Primary to Rental- Pros and Cons?

Question

Hello everybody,

I am totally new to RE world and I am glad I found BP. I have searched the forums for an answer because I don't want to be the one newbie that asks questions which has been answered 100s of times here. I saw similar posts that explains taxes and stuff, but not anything specific to my situation.

Here is my situation that I would like to get yalls thoughts:

- The home we currently live in was bought in 2016 Oct

- We are planning to move this year or next year and would like to keep the current home as rental (was looking to refinance this current home in case we end up keeping this as rental)

- There are two houses near by that rented out at close to $2k/ month

- Would it be better to sell this house, get the equity built in to put down on the next primary house and a separate property for rental?

What are the things I need to be thinking about before making a decision? Thank you to whoever is going to reply. Your thoughts are helping a total newbie with no mentor.

Have a great day!!

Ab John · Answer

Thank you for the response Jaron. I liked the quote " investors dont guess anything". I saw couple of videos posted by BP and calculated cash flow if we end up renting out. Best case scenario it will give us 3% CoC ROI with $200ish per month cash flow. It does not pass the 1% rule test either. I am trying to see if I can plug in numbers and come up with IRR.

Darius Ogloza · Answer

This is basically the strategy we first employed - turning our first home into a rental when we moved to our current home in 2009.  The strategy worked very well for us as we have built up a lot of equity and have had renters pay down the last 12 years of our mortgage on the property.  If you have sufficient capital to buy your next home without selling your current home, if the current home is well located in a stable to growing (preferably) area, and if it cash flows, i would highly recommend you pursue this strategy.  Assuming there has been some growth in your area, why buy an investment property at 2020 prices when you can have one at 2016 prices?

Darius Ogloza · Answer

My personal view is that too many people put too much stock in "cash flowing" from day 1 of an investment.  Investors need to think more dynamically and less rigidly in evaluating assets.  You will inevitably experience negative months with any investment.  Just as inevitably, your day 1 vash experience will no longer be true on day 366 or day 5,000.  The key is to evaluate the investment over some reasonable period of time to fully assess the value of the asset you are holding as opposed to alternative investments.  If rents are increasing and the area is growing/improving, those factors are the key even if you have to feed the alligator here and there.  Putting too much emphasis on day 1 cash flow could lead you to leaving a lot of money on the table when moving from one asset to another.

Sorry to say the only "tools" I use to analyze investments is pencil and paper.

Ab John · Answer

Hello Darius, thank you for the reply. The house is in a premium area and over the years it has appreciated but when I calculated the cash flow, it barely pays the mortgage. One unexpected thing happens and we would be paying out of pocket to keep this property. Is there a place that you recommend I can put in numbers to see if we would be approved for another mortgage keeping this one?

Jaron Walling · Answer

@Ab John This is a common question and the answer revolves around numbers. Investors don't guess on anything.

Are you running the numbers for investment properties? Excel is a wonderful tool.

When you factor in expenses like CapEx, vacancy, insurance, etc it shows you if the investment makes sense. The goal is cash-flow and to save for reserves. If the property costs you money every month as a rental that's a terrible investment. If it cash-flows $250 per month then you have a real winner. A lot of people (not saying you) buy a property for a primary and attempt to turn it into a rental. If the intention for purchasing was not cash-flow it's usually not a great buy and hold investment.

Primary to Rental- Pros and Cons?

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