Should I keep my house as a rental property?

General Landlording & Rental Properties
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Should I keep my house as a rental property?

Robert Jimenez
Member since 2018 · 5 posts · 5 votes

My wife and I have decided to move to a different city nearby so my daughter can attend a better school district. I'm considering keeping our current house as a rental investment. I already have a duplex that I bought 3 years ago and I enjoy being a landlord. We have enough cash on hand for a 20% down payment for our new house. The house we have now is in a gated community in good area of town. We do live on the Central Coast in California and things are getting pretty expensive. My question is, should I keep it as an investment rental or sell it and use the equity towards our new house? We bought our current house at the absolute lowest point in the market back in 2011 for $332,000 at 3.75% interest. We currently owe $297,000 and the current value of our home is $525,000. Our mortgage payment is $2003.00 per month including taxes and insurance. There is an HOA fee of $114.00 per month. A couple of houses down the street that are the same size as ours currently rent for $2400 and $2600 per month. My wife and I are both teachers with pretty good pensions. I would like to retire in 14 years and use my rental properties as monthly income and fill the gap of my pension. After doing the math on our new home purchase we would still be able to save $2000 per month and I would like to pay off the house before I retire by making extra payments. Can anyone give me some advise? Should I do it or not?

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Clayton MobleyPro Member
Birmingham, AL · Member since 2014 · 875 posts · 947 votes
8y

Re: strategy, I think the safe bet is to sell and reinvest that tax-free cash in another market that isn't so boom or bust. 

With the $200k or so of capital you'd end up with, you could put down payments on several high-quality cash flow properties here in Birmingham and in other markets in the south and midwest. Assuming you're able and willing to use financing to leverage that equity, you could potentially get yourself a nice little portfolio of 6-7 properties, keep $20k or so as a reserve (it's always good to have a cash buffer) and start earning approx $5000-7000 a month in gross rental income (i'm using numbers from Birmingham, of course). 

Of course, net income would be lower because of all the expenses mentioned above, but depending on whether you wanted to DIY your investments (find the props, rehab them, find a PM etc) or go the turnkey route (one company does all that for you), where you invest and the people you work with, you could be still be netting $1500 or so per month while letting tenants buy you 75-80% of all your properties. If you don't need the income, use it to pay down loans faster and end up with free and clear investment props even before you retire. 

Once you have a portfolio of cash flow properties, you can use a number of strategies to leapfrog into more and more, it's a bit of a snowball effect.

All that to say, I think you've made a great return on this investment and it's time to cash in and redeploy into something better - more diversification, better cash flow, more flexible options for your investments down the line.

You're in a good position, so congrats on buying low and selling high!

Best of luck

Clayton

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  • Kai Van Leuven
    Investor · USA · Member since 2015 · 325 posts · 447 votes
    8y
    Seems like a nice property to have as a rental. I would hold on to it and keep it as a rental. There is so much growth on the west coast that you will probably do pretty well with equity and rental appreciation. You also already have experience as a landlord. To me it seems like a no brained.
    2Reply
  • Robert Jimenez
    OP
    Member since 2018 · 5 posts · 5 votes
    8y

    Thank you for replying and for your advice kai. It is much appreciated.

    0Reply
  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    8y
    Tell take the profits tax free and go invest elsewhere
    3Reply
  • Jay C.
    Walnut Creek, CA · Member since 2018 · 40 posts · 29 votes
    8y
    Sell now and get 200k tax free profit which is awesome return on initial purchase. How much did your area take a hit in the last downturn? When the market cools will renters choose your home or the home with the better school district you currently seek. These are the questions you should think about and come to a decision that seems most reasonable. Best of luck
    1Reply
  • Clayton MobleyPro Member
    Birmingham, AL · Member since 2014 · 875 posts · 947 votes
    8y

    @Robert Jimenez I'll have to agree with @Caleb Heimsoth and @Jay C. , I would sell. You bought low and have the opportunity to sell high without paying any taxes on that appreciation. Since you've been living there for more than 24 out of the last 60 months, you can take up to $500k (since you're married) in tax-free capital gain. That's tax-free capital you can use to start a nice portfolio of cash flow properties elsewhere in more stable markets. As Jay said, what happened in that area last time the market dipped? The west coast has been hot for a while now, and it's can't last forever. If you rent it out for a few years (more than three) you'll lose that Sec 121 exemption and the opportunity to take the tax-free gain. 

