I am moving into another home. I'm considering renting out my current home once I move out. After doing the math though, I'm not sure if it's worth it or not. In the end, I think this may be more of a philosophical/life advice type question.
My analysis is telling me renting will yield about $24k extra over a 10 year period based on the opportunity cost of historical stock market returns, home value matching future inflation, and conservative estimates for rental income & maintenance. However, by any flip of the coin, the math could go one way or the other... property values could shoot up, stock market could shoot down, etc.. Property values here have gone up ~40% in the past 5 years which is pretty much what's happening nationally for better or for worse. In the end, I think there is some unquantified value to being diversified in something others than domestic stocks. The flip side is rental properties are inevitably more work.
After reviewing below, do you believe my thinking & math is sound or would you suggest I look at anything differently? I tried to use all inflation adjusted numbers and didn't apply net present value analysis or anything like that. So, accounting for inflation, I'm assuming $1 (2020 dollar) now has equivalent value to me as $1 (2020 dollar) 10 years into the future. Debatable if that's a fair assumption or not.
Market Value: $150,000 (Conservative net proceeds in current market doing some aesthetic repairs and a for sale by owner transaction)
Mortgage P&I: $483.08 (Principal is about $200/month)
Insurance & Taxes: $77.79
Total Payment: $560.87
Remaining balance on mortgage: $110,000
Years left on mortgage: 29 years & 4 months (Finalized refinance 8 months ago, break even in 6 months. Mortgage allows for this to not be my primary residence after 12 months)
Interest Rate: 3.25%
Maintenance Notes: Home was new in 2008. Roof, HVAC, and water heater are all original so I'd say probability of HVAC repair/replacement and water heater repair/replacement are fairly high in the next 5 years. Roof "should" be good for another 12 years if it makes it the full 25 year life.
Expected Rental Income: $1,300 month * 11 months = $14,300/yr (Conservative, I think I can get $1,400 based on rates for identical floor plans in surrounding developments)
Mortgage Cost: $560.87 * 12 months = $6,730/yr (Approx. $2000 to principal)
Maintenance: 2% * 160,000 = $3,200 (Can do a lot of work myself, but not sure I'll always have time if, for example, something breaks in the middle of the work week. Can't have a tenant without HVAC/water for long so I'd have to call in a contractor. I see a lot of people do 1% but that seems low to me if you're actually keeping up with everything and not letting it degrade, especially with renters beating on things.)
Looks like my profit (cash+principal) would be ~$6,370 per year leaving me $4,778 after applying my marginal tax rate (~25%) to the profit.
Scenario 1: Rent indefinitely, eventually sell and realize capital gains taxes
Scenario 2: Rent for 2 years, sell without capital gains taxes per IRS rules. The market I'm in is expected to go up another 10% this year with no signs of slowing down. I'm sure that's what people said before the housing crisis too. In the end, nobody can predict the future.
Scenario 3: Sell and net $40,000. Expected inflation adjusted market returns: 7%=2,800/yr in first year.
10 year time frame, then sell:
Scenario 1: Assume rent grows with inflation. Invest cash proceeds each year. Cash rows to $44,000 in ten years. Remaining mortgage principal would be ~$82 so selling at 10 year period would net $68,000. Subtract capital gains tax ~$8,000. So total value would be ~$104,000.
Scenario 2: $10k rental profit, then sell for $40k net. Invest $50k for 8 remaining years. Grows to ~$86k
Scenario 3: Sell and invest $40k, grows to ~$80k
Beyond that, renting keeps outpacing stocks out to about $100k value in 30 years. Again, the +/- variability on this is high due to all the assumptions being made.