Converting Primary residence to first rental

[Thomas Bridges]

Hey everyone, I’m looking for some feedback on a move I’m considering.

I currently own my primary residence and my monthly mortgage payment is about $1,550. The problem is that market rent in my neighborhood looks to be around $1,450/month, so if I moved out and turned it into a rental, I’d likely be negative each month before even factoring in maintenance, vacancy, repairs, etc.

My original idea was to keep the house, rent it out, and then buy a duplex as my next primary residence so I could live in one side and rent the other. But now I’m starting to question whether it would make more sense to just sell my current house and start fresh by buying a duplex as my new primary residence.

My main questions are:

1. -Would you keep a primary residence as a rental if it’s likely to be slightly negative cash flow from day one, or would you sell it and move on?
2. -From an investing standpoint, would it be smarter to sell the house now and focus on house hacking a duplex, rather than forcing my first house to become a rental that doesn’t really work on paper?

I’m trying to think long term and build a rental portfolio the right way, but I also don’t want to hold onto a property just because I already own it if it’s going to drag down my cash flow and borrowing power. Curious how others here would look at this.

[Jeff Roth]

Hi Thomas from Birmingham, Al-

Great question! You own a primary residence that you intended to rent out but monthly market rent is less than your mortgage payment. You asked if you should rent out the house with negative cashflow or sell and go buy a duplex and rent out one side and live in the other that will cashflow when you are ready to move.

Definitely do not have a negative cashflow rental willingly. Insurance will go up as a rental. Property taxes will go up as a rental. Maintenance costs will also go up as a rental from additional wear and tear and potentially also paying for outside lawn and landscape care. All of which, will make the negative cashflow worse not to mention a prolonged vacancy.

If you sell, you can take your gain tax free from the sale of a primary residence and then go buy a property like a duplex that will cashflow when you are ready to move after you live in one of the units.

To Your Success!