    What's more, your numbers look pretty tight between your mortgage payment and HOA. Once you include taxes and insurance, maintenance and vacancy costs, you might not be netting anything positive on this prop with a rent of $2400-2600. You also have to take into account the current state of the prop and what work will need to be done to make it rent ready. Homeowners are happy to let certain maintenance issues slide - we get comfy in our little nests - but tenants are going to want a property in a gated community to look shiny and new. You also need to consider the age of your Capex items. How old is your boiler, your HVAC, your roof? How are your floors looking, would you need to replace carpet? Those things really add up and it may end up that you'd be paying a lot to keep a low cash flow prop in an appreciated area nearing the peak of its cycle.

    7Reply
  • Clayton MobleyPro Member
    Birmingham, AL · Member since 2014 · 875 posts · 947 votes
    8y

    Re: strategy, I think the safe bet is to sell and reinvest that tax-free cash in another market that isn't so boom or bust. 

    With the $200k or so of capital you'd end up with, you could put down payments on several high-quality cash flow properties here in Birmingham and in other markets in the south and midwest. Assuming you're able and willing to use financing to leverage that equity, you could potentially get yourself a nice little portfolio of 6-7 properties, keep $20k or so as a reserve (it's always good to have a cash buffer) and start earning approx $5000-7000 a month in gross rental income (i'm using numbers from Birmingham, of course). 

    Of course, net income would be lower because of all the expenses mentioned above, but depending on whether you wanted to DIY your investments (find the props, rehab them, find a PM etc) or go the turnkey route (one company does all that for you), where you invest and the people you work with, you could be still be netting $1500 or so per month while letting tenants buy you 75-80% of all your properties. If you don't need the income, use it to pay down loans faster and end up with free and clear investment props even before you retire. 

    Once you have a portfolio of cash flow properties, you can use a number of strategies to leapfrog into more and more, it's a bit of a snowball effect.

    All that to say, I think you've made a great return on this investment and it's time to cash in and redeploy into something better - more diversification, better cash flow, more flexible options for your investments down the line.

    You're in a good position, so congrats on buying low and selling high!

    Best of luck

    Clayton

    9Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    8y

    @Robert Jimenez, have you heard the disclaimer (spoken very quickly) at the end of ads for financial products: "past performance is not a reliable indicator of future performance"?

    It's for that reason that BP cannot decide for you. You've been given recommendations to keep it as a rental (in anticipation of future growth/appreciation), and recommendations to sell (to find better cash flow elsewhere). Aren't you glad you asked?

    I agree with those who suggest that with $200k cash (after selling), used as 25% deposit/s on real estate bought for (the bargain) total of around $800,000 (but which should already be aimed to be worth $1,000,000+), you could generate a much higher cash flow for your no-doubt deserved retirement in 14 years time, than keeping this one and paying it down.

    Hint: Look for properties that gross more than 1% of their purchase price per month in rent (but which are still bargains in their market). 

    ie. Unlike your current home. Welcome to BP. All the best...

    2Reply
  • Tyler Mullen
    Investor · Kirkland, WA · Member since 2017 · 310 posts · 271 votes
    8y

    @Robert Jimenez

    You said you're moving for a better school district.  Many of your prospective renters are going to have kids too and there are many renters that could afford to buy a house someplace else, but can only afford to rent (or they are short on time) just to get into a particular school district.  So maybe selling to reinvest in a rental within the better district is the way to go.

    2Reply
  • Ben Tilbury
    Real Estate Agent · San Luis Obispo, CA · Member since 2015 · 100 posts · 38 votes
    8y
    Robert, I’m a realtor and property investment specialist here in San Luis Obispo County. I’d be happy to discuss your best options and give you some local advice and strategies on your game plan. I was going to private message you but it seems your account is hidden. Can you message me so we can connect? Depending on what city your current house is in there are many hyper local factors to consider as you know since our market varies from much of the country. Either way I love meeting and networking with local investors such as yourself so I hope I can help you out.
    0Reply
  • Dave G.
    Investor · Phoenix, AZ · Member since 2016 · 349 posts · 418 votes
    8y

    Sell it!

    My wife and I are in a similar situation, large ~$500k home, upscale neighborhood, rents of ~$2500/month and it just doesn't make sense to us to keep it as a rental. 

