Author Topic: I'm moving. Should I rent out my current house or sell??  (Read 3845 times)

steamboat89

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I'm moving. Should I rent out my current house or sell??
« on: April 19, 2016, 01:51:08 PM »
I live in the Kansas City area and I'm looking to move closer to work.  I'm debating if I should sell my current house, or rent it out.  Here is some info:

Current home mortgage balance: $100,000
Appraised value:  $200,000

New house price range:  $100,000-$160,000

So, would it make more sense to have 2 mortgages, or sell my current house and rapidly pay off the new mortgage debt so I would be completely debt free? 

I believe I could rent out my home for $1200 a month. My mortgage payment is $900.

I'm 27 with a wife and currently no kids.

Thanks guys!! I could use some help with the math

Socmonkey

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Re: I'm moving. Should I rent out my current house or sell??
« Reply #1 on: April 19, 2016, 04:10:53 PM »
Sell it.

If the house is worth 200k and only rents for 1200 it is not a good rental property. You want to be in the 1% rule at least.

Simply stated, your monthly rental must be at least 1% of the purchase price of the property.

Since you initially bought the property as your own home the definition of the 1% is a bit different. The 1% rule is that the rent is 1% of the worth of the property per month. So your 200k house starts to be a rental candidate if it can bring in at least 2k per month. Of course, 1% is the lowest you would ever want to go.

There are a lot of other costs of a rental besides just paying the mortgage, and following the 1% rule will help you to break even on costs in a worse case scenario.

bobechs

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Re: I'm moving. Should I rent out my current house or sell??
« Reply #2 on: April 19, 2016, 04:37:32 PM »
Sell it.

If you can, as you suggest,  convert your post-sale equity in the first house into a paid-off or nearly paid-off second house then you would be exchanging a speculative (read: imaginary) positive cash flow of $300/month (more likely a substantial negative cash flow as a result of imagining away all expenses above mortgage service-- look up the 50% rule used by many landlords to see how bad it might  be for you) for the imputed income of a paid-off house.

Unless you would buy a place that you could rent for $300 or less you come out ahead.

Hint: look for all the local places that rent for $50 or $60/mo for comparison's sake.


steamboat89

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Re: I'm moving. Should I rent out my current house or sell??
« Reply #3 on: April 19, 2016, 05:06:50 PM »
I was leaning towards selling anyways, considering I have no experience with rental properties.  Plus the emotional factor of having no mortgage within a couple years due to the equity in my current home sounds very enticing.  Just wanted to make sure I wasn't "missing" anything. 

Thanks for the help!

steamboat89

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Re: I'm moving. Should I rent out my current house or sell??
« Reply #4 on: April 19, 2016, 05:39:21 PM »
One more question for you guys:

When I sell my house, should I use the capital gains for a down payment on my next home, or invest it all in index funds?  I'm assuming I am exempt from capital gains tax because it's under 250k, right?


bobechs

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Re: I'm moving. Should I rent out my current house or sell??
« Reply #5 on: April 19, 2016, 07:10:20 PM »
The  capital gain -or exclusion of capital gain for tax purposes- is an incident of the sale, not what you do with the money after. [Unless you are in the particular case where you don't meet the conditions for exclusion, but go ahead and buy another house within time limits to forestall that-- something that I think does not apply to your case; see my reference for details]

Once you have the money it is fungible.  You can spend it, or any other money you have or get, on housing (rent or buy), dog food, trips to Las Vegas or buying gold and burying it in the back yard.  It all comes out of the same pot and none of it has any lingering capital gain cooties on it.

Rent & invest vs. buy as a stand-alone subject is a big topic and about ten percent of the posts around here seem to chew endlessly on that topic and its thousand tangents. Read the sticky at the head of this subforum to get started.

http://www.schwab.com/public/schwab/resource_center/expert_insight/ask_carrie/homes_mortgages/pay_capital_gains_on_home_sale.html
« Last Edit: April 19, 2016, 07:14:40 PM by bobechs »

adamcollin

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Re: I'm moving. Should I rent out my current house or sell??
« Reply #6 on: April 19, 2016, 10:46:42 PM »
I think you should sell your house as it can help to clear your debts.

