Rent our current house?

[Meredith Dove]

Hi all,

We bought our house last spring and it is on a busy road and too small for our family of 4 (both drive me nuts). I would really like to move out when we have owned it for 1 year and buy a bigger house. My thought was we could rent this one out as a single family (4 br, 2 ba). How could we get a loan to buy another property in this situation? And how can I determine if it makes sense to rent (or sell) our current home? Thanks so much!

[Kevin Sobilo]

@Meredith Dove, do you really want to be a landlord? Do you plan to acquire more rentals? Are you prepared for things to go sideways? A tenant stops paying, eviction, several thousand in damages?!?

Think about all of those questions first before deciding if your home makes sense as a rental.

I always tell people having 1 rental is horrible! I tell people if you are going to have 1, plan to acquire at least a few more in the near future. When you only have 1, you never become a proficient landlord. With one unit things are either great (and you barely notice) or HORRIBLE (and you can't think of anything else). With more units when there is an issue at one the others are still chugging along smoothing things out.

Also look at what you will pay for another home with interest rates now MUCH higher than several months ago. It could cost you quite a lot more to buy the next house. 

[Nate Sanow]

Quote from @Kevin Sobilo:

@Meredith Dove, do you really want to be a landlord? Do you plan to acquire more rentals? Are you prepared for things to go sideways? A tenant stops paying, eviction, several thousand in damages?!?

Think about all of those questions first before deciding if your home makes sense as a rental.

I always tell people having 1 rental is horrible! I tell people if you are going to have 1, plan to acquire at least a few more in the near future. When you only have 1, you never become a proficient landlord. With one unit things are either great (and you barely notice) or HORRIBLE (and you can't think of anything else). With more units when there is an issue at one the others are still chugging along smoothing things out.

Also look at what you will pay for another home with interest rates now MUCH higher than several months ago. It could cost you quite a lot more to buy the next house. 

 I agree, and say many of the same things. One rental is tough, and becoming a landlord by accident coincides with it… we all start, typically with one but the plan for growth needs to be there too 

[Kevin Sobilo]

Quote from @Nate Sanow:

Quote from @Kevin Sobilo:

@Meredith Dove, do you really want to be a landlord? Do you plan to acquire more rentals? Are you prepared for things to go sideways? A tenant stops paying, eviction, several thousand in damages?!?

Think about all of those questions first before deciding if your home makes sense as a rental.

I always tell people having 1 rental is horrible! I tell people if you are going to have 1, plan to acquire at least a few more in the near future. When you only have 1, you never become a proficient landlord. With one unit things are either great (and you barely notice) or HORRIBLE (and you can't think of anything else). With more units when there is an issue at one the others are still chugging along smoothing things out.

Also look at what you will pay for another home with interest rates now MUCH higher than several months ago. It could cost you quite a lot more to buy the next house. 

 I agree, and say many of the same things. One rental is tough, and becoming a landlord by accident coincides with it… we all start, typically with one but the plan for growth needs to be there too 

@Nate Sanow, I agree. I tell people all the time that 1 unit is a terrible thing. Its either going well and you barely even notice or its going horribly and its all you can think about. With even a few units it starts to level out because when there is an issue with one unit the others are still chugging along.

Also, with 1 unit you never become proficient at screening tenants and managing the property.

So, I agree, I would make a plan for how to grow to more units sooner rather than later. 

[Meredith Dove]

Thank you @Nate Sanow and @Kevin Sobilo for your responses. I'm curious how important you would consider it to stay in your home for at least two years. I am familiar with capital gains tax and the need to stay in the home for 2 years, but I really don't like where we are living and, while don't want to lose much money, would like to move. Any tips on how to figure out how much we would lose by moving after 1 year? Thanks so much!

[Kevin Sobilo]

@Meredith Dove, its about taxes. You just pay tax on your PROFIT if you move early. So, if you break even there is no difference and if you do make money you pay tax on it, but if you have motivation to sell and move paying some tax on money you made isn't a horrible trade-off.

In most cases moving so soon, you won't make any money after you factor in the costs like real estate commissions, transfer taxes, etc. So, it may not be an issue at all. 

[Andrew Postell]

@Meredith Dove I wanted to go back to your original post/question if you don't mind.  To get another loan is possible in this scenario.  You would need your downpayment and when you get prequalified the lender would need to tell you if you need your current primary home rented or not.  Meaning, if you need to rent it BEFORE closing on your next new home.  

Now, "does it make sense"....this is certainly a relative question.  What is the definition of "sense"?  I would guess that your interest rate is SUPER low but you probably did something like a 5% down loan?  Would keeping that property for 5 years and selling for a bunch of money "make sense"?  That concept is here: https://www.biggerpockets.com/...   Just be aware that the potential to cash flow may not be there for you if you borrowed 95% of the property value.  For investment properties we are usually borrowing something like 75%....which makes our payment lower type of thing.  You might cash flow...but maybe not.  So would it be worth it to make a bunch of money after 5 years if you had to set aside $50 per month to do so?  Again, it's all relative.

Also, for "Capital Gains" taxes - that's what you pay when you sell an asset after holding it.  It is true that if you live in a property for 2 our of the past 5 years you don't pay capital gains.  My wife and I are selling a property next year that we are using that rule for.  Our gain is pretty incredible though....we purchased the property about 8 years ago.  So the gain is up there.  We wanted to rent it for 2 years so we could capture even more gain but when we sell it will be tax free.

