Converting Primary Residence into Rental Property (Houston)

11 Replies

Hi everyone. I have done my background research on this topic in general, but I would love some specific feedback as to my particular situation so we don't screw this up. If it wasn't already clear, this would be our first foray into the rental market.

We plan on moving from Houston back to Denver. We currently have a 3-story townhome with about 2400sqft (3bed, 3.5bath) that is our primary residence in the Montrose/River Oaks area. We paid 392, owe 364, and pay 3000 per month in mortgage (including tax and insurance). Based on very good comps I think we'd come in at 425 and know with 100% certainty that we could get 3k/month in rent. We would consider selling, but after commissions and fees we'd basically just break even and get our paid-in equity back; as a result, we're thinking of hanging onto the property as a rental when we move in the next several months. Given vacancy and repair estimates, we will be operating at a net loss for at least a couple of years, which we would have no trouble absorbing. This would be purely an appreciation bet that would eventually run at a break-even with normal rises in rental rates over time. I know that cash flow is king and that real estate appreciation is speculative, but also am aware of the fact that, after a sale, even at 425, we would merely get out what we paid and the $35k in equity that we pull out would not go anywhere near the 20-25% down we'd need to purchase a better cash-flowing property in the very expensive cities in which we live. 

So, do we hold or sell?

All comments, thoughts and advice would be greatly appreciated.


I would recommend selling within 2 years of moving if it does appreciate. This will allow you to use the tax code 121 tax exemption on primary residence. Consult with a cpa for details. 

The main thing to consider is whether your equity would be better used in another investment vehicle.

Sell. Speculative appreciation play with nothing that shows an expected large increase in value. One rehab to get ready to sell when the time comes and you probably lose any increase in equity.

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I would strongly advice you to take in consideration the prices of Oil. My prediction is that it will not be a lot of appreciation in the upcoming few years due to the oil prices. Furthermore, everyday I'm seeing how developers are cutting $20-$30K of the prices of newly builded townhomes in Montrose area.

Hope this helps!

from my quick math you if you break even on cash flow, you are still gaining 600/ month in principal pay off. Thats 7200 per year. Doesnt sound like much equity gain but imagine if you had 10 properties doing that. If you dont need cashflow, keep it and build wealth. Re-evaluate it in a couple year to see what appreciationis is doing. 

Does anyone have a counterpoint to Mike Landry? The ultimate issue is what can the $30k do better in my markets than 600/month, even if that is not cash flow? At a 5% return scenario in the stock market that would only be $1,500 per year. I can't buy any properties in areas that I know for a $30k down payment at a 20-25% rate. At a true break-even point I don't honestly see why to sell, given that it is in a good area. And low oil prices could be a positive just as easily as a negative. I think the crux of the matter, however, is the fact that if I'm break-even on paper before vacancy and repairs (and management fee, which I'd seek to avoid at least in large part), I might be deep in the red every year (but probably not more than principal accretion).  

The latest letter from the Texas Real Estate center at A&M quoted a source...can't remember which...saying that Houston apartment supply is overbuilt with more in the pipeline. And in my book, that is a very expensive rental. (Vacancies hurt more). But one of the more successful ways of becoming a re investor is exactly what you are contemplating. If you love the place then renters will too. And a mortgage at low owner occupant rates puts you ahead of a pure investment purchase. If you lose money every month but make it up at tax time by taking a loss after expenses and depreciation and you knock down a decent amount of principle each month, it might be a decent way of slowly acquiring a paid off townhome in a close in area in a great city. There are some disadvantages to long distance keep that in mind.

If you don't mind living in the future investment, you could put down as little as 5% on a primary (which, with $30k down,could get you $600k home assuming you qualify for that size loan). I can get you in touch with a lender that would be able to give you better advice on the lending logistics. Let's perform a thought experiment though. Using a 95% LTV, at an average home appreciation of 4%/year (national average is about 5% overall), you're appreciation is 80% of your investment. Obviously, you'll have holding costs your first year as you must live in the dwelling as a primary to qualify for the high LTV. After the required period ends, if you can rent the property for your mortgage + expenses, you end up with appreciation of $25k/year at 4%. You may need to break that into 2 investments of $300k to make the numbers work, but it's some food for thought.

@Eric Risi another vote for sell. I'm surprised that no one has mentioned the long distance landlording thing. Being a newbie is hard but doing it from out of state is a bad plan in my mind. Hiring a PM will likely cost you more and drive up any expenses you have (that will more than offset the meager "profit" mentioned by @Mike Landry . In addition, you will have vacancies. I will say this, feeding a real estate alligator is no fun. If you want to buy a property and don't mind feeding it, the only way to do it is where you live. Never long distance. Just my 2 cents.

Come join our local meetup when you land in Denver.

I'm not going to argue with the people saying sell. They have good points. With vacancy, mx and pm you just might be breaking even when including principal payoff. And betting on appreciation now in houston.....might not be a good idea for a first investment if it is your first. A lot depends on your income, retirement/ real estate portfolio, and risk tolerance. Fyi I know river oaks is a nice area but I'm not very familiar with real estate there and where it's headed. Also I cringe at condo fees and I can only assume they are high there.