Does this rental make sense?

[Blake Davis]

Hi all! I'm considering renting my current primary residence when we "upgrade" and buy something nicer in a few years. I'm trying to understand the levers and drivers that make a property a good rental property, and I would very much appreciate words of wisdom from those who are more experienced than I am. I'm not sure how much background is needed, but here goes:

• 32% marginal tax rate for federal, plus state income taxes (AZ); decent chance of being 35% marginal tax bracket when it's time to move.
• Property is 3 bedrooms, 2 bathrooms, and just a touch over 1,700 square feet in the Phoenix area. It is very close to one of the best elementary schools in the state (top 10-15 no doubt). 
• Appraisal end of last year when we refi'd was $375,000.
• We refi'd last month to a 15 year fixed at 2.75% with no out of pocket closing costs (the lender credit covered all of the fees and there is no escrow account). We owe $205,000. Property taxes and insurance are roughly $275 a month. HOA of $42 a month.
• The home has lots of nice upgrades, is located next to a park, and based on the rental numbers I've heard talking to neighbors, it would likely fetch $2,000 to $2,100 a month. Everything is in great condition following expansive upgrades. That said, the roof will probably need to be replaced in 5-7 years and the AC, although working great right now, is 11 years old. I'm assuming replacement in 4-5 years, which is about how long I think we'll be in the house before moving.
• This is a very nice neighborhood, lots of families, low / no crime, etc. Close to very good amenities and freeway access. Good employment nearby. Outside of this subdivision, most of the homes are around $600,000 to $1,100,000. We live in an older development, but are zoned for the same schools as the "rich people." 
• We don't need the equity in this place to buy our next home. If we elected not to rent, the money would be invested in Vanguard index funds and held "forever." 
• Is this a good rental property? 
• We'd benefit from a good tax write off that we would have to recapture in the future, the property would be great for a recently divorced man or woman with small kids who can no longer afford the big, fancy house but doesn't want to change schools, etc. Should we refi again to a 30 year and increase the monthly cash flow?
• Thanks so much for your help and guidance!!!

[Joseph Cacciapaglia]

A $375K home that rents for $2100 isn't what I would call a good rental property. The problem is even if you're making a positive cash flow, because you have low leverage, you're not getting a great return on your equity. If you sell, why not invest in a small multifamily property instead of a Vanguard index fund? With the equity in this property, you could buy the nicest fourplex in my market.