for a rental or sell it?

Question

My name is Travis Horstman and I'm just getting started on my real estate investing journey. I am looking for some opinions on what to do with mine and my fiancé's primary homes.

I own my home at a 3.25% interest rate and have about $106,000 in equity (I recently had an appraisal done). My fiancé owns her home as well with a low interest rate and about $150,000 in equity.

We are planning to move in together soon and like the idea of house hacking. Either single family or multi family. With that considered, should we keep our houses as rentals? I analyzed both houses and they would be very close to breaking even after mortgages and all other expenses. However, that is being rather conservative with the local rent rates. My house was built in 2017 and hers was built in 2020. We both want to keep our houses as rentals due to our low interest rates and equity, but only if it financially makes sense.

We wouldn't need the equity in either home to make our next purchase, but it would allow us to potentially buy more than one property with our liquid cash and the equity from one, or both of the houses.

I appreciate any and all feedback! I am happy to be a part of the BP community!

Nathan Gesner · Answer

I know a lot of people that wish they had held on to previous investments, including me. I owned a home in Hawaii with a mortgage of $2,400. If I had kept it and rented it out through a manager, I would have lost $200 - $300 a month. If it sat vacant for a month, it would cost me $2,600 plus utilities. I thought that was too big a risk. 15 years later, that home rents for $3,500 and increased $400,000 in value.

My very first home in Colorado Springs was bought in 1998. It had a payment of $565 and would have rented for $800 a month but I knew nothing about real estate investing at the time. Today it could rent for $2,500 and has gained $300,000 in value.

If you can afford to hold on to them, I recommend you find a way to do it. Even if you sell one to and retain some of the earnings as a reserve so you can afford to hold the second.

The only time I recommend selling is if you can invest the money in a better-performing property or the sale moves you closer to another goal.

Gustavo Delgado · Answer

keep them and lease them out. Im in Houston as well and if your properties are anywhere in Katy, Cypress area you are good. Even to the north, spring, woodlands, humble there is so much development your properties will keep appreciating maybe a bit slower but they will rent easily.

Tammy Wheatley · Answer

I'm a newbie too, so take what I have to say with that in mind :)

So much potential with 2 homes that could be rentals! Is there a market for rentals of the type the homes are? Are they in a good rental location? If not, perhaps sell just one of them and use the other as a rental as you are learning on this journey?
I'd be so tempted to keep them both, even if they don't cash flow. The interest rates alone! You could leverage the equity in a Heloc if you needed it for a future property or multiple properties!

Eric Fernwood · Answer

Hello @Travis Horstman,

What you should do depends on future rent and price growth in the city where your homes are located.

For most people, the goal of real estate investing is financial freedom. However, financial freedom goes beyond simply replacing your current income; it requires maintaining your current lifestyle for life. To attain lifelong financial freedom, you need a passive income that meets two requirements:

• Rents must keep pace with inflation: Inflation consistently erodes the purchasing power of a fixed amount of money. For instance, if the inflation rate is 5%, what you can buy today for $100 will cost $155 in 10 years. If rents fail to pace with the cost of living, your financial independence will be short-lived.
• Persistent: Your rental income must last a long time, ensuring that you do not outlive your income.

What are the requirements that a city must meet in order to likely achieve financial freedom?

• A metro population >1M. Smaller cities tend to be dependent on a single company or market sector.
• Significant and sustained population growth causes increasing demand for housing. When there are significantly more buyers than sellers, rents and prices tend to rise, enabling them to outpace inflation.
• Low crime rate - Never invest in any city on Neighborhood Scout’s 100 most dangerous cities list.
• Low risk of a natural disaster - Disasters like tornadoes can completely decimate communities. Those affected will relocate to a place where they can live and work today. Once settled, there is no incentive to return to the rebuilt community. This means that even if your insurance company rebuilds your property, there may not be anyone available to rent it. However, you will still be responsible for paying your mortgage, taxes, insurance, and utilities. A good way to gauge the risk of natural disasters in a particular community is by considering the cost of homeowners insurance. It is advisable to avoid purchasing property in cities with high insurance rates.  Insurance - ValuePenguin
• No rent control of any kind: Google search
• Pro-business legislative environment: Google search

What if your city does not meet these criteria? In this case, you may have a unique option available. If you have owned and used your home as your primary residence for at least two out of the past five years, you may qualify to exclude up to $250,000 of the gain from your income, or up to $500,000 if filing a joint return with your spouse. This presents a special opportunity to use the net proceeds to purchase a property in a city that meets the requirements for financial freedom.

So, it comes down to the following:

• If your city meets the requirements for financial freedom, converting the properties to rentals is an excellent idea.
• If your city does not meet the requirements for financial freedom, you may have the option to sell your properties without having to pay capital gains tax. With the proceeds from the sale, you can purchase a rental property in a city that meets the requirements for financial freedom.

Travis, I hope this helps,

…Eric

Andrew Ricker · Answer

Hey Travis,

Welcome to the BP community!

A lot of the basics are covered already, but some questions you should be asking yourself is what is you and your partners long-term investment goal? How many properties do you imagine yourself having? All self-managed, or property mgmt? Do you want to 1031 and scale to a couple of really nice high end properties or have a bunch of c class dependables? a 2017 and 2020 build are a great start. The equity in those doesn't mean much unless it's in your pocket OR if the market rents are slated to continue to increase; which sadly for the bigger part of 2023 rents have been flat or decreasing.

Depending on what market you are in, and specifically the neighborhood will dictate a lot more about the strategy that makes sense. Is there economic growth? Is it a steady market? If rents decrease, can you guys handle a net loss every month? Losing hundreds every month on top of being a landlord isn't a great plan if you both have full-time jobs and don't want the hassle.

If you're breaking even or even making some $$ and you don't mind the idea of being a landlord and your #'s make sense in a worst-case AND best case scenario - I'd say hold on to those suckers for as long as you can because the 3-4% interest rates aren't coming back anytime soon.

I hope these questions help a bit!

Abbey Humphreys · Answer

Welcome to BP! Seems like, given your circumstances, keeping them as rentals makes the most sense long-term. @Nathan Gesner said it well, unless you have something specific in sight that would make selling a better option, holding is the move.

Theresa Harris · Answer

I agree with Nathan.  Rents go up over time.  One other thing to consider is capital gains.  If you are going to be using it as a rental (not living in it) and sell it 5 years down the road, you will need to pay capital gains.  The lower interest rates that you have will be huge on keeping costs lower.

Keep my primary house for a rental or sell it?

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