How do I best use my current equity?

Question

I am currently living in my 3bd 2 1/2 bath 2435sqft on 4+ acre home I bought in 2020. My wife and I are looking to start our rental investing journey. I'm struggling to find the best use of our current equity in the home. Bought the house in 2020, for $325k with a 15yr 2.75% mortgage. Home's current value is roughly $500k - $525k depending on local realtors we've spoke with. We owe $220k and have a few simple things we could do to increase the value a bit. We love the location and property it suits on, but long term goal is to build a home in a few years on land we own. We currently are thinking of selling this home, downsizing short term and buying a home out right with the equity that we'll turn rental. We like our home and the equity already in it and wondered if there was a better way to use it and potentially the home itself as a rental to grow effectively and efficiently. Rents in my area for 3bd homes are roughly $1,600 - $2,400/month. We could relatively easily convert a bonus room in the house to a 4th bedroom and add to potential home value too. Any advice or insight would be appreciated.

Sorry if this is too much information or rambling.

thanks

Sorry if this is too much information or rambling.

thanks

Greg Scott · Answer

If you do the math a $525K home that rents for even $2,400 is not going to give you a good return.  Plus, converting a home you lived in to a long-term rental can void your ability to avoid long-term capital gains tax.  I wouldn't do that.

If you downsize temporarily to build the new house, I would only buy a house in an area that makes more sense as a rental.  Downsizing and having no mortgage may also not be the best idea because you will need cash if you are going to build your new personal residence. Before making any decisions, I would sit down with a mortgage broker to talk through all the issues.