selling or turning primary residence into a rental

13 Replies

Hi,

I'm new here but have found valuable information on this site so I decided to join.  We currently own a townhome in Virginia since Nov 2015.  We are now debating about selling it vs turning it into a rental property since we are planning on moving to a better school district.  See details below:

Primary Residence: Northern Virginia

Purchase date and price: Nov 2015 - 325K

Loan balance as of today: 297K

Monthly mortgage payment: $2058.00 (30 year fixed at 3.625%)

Home value: 350K-360K  (based on 4 renovated townhomes that sold during summer 2017 in or close to our street)

Our home has been renovated too: new hardwood floors in main and second level, new kitchen cabinets and tile floor, two updated bathrooms, lighting fixtures, etc so it can possibly go for a little more than 360K but not more than 370K

Rentals are going for: $1700-$1800 in our area.  Not sure how easy is to find a tenant though.

We can probably refinance into a conventional loan and drop PMI or get a lower PMI rate since our townhome has appraised in value. If we refinance our estimated monthly payments (30 year fixed) could be around $1800-$1900 so we wont make any money on a monthly basis.

or

Should we just sell it, and take 40-50K (gain) add some savings and put 20% down to our new home which will probably be in the 375K-400K price range.

What would you do and why?

Thank you in advance for your time!

  

Your monthly mortgage payment is $2058 and the property can only rent for about $1800. That puts you $258 negative cash flow before you even start talking about repairs or (presumably) HOA fees. Your rate is pretty good now so it is not clear if refinancing would help. Even if you got the mortgage payment to $1800, this is definitely not a good rental situation.

You said your alternative was to roll sales proceeds into another personal residence, but why is that the other alternative?  If you were just going to rent the house, you didn't need the proceeds to buy a new residence.

With $50K proceeds you could probably buy 2 single family rentals (or at least one duplex) that actually are good investments that would generate good cash flow.  That would be my choice.

Thank you for your response. I think selling and reinvesting is the best option.

I may have missed it @Bruna P. , but what is your goal? As @Greg Scott pointed out, the property will negatively cash flow. Only keep it if you're in the long haul for appreciation and need the tax write off because in the end, with your current mortgage, you'll end up paying $500+ month to keep it. Will it appreciate that much over time...hard for me to say as I know nothing about your area. I'm doubtful but you'll know better than me.

Is it possible for you to do a cash out refinance and keep as a rental? Possible, but not probable. Taking this option will allow you to potentially grab a better mortgage payment and put you closer to positively cash flowing while providing you some cash for a down payment on your next home. You'll have to work hard to find the right lender in this scenario though and really push them on the appraisal. 

Best of luck!

@Bruna P.

I would sell the property and purchase properties lower in value.

the general rule is that if you buy homes at $150,000 or below there is a great chance of the property cash-flowing. Once you hit the $300,000 range; it is very hard to cash flow; at this price range you are likely playing the appreciation game.


Your gain would be less than $40,000-$50,000 because you also have to factor in the improvements you made to the house. These amounts get added to the basis and reduce your gain.
furthermore, It should also be noted that since you lived in the home for 2 years - you would qualify to exclude up to 250,000/500,000(MFJ) of the gain under the current tax code.

Basit Siddiqi, CPA
917-280-8544

Your economic case for renting this TH is not very strong. I would sell it and use the cash to reinvest in other properties!

I’m guessing you live in the outskirts of NoVa. Ain’t nowhere you’re finding townhomes for less than $500k over there these days.

Those are the best school districts in the nation so I’m guessing you mean moving into Fairfax or MoCospecifically.

Agree with the others. That potential rent doesn’t cut it. Not as much appreciation in the DC suburbs cause honestly that market never got hit that bad in the first place like NYC.

Thank you all for your feedback. Yes we are in Lake Ridge VA (about 40 min from DC) looking to buy into Fairfax County, you can actually find older townhomes for 400K in places like Burke, West Springfield (Fairfax County) so that will be our next move. We will sell our current residence and invest the proceeds in a rental unit in the 200K price range (it will have to be Manassas, Stafford or Richmond, VA)

Thanks again!

"We will sell our current residence and invest the proceeds in a rental unit in the 200K price range"

That plan is only worth consideration assuming you can get $1800 - $2000/month rent. If not it would be a poor investment.

@Bruna P. Excellent thread, I live in Reston. Thanks for this post. I gained some valuable insight.

I grew up in Dale City and I'm still a volunteer firefighter there.  My mom and sister both own investment properties there and my sister has entertained selling her house there to get better cash flow in the south.  Lake Ridge is not a bad neighborhood, but you as everyone else mentioned, you need to cash flow before you can consider holding it.  There are some places you can do it in Woodbridge, mainly the older state street areas, but in general, you need to go south of Rt. 234 before it starts to work.  Then, the further south you go, the better it works.  I own four investment properties in Stafford and Fredericksburg in addition to my primary residence that I bought as a very extended live-in flip.  One last thing that hasn't been mentioned yet is that you should not think of listing this house until mid-April or so. 

Please let me know if you need any help at all.

Thank you so much for the advice! @Eddy Dumire Yes, we are planning on listing our property during Spring 2018, and yes we are also planning on investing in the Stafford/Fredericksburg areas.   

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