My family and I are looking to move from our current town home into a single family home in a much better school district. I’ve got the age old question of whether we should sell our townhome or keep it and make it our first rental.

This is my first post on BiggerPockets so please let me know if I have left out any information that may be helpful in the analysis.

Single Family Townhome

Built: 2001

Purchase Date: 2008

Purchase Price: $270,000

Property Tax: $5700/year

HOA: $125/month

Water/Sewer: $1320/year (Must be paid to county by home owner)

Insurance: $800/year

Maintenance Costs: $400/year

Other planned future costs: Roof (in about 5 years, ~$5000), water heater (in 7 years, ~$1300 including labor), water softener (in 5 years, $500)

Current Mortgage (Refinanced in 2012)

Term: 15

Rate: 3.375%

Principal: $140,000

Market Value: $230,000 (Upstate NY market with minimal appreciation expected)

Rental: $2000/month ($2200 possible but I want to be conservative)

I was also considering refinancing to a 30 year mortgage to help with cash flow but I’m not sure if it is worth the $4000-5000 in closing costs to refinance.

Normally I would not consider this a good rental property because of the low/negative cash flow. However, since we already own the property we avoid the transaction costs of selling when we move. We have also lived in the house for 9 years so we are familiar with how to repair and maintain the house.

My questions are:

1) Does it make any sense to keep this property as a rental when we move?

2) Would you refinance the property to a 30 year or keep the current mortgage?

Thanks for any advice you may have and please let me know if there is anything else I should consider.

-Kevin

@Kevin Maldonado Great first post. Looks like you have been doing some research regarding rentals for sure. Here are my thoughts on you situation. First, I have a couple questions. How far away will your new house be? Are you planning on managing this property yourself? Do you make enough monthly income to cover your new mortgage and your current mortgage and still have enough to cover your bills? Is 800 your current insurance rate or is that an estimate for a landlord policy because usually they are significantly different. What does the HOA cover? You said that you were expecting to get a new roof for 5K. Isn't that covered in the HOA? How hot is the rental market in that area?

Regarding the numbers, it looks like you have a good grasp on the expenses.  I think your maintenance budget of $400 is very low.  I usually do 12% of rent but since this property is newer I might go down to 8%.   The rest looks reasonable.  If you refinanced before you moved to a 30 year mortgage I show a best case scenario cashflow (2200/month with 5% vacancy) of  around $200 per month if you used a property manager.  If you managed it yourself (easily doable unless you move far away) you are looking at almost $500 a month cashflow.  Note I assumed 146k note on the refi to take into account that you will probably roll the closing costs into the refi.  

Option 1. if you are really interested in getting into real estate some more, I might consider refi before moving to a 30yr at about 175k.   That would give you 30k to put as a down payment for another rental.  Even at 175k with 10% vacancy @ 2200 a month you are break even with a management company and positive cashflow of $275 per month if you manage yourself.  

Option 2, if you make significant w-2 income, is to leave it as is and just rent it out.  If you manage it yourself you should positive cashflow around $30 bucks a month but in 10ish years it will be paid off and your cashflow will go up significantly.  I would not do this if your income was not significant to support issues or if you plan to move far away from the property.  If you are wanting to be an absentee LL then you might  want to sell and buy a cash flowing property out of state (maybe Texas :)  ).    

Personally I think if you want to be completely hands off, I would refi to 30 years at 146k and get a good property manager.  If you want max cashflow, manage it yourself and refi to 30 year and start learning landlord laws :). 

Feel free to PM me if you want to chat on the phone.  If you have any other general questions please just post below so others can read and learn.

Ryan, thanks so much for your detailed response. I didn't realize you posted right away since I didn't have notifications enabled. Here are some more details to the clarifying questions you asked:

How far away will your new house be? Within 30-40 minutes.

Are you planning on managing this property yourself? Yes. Since this would be our first rental we'd like to give management a try before we decide if we are up for the job or not.

Do you make enough monthly income to cover your new mortgage and your current mortgage and still have enough to cover your bills? Yes, but this would not be an ideal situation since we're fairly conservative with our finances.

Is 800 your current insurance rate or is that an estimate for a landlord policy because usually they are significantly different. This is a current rate for a home owners policy. There are some additional discounts for having auto insurance with the same company but I didn't include those.

What does the HOA cover? You said that you were expecting to get a new roof for 5K. Isn't that covered in the HOA? The HOA covers lawn care and garbage removal. We actually own the land and building structure so we are responsible for all repairs.

How hot is the rental market in that area? I don't think it's that great, but I don't really have any experience to base that on. $2200 would be at the high end of the market.  $1900 or $2000 /month would be much more likely  based on other rentals in the neighborhood.

Option 1 seems like the lower risk option and the way we are leaning if we keep the property.  But we are just unsure if we should keep it at all.

Option 2 seems a bit risky since we will most likely be cash flow negative for about 10 years. Also, how did you calculate a positive cash flow if we stay with the 15 year mortgage? Here is what I calculated as our current monthly expenses: Principle + Interest= $1450, Property Tax=$475, Insurance=$67, HOA=125, Water/Sewer(Fixed cost even if we use no water)=110 Total = $2227 and then I have to add on maintenance costs and vacancy as well.

Since we bought the property in 2008 without having any real estate experience we seriously overpaid for it at the peak of the market. When I work out the numbers, especially for option 2, this seems to be a pretty bad property to keep as a rental in terms to cash flow. I'm just hesitating to sell it because of the cost and hassle of selling a property. I guess we shouldn't look at what losses we have already had on the property since they are sunk costs, and just look at the property as if we we buying it today.

What I'm really looking to understand is if a savvy real estate investor would even consider this as a viable investment property with our current numbers (staying with current mortgage or a 30 year refi). Or would you they look at all the expenses and run for the hills and sell?

Thanks again for all your insights!

It will not cash flow so I would sell.

Thanks Amy Beth. It might be best to sell and just look for a better cash flowing property.