Should I convert my primary home into a rental?

Question

I am looking into moving to another area and thinking about converting my home into a rental.  Here are some of the details on my primary home:

Value: around 450-470K

Balance: 230K

Current PITI:$1445/month

Rents in my area: $1800-2300/month

Should I refinance my home, cash out some equity, and use it as a down payment for my new home?

Should I use a HELOC as a down payment for the new home?

Steve Vaughan · Answer

Tax-free appreciation on primary home is the sweetest deal you will ever get from the IRS. If your cost basis is well below the $450k and you have been there 2 years and aren't coming back, I would sell.  You can invest your tax free profit however you want!

Dave Fontana · Answer

Don't move!!

I would refi and put the money in a multi family rental . Looks like you can pull 220K out of you current home. You might be able to buy something for 800k-950k.  If you find something that puts out 20% cash on cash, you would have 14% to 16% positive cash flow on the 220K. In a 4 years you can save 200K +/- from the new rental building. I would buy something than. At that point you could own 3 properties.

Devan Mcclish · Answer

@Jose Garcia

I think this question depends on what your strategy is. If you are a buy and hold investor, keep your home and rent it out as is. You could open a line of credit or refinance to pull the equity out. The only problem there is if you refi at 80% LTV of 450k, amortized over 20 years and 5% interest (because this would no longer be your primary residence, more than likely banks would consider it to be a commercial mortgage), your monthly payment is $2375.82, meaning you would have negative cash flow. SO, if you are thinking about refinancing and keeping as a rental, I would advise against that.

Jose Garcia · Answer

Thank you for the feedback everyone.

Mark B. · Answer

To find the current rental value you could post a test advertisement at the highest end of the market to see what the response is; if little response then drop the price a bit. Take great photos and don't use your address, just post the intersection or neighborhood name.

Keep in mind that if you may return in the future (and just in general) that your property taxes are locked into a max of 2%/yr growth regardless of your homes true value.

Another consideration is that equity = down side protection. If you are able to buy your new home (duplex? - Live in one side rent out the other) with a very strong down payment you can get the advantage of better downside protection and income.

Make sure that you have enough in reserves so that major repairs and a vacancy coming off of major repairs won't sink you and that everyone sleeps well at night.

When you are looking for renters do a complete credit & background check on all occupants 18 & over - no exceptions!

Elizabeth Colegrove · Answer

Are you sure your rents are that low? I would guess they are higher than you think they are for that "value" of house!

The guest you need to ask yourself is if you sell the house what are you going to do with the profits? Is the house or the profits going to make you more successful in your long term goals?

Our goal is the cash flow in 15 years. Therefore while we could sell all of our houses for a profit we don't have another area that would allow us to reinvest to achieve our goal!

Jean Bolger · Answer

You're right of course @Brandon Hall

- I was just trying to keep it simple. And if you're in an area where you think the appreciation would be huge in the next two-three years then renting it out for a few years would be worth considering. Of course, the longer you hold the longer you take the chance of bad tenants or other factors that would make you incurring major expenses before you sell. And if the market turns against you you could be screwed. So my answer remains sell!

Brandon Hall · Answer

@Jean Bolger He wouldn't be giving up his section 121 exclusion until 3 years after the date he moves out (assuming he has lived there for at least two years).

@Jose Garcia I'm on the sell side - it seems like the opportunity cost of your money is too high to hold it as a rental.

Jean Bolger · Answer

Sell it, use part of the money for your new home and the rest to invest. The only reason to give up that tax exempt profit on your primary would be if it could become an amazing  cashflow generator- and it's not even close to being that

Jeff Sadosky · Answer

Unless you feel like you can get it rented at the high end of that $1800-2300 range, given the circumstances you just described, you might have some trouble making the unit cashflow positive when you factor in management costs, maintenance, capex, etc.  So you'd have to be willing to float the rental property each month, don't know if you're in a position to do so (and if it is worth it in the long run).

If you were to sell, could you split that equity up to make down payments on your new home AND a rental property that might cash flow with a lower purchase price?

Should I convert my primary home into a rental?

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