Personal Residence Converted to Rental Property--2.37% interest rate--sell or hold?

[Valerie Kinkead]

My husband's job moved us away from family and across the country in early 2022. With the way house prices were skyrocketing in our home state, we didn't know if we would ever be able to afford to move back again if we wanted to, so we kept our personal residence and have been renting it out. We didn't know for sure how long we would stay in our new location but knew it would probably be 2-3 years minimum. We are coming up on 2 years now and we know that if we ever want to sell the property in our home state, that we need to do it soon to avoid paying capital gains by using the personal residence exemption. We have about 200k of equity locked up in our home, but its only cash flowing about $100/month. Its a VA assumable loan at 2.37%. Without selling it, we are short on our emergency cash reserves and are in a risky situation if any emergency should come up. The home is in an area with a huge housing shortage, in a great neighborhood that saw 20%+ appreciation during the pandemic. If interest rates go down we know prices would start going up quickly again, but in the meantime, we are short on cash and having to be very careful with our spending. Should we sell the house to get ourselves in a better financial situation and risk not being able to afford to buy back into that market if we ever decide to move back? Or keep the house and just work really hard over the next couple years? We are in our 40s, so we don't have a lot of time to correct mistakes if something goes wrong. Both come from low-income backgrounds with not great financial education and we're trying to do better for our kids than what our parents did, but worried we might be screwing it up anyway! ;-p

[Byron Valles]

Quote from @Valerie Kinkead:

My husband's job moved us away from family and across the country in early 2022. With the way house prices were skyrocketing in our home state, we didn't know if we would ever be able to afford to move back again if we wanted to, so we kept our personal residence and have been renting it out. We didn't know for sure how long we would stay in our new location but knew it would probably be 2-3 years minimum. We are coming up on 2 years now and we know that if we ever want to sell the property in our home state, that we need to do it soon to avoid paying capital gains by using the personal residence exemption. We have about 200k of equity locked up in our home, but its only cash flowing about $100/month. Its a VA assumable loan at 2.37%. Without selling it, we are short on our emergency cash reserves and are in a risky situation if any emergency should come up. The home is in an area with a huge housing shortage, in a great neighborhood that saw 20%+ appreciation during the pandemic. If interest rates go down we know prices would start going up quickly again, but in the meantime, we are short on cash and having to be very careful with our spending. Should we sell the house to get ourselves in a better financial situation and risk not being able to afford to buy back into that market if we ever decide to move back? Or keep the house and just work really hard over the next couple years? We are in our 40s, so we don't have a lot of time to correct mistakes if something goes wrong. Both come from low-income backgrounds with not great financial education and we're trying to do better for our kids than what our parents did, but worried we might be screwing it up anyway! ;-p

 Hi Valerie, 

from what you wrote it sounds like there is a lot of upside to keeping the home in the form of appreciation. Is the $100/month cash flow taking into account other operating expenses and things like vacancy, capital expenditures, etc? 

As exciting as the appreciation may sound, I do agree that you should have appropriate emergency savings funds to cover the unexpected. I know that building an emergency savings fund when you are on a tight budget can be difficult. Here are a couple of creative ways you may find helpful: 

- Temporarily suspending retirement plan contributions until you meet your emergency fund target. 

- Removing your escrow account (assuming you have one) I thought of this since you mentioned having significant equity in your home and the fact that most mortgage servicing companies keep a reserve balance in your escrow account. If you do this, please remember to account for your home insurance and taxes in your budget. 

- Have a family budget weekend where you take the time to document and analyze exactly where your money goes. Then prioritize the expenses that are necessary and important to you. Eliminate those that are not. 

- Tax planning - if you normally get a tax return at the end of the year, this could mean that you are over-withholding from your paychecks. You can check and adjust this as necessary. If you aren't comfortable doing this yourself, think about hiring a professional like a CPA or Financial Planner. 

- visit missingmoney.com  this is a national directory to find any unclaimed property! I've done this for myself, family members and clients and every single person I've helped has found money that they've left behind. Some small amounts but others higher amounts. 

I can think of a couple of other creative strategies but I will leave it at that since this is getting long. 

Best of luck! 

Byron