I am purchasing a new primary residence soon. Sell or rent my current primary?

Question

We are purchasing a new primary residence in approximately 6 months. Should I sell or rent our current primary. Current home should rent for $2,500 per month. We owe $250k with a 3% mortgage and a HELOC for $150k at 10%. Home will sell around $425k. We currently earn $250k per year and have no other write offs, so I believe this would be a great tax strategy to create LLC for rental. But, we also have $200k debt beside mortgage and HELOC. Looking for pros and cons.

Hossein Sharifi · Answer

After the 3% mortgage, taxes, insurance, maintenance, and vacancy, $2,500 rent likely won't cover much of that 10% HELOC. Unless you'd happily buy this house as a rental at today's price, selling to clear the HELOC is probably the stronger move. An LLC won't change the tax picture much. The bigger question is your capital gains exclusion: if you've lived there 2 of the last 5 years, renting it too long can cost you that.

Jaron Walling · Answer

100% agree with @JD Martin. Without the PITI, estimated capex, repairs, vacancy, or PM we can't give great advice. These questions pop up all the time. If the intent mostly like years ago was to buy, live for a few years, and then hold as a rental the numbers should support it.

You make a quarter million per year with $200k in bad debt. Selling the house tax free and wiping that out would be a huge win. It's way more powerful than fixating on the 3% rate and justifying to hold as a rental. A small amount of CF isn't worth it for someone in this position.

JD Martin · Answer

The LLC is unnecessary just to have a rental. Quick mental calculations says you will take in less in rent than you are paying out on mortgages, not to mention maintenance and upkeep. Based on your limited info and your debt load I would sell.

Jules Aton · Answer

I agree. My first thought was what does it look like when considering the capital gains exclusion? Congratulations on your new position. Attempt to avoid lifestyle inflation and your future self will thank you.

Jaron Walling · Answer

Harold, it's hard to talk with people about money. Coming to the forums and discussing your property, bad debts, and plans is a massive educational leap forward so congrats. People don't like to admit 2nd mortgages, or HELOCs. Until they talk to experienced people they usually continue to make poor choices with money.

I'd strongly consider selling. You're in a great position (on paper) but cleaning up the debt will set the foundation you need to really excel. You'll be in a better position to buy again and have the strategy(s) to back it up. If you do decide to sell wait until the spring to list. Mid terms and seasonality is really hurting pricing. Cheers.

Harold Penovich · Answer

Thank you JD. I appreciate your input.

Hossein Sharifi · Answer

Sounds like a solid call. Clearing that 10% HELOC is a guaranteed return most rentals can't match right now. Good luck with the sale and the new place!

Josh Young · Answer

@Harold Penovich

I would definitely keep it as a rental. That is a pretty good rent to price ratio at around 7% annual yield. What part of the valley is it located in? That 3% interest rate is a great asset and having a HELOC can be a helpful tool in the future. If you sell at $425k and you owe $400k in combine debt on the property you will need to pay to sell it (figure about 8-10% in commissions, title, escrow, concessions, and repairs) and then you’d have to come up with more money to start investing. Instead you could use your high income to pay down your bad debt (which you are going to need to do anyways) and pay down your HELOC, so you have available funds to draw in case you need liquidity. No matter what you do though you need to start spending less than you make and use that high income to pay off your bad debt.

Alex S. · Answer

One thing that makes this decision much cleaner: run the rent-vs-sell comparison as return on equity, not cash flow. Take your current equity (what you'd actually net after selling costs) and divide the expected annual cash flow plus principal paydown plus a conservative appreciation estimate by that number - if the result is below what paying off your high-interest debt saves you, the math says sell. On the HELOC specifically, make sure you model it at a rate a few points higher than today's, since it's variable and will ride with your cash flow for the whole hold.

Gregory Acs · Answer

Hi Harold,

There are a few moving pieces here, so I'd look at the numbers before making a decision. A 3% mortgage is a valuable asset in today's market, but the 10% HELOC and your other debt could change the equation. I'd compare the expected rental cash flow after all expenses, including maintenance, vacancy, and the HELOC payment, against the benefits of selling and using the proceeds to reduce high interest debt.

I'd also talk with a CPA before setting up an LLC. An LLC doesn't automatically create tax benefits for a single rental property, so it's worth understanding the tax and liability implications before making that move.

I'm a mortgage broker and work with homeowners making this type of transition. I'd be happy to help you compare the financing scenarios and determine which option best fits your goals. Feel free to send me a message.

I am purchasing a new primary residence soon. Sell or rent my current primary?

I am purchasing a new primary residence soon. Sell or rent my current primary?

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