Drifterrider

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Re: I'm moving. Should I rent out my current house or sell??
« Reply #7 on: April 20, 2016, 04:44:53 AM »
I'm 27 with a wife and currently no kids. Thanks guys!! I could use some help with the math

If I were you (and I'm not) I would sell the current house.  The numbers don't work for a rental.  Question:  how big is your emergency fund?  I would put as little down on a different house as was required to get the best financing deal and hold the balance of the money.

Also, as you are married, if you meet the 2 out of 5 rule, you may exclude $500K from capital gains.

bobechs

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Re: I'm moving. Should I rent out my current house or sell??
« Reply #8 on: April 20, 2016, 07:52:55 AM »
I'm 27 with a wife and currently no kids. Thanks guys!! I could use some help with the math

If I were you (and I'm not) I would sell the current house.  The numbers don't work for a rental.  Question:  how big is your emergency fund?  I would put as little down on a different house as was required to get the best financing deal and hold the balance of the money.

Also, as you are married, if you meet the 2 out of 5 rule, you may exclude $500K from capital gains.



Not really.  As we are given that the house is appraised at (and we can take it would sell for no more than) $200,000, even if OP bought the house outright for $1 (which is not the case, very likely) the maximum possible exclusion would be $200,000, less one dollar.

You cannot exclude more than your actual capital gain from capital gains.  Even being married does not change that.

With a more realistic capital gain of $100,000 (on the conditions given) and assuming a down payment of 20% of, say, $150,000 for a replacement house you are advocating holding $70,000 in a liquid emergency fund.  I'd be interested in what you imagine the hypothetical conditions under which having that much cash on hand in the bank (and simultaneously paying interest on its equivalent owed on a mortgage) would be necessary and prudent? 

Drifterrider

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Re: I'm moving. Should I rent out my current house or sell??
« Reply #9 on: April 20, 2016, 10:01:58 AM »
Really?  You really read that to mean they get $500K no matter the numbers?

ESL?

bobechs

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Re: I'm moving. Should I rent out my current house or sell??
« Reply #10 on: April 20, 2016, 10:29:49 AM »
Really?  You really read that to mean they get $500K no matter the numbers?

ESL?

Nope, I read it that marriage and its effect on capital gain was a complete red herring in the context of this situation.  I was somewhat more puzzled how someone could come up with a defensible plan to put what is probably most of OP's net worth in an emergency fund.

Yeah, I have taught ESL.  Why do you ask?

rachael talcott

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Re: I'm moving. Should I rent out my current house or sell??
« Reply #11 on: April 20, 2016, 07:58:02 PM »
One more question for you guys:

When I sell my house, should I use the capital gains for a down payment on my next home, or invest it all in index funds?  I'm assuming I am exempt from capital gains tax because it's under 250k, right?

Some math:

Option one: $100,000 from selling house goes into buying cheaper new house, relieving you of your mortgage payment. 

Option two: $100,000 from selling house goes into index fund, which provides 4% withdrawal rate, or $4000/yr ($333/mo).  You get a mortgage for maybe $450/mo.  So you are $450-$333 = $117/mo worse off than option one.  Plus you have to pay origination fees (thousands) to get the mortgage. 

Option three: Same as two but instead of withdrawing 4%, you just leave the money in the market for 10 years while you're living off of your salary.  The average return on the market is ~7%, so you come out ~3% ahead on average.  But there is also some risk that you will hit a below-average 10-year return window: http://1.bp.blogspot.com/-1PWqY3_kdaw/UP8WGdGHSXI/AAAAAAAABo4/G4_EGQfARnQ/s1600/Dow+10-Year+Rolling+Returns.jpg

If you are close to retirement, option one is better than option two, and you don't have option three.  There is probably some point where doing option three for a long time is almost always better than option one.  What is your timeline to retirement?