    And as pointed out by @Clayton Mobley the class of tenant renting something like that will expect everything to be beautiful and fully functional all the time. Capex for a big, upscale home is a killer. We just spent $6k painting ours, and $10k on new ac units 3 years ago. Refinishing the pool for ~$15k will be next. Then the roof will need replacing a few years later, another ~$15k. It never stops. These numbers for us make it a loser to keep after we move on. Sounds to me like your situation as very much the same.

    7Reply
  • Robert Jimenez
    OP
    Member since 2018 · 5 posts · 5 votes
    8y

    @Caleb Heimsoth, @Jay C., @Clayton Mobley, @Dave G. and @Tyler Mullen, thank you guys for your time and the great advice. You of all have given me something to think about. I'm sorry I asked! Hahahaha just kidding. I will have to do a lot of homework on buying multiple properties out of state. I've never considered do that before. It's kind of scary, but it sounds interesting to be able to build a small portfolio. Any suggestions where I should start looking? 

    0Reply
  • Clayton MobleyPro Member
    Birmingham, AL · Member since 2014 · 875 posts · 947 votes
    8y

    @Robert Jimenez you're already in the best place to learn about markets and strategies from real investors. You'll probably want to learn about both turnkey and the BRRRR method - it will depend on how hands-on you want to be with your investments. There are hundreds of threads about both strategies, the good the bad and the ugly. Once you determine the strategy you want to use, start researching markets. If you go turnkey, start talking to teams you're interested in and vetting them. Ask lots of questions and expect thorough, data-backed answered. When you've narrowed down your top one or two markets (or top one or two turnkey teams if you go that way), consider visiting the area to shake some hands, look people in the eye, and take a look at their work (this goes for using the BRRRR method as well, as you'll need to build a team, agent, contractor, property manager etc, and it pays to go see them in action before pulling the trigger).

    Regardless of how you go about it or where you invest, you're going to need to do your homework. Use BP for all it's worth, set up keyword alerts to keep you posted and don't be afraid to ask questions on the forum. Everyone is a new investor at one point and you'll find the BP community is very helpful and generous with their time and knowledge.

    Good luck!

    2Reply
  • Ryan Huynh
    Rental Property Investor · Kansas City, MO · Member since 2018 · 32 posts · 19 votes
    8y

    Yeah I'd have to agree with Clayton and Dave. The numbers are pretty close, especially with the HOA fee. It will definitely be a lot of upkeep given the kind of tenant who goes for these rentals. I'd also go with selling it.

    1Reply
  • Mary White
    Rental Property Investor · Klamath Falls, OR · Member since 2016 · 146 posts · 213 votes
    8y

    Hi Robert,

    We got stuck in 2007 with a house that we got an excellent price on in an up and coming Albany, Oregon neighborhood. We were forced to rent it out due to a cross-state move and barely break even every month. The market hadn't recovered significantly until about 2015, so we had a long distance (7 hours away) rental for all that time and were unable to sell it as owner occupants. Last year we sold it and had to go through a failed 1031 exchange (shady real estate agent caused problems). We ended up losing the full exchange and settling for a partial exchange. We are now writing a fat check to the IRS for our capital gains. 

    Long story short, I would definitely sell the property and "get while the getting's good." We did still get very good gains on the property by allowing it to bounce back and then some, but the years of stress are so not worth it. Put that $200,000 in the bank and don't spend it until you have the property and market that match up with your goals. 

    I hope this helps! 

    3Reply
  • Terrell Garren
    Rental Property Investor · Concord, NC · Member since 2016 · 1k+ posts · 3k+ votes
    8y

    I agree with others - sell. Dave Ramsey logic applies here.  If you had $200K of cash in your pocket, would you borrow another $300K to acquire your house as a rental? I don't think so given many better RE investment options.

    5Reply
  • Jacob Villalobos
    Whittier , CA · Member since 2013 · 176 posts · 96 votes
    8y

    Sell sell sell... 

    We are at or close to top market.  

    Find something that will give a better yield.  

    It's tax free if you have lived there for the last 2 of the 5 years. 

    Reposition your capital and make even more $$$$

    1Reply
  • Jim K.
    Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes
    8y

    @Robert Jimenez

    Nine times out of ten, when I hear someone say that they want to keep their current home as an investment property when they move somewhere else, it's for sentimental reasons, not hard-headed pragmatic reasons. I would urge you to look closely at the numbers and the possible returns versus what your duplex makes for you.