Lots to think about for sure.  Oh, and I started with 1 rental property.  I couldn't have lots if I didn't start with 1.  Hope some of this helps!

[Meredith Dove]

Thank you so much for your thoughts, @Andrew Postell! Agreed- how can you start renting properties if you don't start with just one!?

This is our primary residence, not an investment property (hoping to get into that soon) and we put 20% down with a 5% interest rate. I am not sure how that affects the potential to cash flow other than that it might make the ability to cash flow higher since the monthly payments are lower than if it we borrowed 95% of the property value...?

In terms of the link that you sent, I don't think we made a wise purchase to rehab. We bought it last spring for a high price ($580k) and even if we were to put 30% in to rehab it, I don't think it would be worth $754k for quite some time due to the location on a busy road. The location does have a lot going for it in other ways (good school system, on the edge of a park, nice town)... but I don't think it is worth rehabbing. I am very interested in any of your (or others') thoughts on this. Thanks again.

[Andrew Postell]

@Meredith Dove ok, that makes sense.  And yes, the lower loan amount means your payment is a little lower which will help with cash flow.

And the take away I wanted you to have from that article is holding the property for 5 years.  If you only held it for 1 year...you would likely lose money.  So look at all of your properties with a 5 year examination...taking into consideration the appreciation of the asset and the principle buydown of the loan you will have a good amount of equity after holding the property for 5 years.

Hope all of that makes sense. 

[Meredith Dove]

Thank you @Andrew Postell! I guess my original question about renting it was because of exactly what you said. Holding it for 5 years would be better than selling after 1 year- so I was thinking renting it for the next 4 years might be a wiser choice than selling it after one year. I wonder if there is a way to determine that. I am familiar with the rental calculator on this site, but I am not sure how to compare the cash flow of renting for 4 years with the losses and gains we might have if we sell after 1 year, if that makes sense.

Again, thank you for your thoughts! 

[Andrew Postell]

@Meredith Dove so if we analyze just the property value and the fees you pay when selling that will show you that selling after 1 year won't make a lot of sense.  When you sell a property you have to pay realtor commissions - so that's 6% right there - and then closing costs (unless you can get the seller to pay for those which is very hard currently).  So just to break even you would need about 8% appreciation in 1 year.  And that's to break even.  As long as your home is appreciating each year, then the longer you hold it the more money you make...and your mortgage balance is going down more and more aggressively each year too.  And that's why 5 years is usually what we want for an investment property.  3 years is usually the minimum perspective for ANY property you purchase.  If you sell before 3 years you are taking a risk.  It might work out if you sell sooner than 3 years - but it might not.

[Meredith Dove]

Yes, so @Andrew Postell if the choices are 1) renting it for 4 yrs or 2) selling after 1 year (since living in it is not a preference), which would be wiser financially? I understand neither are great options most likely but trying to compare the two in terms of losses... 

[Andrew Postell]

@Meredith Dove if you sell after 1 year you are almost guaranteed to lose money on the transaction.

[Justin Hammerle]

@Meredith Dove I think your question is dependent on a lot of factors; mainly what you currently owe on your house, what that house currently rents for, your income, your savings, and your overall investment goals.  Without understanding each in a very detailed way, it would be difficult to give you advice that would hold much merit.  My quick simple two cents is, if you don't have enough income to support your current mortgage and an additional home large enough for your family, it would quickly rule out the idea of renting.

[Ian Halter]

@Meredith Dove

Taking a stab at some quick analysis.

Costs: 580K at 5% with 20% down, guessing taxes and insurance tells me you're paying between $3100-$3400 as a mortgage payment. Once you move to a different home, your taxes will increase by probably $200/month due to losing homestead exemption.

Best Case Costs: $3300/mo minimum

Revenues: Given what I know about the greater Providence area, if your house is not in a great location or great neighborhood (think B/B- rating) it would be tough to rent a 4bed 2bath for > $3500. Many prospective homeowners can find a home elsewhere in an equally good neighborhood, it would be smaller, but they'd have a similar monthly payment even with rates today. However, let's say you somehow found someone willing to pay $3600/month for a B/B- entire-house rental on a busy main road.

Best Case Revenues: $3600/mo

After all the work involved with landlording and assuming absolutely nothing goes wrong (quick to find a tenant, no extra rehab costs to ensure up to rental code) best case you make $300/month. There is a much larger and very real chance you make no money on this house by renting it. Hire a property manager and you're likely in the red.

Reviewing the options:

- Sell the house: likely incur a loss (market has cooled) while increase your living costs (you want a bigger house and rates are higher) and with kids likely move in ready (more expensive)

- Rent the house: small likelihood of profit, more likely breakeven even with landlording work

With the market where it is - you're not in a great spot, I won't sugarcoat it; however I think there's a 3rd option. Contractors will be looking for work, as builders can't sell homes. The increase in supply of large build contractors should drive down bids for large additions (competition). I highly recommend investing what an addition would look like, a few people I know have already seen bids for large additions or ADUs (500-1500 sq ft added) drop by 20-30% by waiting for this market to cool.

[Meredith Dove]

I am so sorry I am just seeing this now, Ian. Thank you so much for your helo with this analysis. We are in an "A" town but the best case scenario is so helpful to see. Now I'm wondering if the addition would be worth it if the location is not ideal, but it could be something to think about! Thank you so much! Love this idea.