My primary residence - rent or sell?

Question

I just closed on a rental property and once I get the renter in place, I've got to make a decision on what to do with the house I'm currently living in.  I have been planning on keeping it as a rental, but now I'm not so sure.  Help me decide which would be smarter.

I bought the house almost 5 years ago for $180k.  According to comps, prices have gone up and with about $5k in updates I should be able to get $195k.  I currently owe $155k, so after everything I can think of, I should net around $25k if I list with a Realtor.

My payment is $1118 and the house would rent for $1600/mo.  After I account for maintenance, capex, vacancy, and management (even though I'll be managing it for the near future) I would only cashflow $53/mo.

When I ran those numbers, holding onto it as a rental didn't seem to be such a good idea.

Whether I sell this house or rent it, I'm going to buy my next one through the eyes of a real estate investor.  I'll be looking for a good deal that I can force some equity into.  I'm buying as an owner occupant, but will move in 1-2 years and keep the property as a rental.

So... what's the smarter play here?  I'm leaning more toward selling.

Sharon Tzib · Answer

Don't forget to consult with your CPA about the tax benefits you'll now be able to enjoy turning the home into a rental (depreciation, interest and other deductions). I find many newbie investors overlook that, but even one rental can have an amazing effect on your effective tax rate.

Thomas S. · Answer

If your present home is a SFH you will experience far higher expenses than you are calculating in the long term. There is no way you will ever realise positive cash flow from this property.

A rental property that can not show positive cash flow with a hypothetical 100% financing/50% expenses will only get worse as equity grows. Equity will turn a income investment property into a liability since all the income is going to pay for the opportunity value of the equity. This leaves the property itself with a negative return and is a liability. Be very carful assuming your property will have any positive cash flow. Equity kills cash flow. You must understand the value of cash.

You should sell.

Will Stafford · Answer

You should never be paying closing costs to do a simple owner-occupied conforming refi. Your lender sucks.

Shaun R. · Answer

Some things I should have added in the original post.  The interest rate on my current mortgage is 3.625%.

If I keep my current residence, I do have the ability to buy my next one using a 5% down conventional mortgage.

I am investing in buy and hold properties for cash flow.

I haven't shopped around on refi's, but I asked the lender that I used to purchase my rental property, and she told me that she estimated it would be about $3500 in costs to do a refi and get rid of PMI.  Is that worth it to get rid of $150 per month of my payment?

Ben Wilkins · Answer

@Shaun R. - it really comes down to the second point that @Deborah Gilbreath made: are you building your portfolio for cash flow or for equity?

If you decide to keep the property, you have some options that might increase your cash flow. If I'm doing my math correctly you're paying PMI on the mortgage, which is bringing your monthly payment up. Since the house has appreciated, refinance to get rid of the PMI and lower your payment. You might even squeeze some leverage out of the property, but I don't think the numbers will work out for that.

Since you can refi up to 80% of the value (usually), your house at $195k could be refinanced to $156k - that would put you at 80% of the value, remove the PMI, and bring your monthly mortgage down to just over $900 if you refi for a 25 year loan. You wouldn't lose any payment time, decrease your monthly expenses, and might even get a better interest rate. You could technically gain an extra $1000 in pocket (since you owe $155k and can refinance to $156k), which would cover a bit of the refinance cost.

Something to think about, but if you can get rid of the PMI payment and gain an extra $100 per month, I would consider keeping the property as a rental.

Deborah Pyburn · Answer

@Shaun R. Two things to consider:

1. Your current home, if you were to hold on to it as a rental, do you have the necessary capital to finance your third property?

2. While you would only be able to CF $50 a month with it being a rental, are you building your portfolio for cash flow or equity?

On paper, I would agree that selling would be the better option because you will have more money available for your next investment and you can purchase your next home in an area that will allow for better cash flow.

My primary residence - rent or sell?

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