keep it and rent it or sell it? what's the Mustachian move?

[frugalfranny]

I am new, but we have been living the Mustachian lifestyle, more or less for a while now.

I need some help trying to figure out if we should keep our current home and rent it out when we buy a new one in the city, or if it is smarter for us to sell it. We have been landlords before, so we know what we'd be getting into as far as that goes.

The particulars:
-house is worth about $150,000+, no mortgage
-rent should be $1000, more or less (it has a pool, which is not common in the area, so I don't know how that might change things, and having been landlord before, I would prefer to take less and be picky about renters than charge more). It would also be a great vacation rental, and make more, up to $2000+ but we are not prepared for that amount of work or investment in furniture, etc. right now.
-we do have a HELOC - currently $30,000, but we will likely max out to $60,000, and hopefully lock in to 4.5% right away
-real estate in our area is predicted to go up 12% this year
-we bought the house 1.5 yrs ago for 80,000 cash, but we have medical reason for moving into town, so should not have to pay capital gains if we sell before 2 yrs

In our case, I don't know if the basic numbers are the only consideration - here are basics of the rest of our financial picture:

my husband's teacher salary in Hawaii is not high, although cost of living is (we live cheaply though, we have 3 kids=12,10,7, my husband took an unpaid yr sabbatical 2 yrs ago, and we still had cash for house, so I don't need advice about that). What I know is that we will never be a high-earning family, and we do need the rental income if we are going to get ahead.

we moved here due to my chronic medical condition, and we assume I will be able to work with this new degree, but there is a greater than normal chance for a 35 yr old that I will not be able to work when I graduate

all of our $$ is tied up in that house, so no savings, no other investments (except $5000 in a vanguard acct we won't touch)

so we don't actually have the down payment for the new house (bank of dad will help and we will pay him back from HELOC)

and I am going to grad school and have accrued $21000 student loans this year, and unless we sell this house, will likely need $10,000 to cover tuition next year (all but $3800 is accruing 6% interest, although payments don't start until graduation next spring)

but the good news is we don't have any other debt.

new house price = $180,000, if we stick with current plan and rate, payments of $1090, we will likely mortgage 191,000. We will make 2+ studios in the basement for rental income of $1000/mth, which will pay for the mortgage while we enjoy the upstairs and living much closer to schools/work.

If we sold this current house, we would pay for grad school/ the student loan, pay back HELOC (obviously), pay down mortgage to kill PMI, etc. and what I end up with once all is said and done is $60,000 - so I figure that is what we have tied up in the house that we would have left over to invest in a different way if we sold it. Part would become savings (a cushion!) - part could go toward putting solar panels onto the new house to reduce elec. costs, etc. Or we could even buy a condo to rent out that would make more than the $300-$400 we would make on the house.

Any ideas? Considerations? What bottom lines should we be looking at? The $60,000? The income potential ($17,000 appreciation plus $12,000 rental income, which breaks down to be $400 toward HELOC, $300-400 income, $200 taxes/insurance)? How much we would save in interest by paying off HELOC and student loans, and on utilities by putting in solar?

I really appreciate your opinions, thoughts, or advice. Part of me says not to let this asset go and that the investment will pay for itself despite all the messy loans and feeling stretched right now ( ex. I should be able to work the year after I graduate and pay off the whole student loan in one year) the other part says that it would be great to simplify and focus on reducing costs, saving and investing again when we are ready.

thanks again,
frugalfranny

[MrMoneyPinch]

Forget about that 12%.  That's voodoo numbers, especially if you factor that over many years.  What would you say if I told you that house would double in 6 years? That's what 12% means.
As for the rest, it's all in the numbers, and I know nothing about rentals in HI.

[Johnny Aloha]

Wow, you have a lot going on.  Medical situation causing a move, a graduate program, 3 kids, trying to sell a house, and probably some other stuff.

So if I follow your post correctly, the housing situation is:

value: $150k
purchase price: $80k cash
market rent: $1000/month
no savings or liquid funds
$21k student loans @6%

I'd sell the house and take the $70k gain (minus selling expenses).  Your long term cash flow would be about $500/month BEFORE paying debt, and might even be lower since you have a pool on the property - extra maintenance.

Hawaii prices are expected to increase a bit this year, but if I was you I wouldn't count on it.  What area are you in - for a $180k house, my guess is that you live somewhere around Hilo.  I don't know anything about that market but would expect 12% to be optimistic for that area.

[frugalfranny]

Thanks for your responses. Since the time I posted, I think we have decided to sell. There are so many reasons to keep it, but we have decided that we can invest in a rental later when investing will not mean that we have to hold any other kind of debt (like the student loans). Selling also means that we can put 20% down, and I am happy to continue our tradition of never paying mortgage insurance.

JohnnyAloha, yes, our current pool house is outside Hilo, but the new (but very old) house for $180,000 is right in Hilo town - it is currently undervalued for various reasons.

As for the 12%, it is actually not totally inconceivable that house prices could double in 6 years, but it is unlikely. I think that the market will likely correct so that it is more like increasing by 1/3, but if you compare cost of construction and materials as well as house prices in other places in Hawaii, Hilo prices are currently pretty low.

Aloha!