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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  • James Allen
    Lender · Los Angeles, CA · Member since 2015 · 184 posts · 92 votes
    8y

    @Robert Jimenez - I agree with some of the others who commented before. I think selling your house up to 500k tax free ($250k each for you & Wife) would be the best play. The good news is you have a decent amount of equity and with that you can get some great returns in the mid-west and the south in comparison to holding this one as a rental. You can even find places that give you cash flow & appreciation if that's more what you're looking for. 

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  • Spencer Hilligoss
    Investor · Alameda, CA · Member since 2016 · 132 posts · 170 votes
    8y

    @Caleb Heimsoth @Jay C. and @Clayton Mobley nailed it

    We wrestled with the same question for our own home last year. we ran analysis to assess how it would perform as a rental.  

    ultimately, we ended up staying put, opening a HELOC to tap the $XXXk equity that's built up over the past 5 years and deploying the new found capital in strong cash flow markets out-of-state.

    Here are the two questions that we found most helpful is determining whether to convert our home into a rental:

    1) Does our home meet our investment criteria*, as a rental? (conservatively underwritten)

    2) Could we find (and afford) a stronger performing asset with a reasonable amount of focus and hustle?

    If "no" to #1 =  end of conversation

    If "yes" to both #1 and #2 = giddy up!

    1Reply
  • David BarnettPro Member
    Rental Property Investor · Cambridge, MA · Member since 2016 · 634 posts · 415 votes
    8y

    In the interest of providing another potential option is to keep it as a rental for the next 12-24 months and then sell it.  This way, you'd have the tenant paying down the mortgage (assuming no large capex expenses) and then you can sell within the period of the capital gains exclusion (primary residence two out of the last five years).  Without knowing the term of your initial mortgage, the tenant has the potential of paying down the principal on the mortgage, increasing your proceeds when you do sell it.  

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  • Account Closed
    Tax CPA · Charlotte, NC · Member since 2014 · 215 posts · 186 votes
    8y

    @Robert Jimenez Good question! I would have to agree on the point that everyone has made that there does not seem to be enough room between rent received vs. the mortgage payment. On top of that, you can't pass up the tax-free exclusion of up to $500,000 of gain.

    Good problem to have!

    0Reply
  • Thomas Hanks
    Rental Property Investor · Fallon, NV · Member since 2018 · 16 posts · 11 votes
    8y

    Hi @Robert Jimenez, what sort of return do you want on your money when you decide to get into REI? Take that criteria and use the bigger pockets calculators to help you decide on what to do. Let the numbers help you decide on what to do vs. emotional feeling for your house. Also, you need to calculate for property management, vacancy, repairs and capital expenditures, in addition to your mortgage.

    1Reply
  • Kai Van Leuven
    Investor · USA · Member since 2015 · 325 posts · 447 votes
    8y

    @Robert Jimenez I know that alot of folks on here would love for you to take all of the money tax free and buy a bunch of "fools gold", I mean OOS REI, but I don't tend to lean that way. You already have the property and the experience. Why not keep the house, maybe tap so equity and buy another solid place close by. There are so many people on BP that will tell you to take your good assets and trade them for bad. They are the OOS investors that would rather make $200 per month with an asset that will not go up in value, probably ever. If you are buying at market, when will you be able to actually break even to sell a property. Houses don't sell for free. How large is Cap Ex expense, percentage wise, on a 70K house. It really does not make sense.

    I am trying to figure out the last time I saw someone from any of these midwest/south states say "I have 200K in equity in my property. What should I do now?". There is a reason the values are low. Don't fall for it...

    1Reply
  • Robert Jimenez
    OP
    Member since 2018 · 5 posts · 5 votes
    8y

    @Kai Van Leuven I really appreciate you taking the time to write back. To be honest, I'm not comfortable with OOS REI. I like to be more hands on with my property. You bring up a good point about the OOS properties not going up in value. I feel the house I'm in now will never be worth less than I paid for it and the house is only 8 years old and in great shape. It is not a money pit at all. I'm comfortable only making $200-$400 per month while someone else is making my mortgage payment for me. My main goal is to have it paid off when I retire and use the rental income to close the gap on my pension, if not more. I'm leaning towards keeping it and renting it out for two years and see how it goes. If it is not working out then I can sell it and still pay no capital gains. If it works out, then I will have some really good passive income when I retire and still have a house worth a lot of money that I could eventally leave to my wife and daughter when I'm gone. I can't tell you how many times I hear family members and friends saying that the wished they had kept their old house or condo as an investment here in California. Thanks Kai.

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