    1Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    8y

    The property is a money pit as a rental. All you have is a appreciation gamble. Are you a investor or a gambler.

    Between expenses and lost opportunity value on your equity you will lose about 4K per month on this property.

    I would sell in a heart beat, take the money and make it earn it's keep.

    2Reply
  • Liwen Gu
    Real Estate Broker · Salem, OR · Member since 2017 · 101 posts · 43 votes
    8y

    My initial reaction is that $2000/month mortgage seems is a little high for a rental. One question that I have for you is if it's easy to find good tenants in your neighborhood to rent it at $2400/$2600? I don't know your local market so it's a little hard to judge but last time I rented out a house in that price range, it was a little hard to get the ideal renters (for me the ideal renters are a family with a stable income that want to stay for 3+ years but if you think about it, why would a family want to pay that much for rent when they can just buy their own house). Of course, it's not impossible but it was just that last time I got applications from a group of adults (friends) who want to share a house instead of a family that I wanted. That was when I realized that expensive rentals might not be a good idea. 

    1Reply
  • Scott R.
    Investor · Beverly Hills, CA · Member since 2017 · 95 posts · 58 votes
    8y
    Originally posted by @Thomas S.:

    The property is a money pit as a rental. All you have is a appreciation gamble. Are you a investor or a gambler.

    Between expenses and lost opportunity value on your equity you will lose about 4K per month on this property.

    I would sell in a heart beat, take the money and make it earn it's keep.

     How do you figure it's a money pit? Also, is it really gambling when long term appreciation always goes up?

    0Reply
  • James Wise
    Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes
    8y
    Originally posted by @Robert Jimenez:

    My wife and I have decided to move to a different city nearby so my daughter can attend a better school district. I'm considering keeping our current house as a rental investment. I already have a duplex that I bought 3 years ago and I enjoy being a landlord. We have enough cash on hand for a 20% down payment for our new house. The house we have now is in a gated community in good area of town. We do live on the Central Coast in California and things are getting pretty expensive. My question is, should I keep it as an investment rental or sell it and use the equity towards our new house? We bought our current house at the absolute lowest point in the market back in 2011 for $332,000 at 3.75% interest. We currently owe $297,000 and the current value of our home is $525,000. Our mortgage payment is $2003.00 per month including taxes and insurance. There is an HOA fee of $114.00 per month. A couple of houses down the street that are the same size as ours currently rent for $2400 and $2600 per month. My wife and I are both teachers with pretty good pensions. I would like to retire in 14 years and use my rental properties as monthly income and fill the gap of my pension. After doing the math on our new home purchase we would still be able to save $2000 per month and I would like to pay off the house before I retire by making extra payments. Can anyone give me some advise? Should I do it or not?

     Mortgages are the best debt. If the other property makes you money no sense selling it just to avoid a larger mortgage on your next home. It is true you want to avoid bad consumer debt but no reason not to utilize good debt like a mortgage to build yourself a better retirement.

    0Reply
  • Walt Dockery
    Investor · Winter Park, FL · Member since 2017 · 171 posts · 165 votes
    8y

    The operative question is, if you didn’t already own it would you buy it as a rental for ~$525k with the expectation of renting for ~$2500 less hoa of $114?  I don’t know your area, but I imagine something like another duplex would provide a better return.

    Don’t fall into the trap of considering the ‘cost’ to be what you paid as opposed to the mkt value you could sell it for. IMO there’s generally a price point above which rentals don’t make a lot of sense, and IMO in most areas $525k is above that point. 

    2Reply
  • Charles M.
    Montgomery, AL Investor · Member since 2018 · 171 posts · 56 votes
    8y

    You could sell for full asking plus interest and worry NOT about tax increase default or damage  etc etc. Simply collect static monthly payments 12-24 months then Cash out... Inbox me.

    0Reply
  • Krissy Key
    Greenville, SC · Member since 2018 · 45 posts · 17 votes
    8y
    Using the 1% rule, if you cannot rent it for $5250/month then sell.
    0Reply
  • Robert Jimenez
    OP
    Member since 2018 · 5 posts · 5 votes
    8y

    I'm glad I found this Real-estate community here on Bigger Pockets. Everyone has giving me some great advise and insight. It seems overwhelmingly that everyone suggests that I sell and reinvest elsewhere. I'm glad I asked. Thank you!

    2Reply
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