Sell or rent it out? Newbie question...

[Practical Pig]

First post here...loving the Mustachian mindset!

Here's the details:
We bought our home 2 years ago for $170,000, we currently owe $130,000 and our mortgage payment is $600/month.
Since then, the market in our town has gone up, and coupled with a full diy kitchen & bath remodel and extensive updates done over the past year, we could sell for $250,000.

Here's the dilemma:
Husband wants to sell the house and net $120,000. Use $30K to pay off student loans (our only debt) and put $75k towards a down payment on a new house. (New to us...we have our eye on the historic section of our town). Invest the rest. Live debt free (except for the mortgage, which we would pay off aggressively) and go from there. Live frugally but without stress of big debt.

Wife thinks it's best to save up for a 10% down payment for a house in the historic neighborhood, rent out our current house (rent would be around $1600/month), and use the income from rent each month to pay off student loans, and have a nice asset for retirement in 30 years. Scrimp big time in the next few years.

We're 30 with 2 small kids and are just beginning to invest. Both neighborhoods are within walking/biking distance of husband's work, wife works at home. Meager earners (teacher and self employed writer).

Ideas? Suggestions? Holes to poke in either plan?
Thanks in advance for your help!

[KingCoin]

What's the interest rate on your student loans?

Assuming the house is worth 120k (you say net, I'm not sure if that's inclusive of paying off the remaining mortgage), and applying the 50% rule to the rent, the second house is yielding 8%. That's pretty attractive, and to me, argues you should hang onto it, especially if it's in good shape and won't need much maintenance in the near term.

[Practical Pig]

We'd have $120,000 after paying off the mortgage if we sold. (Owe 130k, sell for 250k) Of course not including expenses involved in the sale, etc.

Interest rate on $6k of the student loans is 7%, the rest (about 20k) is at 2.8%.

and applying the 50% rule to the rent, the second house is yielding 8%
Okay, total newbie...can you explain what that means?

[Another Reader]

With selling expenses, you might end up with around $100k.  Commission, title charges, and repairs add up quickly.

A $250,000 house that generates $1,600 a month rent would yield a free and clear 3.8 percent from cash flow, using the 50 percent expense rule.  Unless your mortgage is less than 3.8 percent, leverage is not your friend.  If you expect rents and values to go up rapidly and you want to hold the house for the long term, you could keep it, but in your shoes I would probably sell and move on.  I would get rid of the student loans and look for better investment opportunities.

[Practical Pig]

Thank you for the answers!

Can someone please explain the 50% expense rule when it comes to rent? We would be renting our house worth $250,000 (on which we owe $130,000) for $1,600/month. Our mortgage, insurance and tax is $850/month.

Thanks again

[Another Reader]

Vacancy and collection loss, repairs and replacements, property management expense, utilities between tenants, etc.  Tenants are hard on houses, and you will replace carpets, garbage disposals, window coverings, dishwashers, etc much more often than if you lived there.  Add taxes and insurance, and you are nearing 50 percent.   You can manage the property yourself and do all the repairs, but you are paying in time instead.