Current Residence, Sell or Rent?

Question

I'm in the beginning phases of getting into the rental real-estate market. My current residence is the only property I own (single family), however, a new job has left me with a long commute and I'm looking to move.

1) Should I keep my current residence as my first rental, use the equity (total equity is ~90k but would only be able to tap into 50% of that from what I've found with cash-out refis) as leverage for more rentals and have a small cash flow of about $50-100/month? I have already recovered my entire down payment through renting out my basement (FYI).

2) Sell the house, take the ~90k in cash (minus sale fees), and use this to invest in higher cash flow rentals?

About the house:

-Purchase price: 285k

-DP: 15k

-Basement rental income to date: 22k

-Fully remodeled on the inside

-new roof, AC unit, kitchen appliances and furnace (4k out of pocket from me for upgrades etc)

Any advice would be greatly appreciated!

Bill Plymouth · Answer

When it comes to renting out a primary residence I am usually on the hesitant side.  Reason being that this properties original purpose wasn’t meant to be a rental.  The numbers may be negative or very very slim.

I’m not very big on appreciation plays(renting a property with negative cash flow in hopes of appreciation) There are way more X factors than you can control.  I see it as more of a gamble than an investment.  Although, there are plenty of investors who make these kinds of plays.  They just aren’t for me.

If you sell the property, let’s say you take home 55k after all taxes fees (I’m being very liberal with this number), and commissions.  You can use that 55k to do a down payment on a large property or split the profits for payments on 2 smaller properties.

You have options.  It depends on your goals and long term strategy.

I hope this helps.  Good luck.

Bryan Beyers · Answer

@Chris Habets, I was living in the home and basically had a roommate who lived in the basement. If I were to keep the home as a rental, it would be for the entire house (once I move out).

Bryan Beyers · Answer

@Jaysen Medhurst

I'm sorry, I should have clarified... When I rented the basement out, it was just a roommate of mine while I occupied the home. The basement is vacant now because I plan to move out of the house. I wouldn't be looking to rent them out separate, I would rent out the entire home.

Chris Habets · Answer

I'd disagree with Jaysen depending on where you live. You don't need to hit the 1% rule in some markets, I don't in Ottawa, Canada and returning nicely on my Duplex.

Depending on local laws, your basement better be legal to rent it out without living in the home.

When including closing costs and realtor fees, I often find it much better to keep any real estate I already own if it cash flows by any margin.

Jaysen Medhurst · Answer

@Bryan Beyers, at first blush, you're current home won't make a very good rental. With a value of ~$300k, you'll need to rent it for at least $3k/month. Problem is anyone who can afford $3k in rent can easily afford a $300k house, so your rental pool is incredibly small.

What are the details on the "basement rental?" Is this a legal unit? If not, I wouldn't plan to rent both it and the main house out. That will catch up with you.