Author Topic: Math check and please advise! Rent current home and upgrade primary residence??  (Read 527 times)


  • 5 O'Clock Shadow
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Does our current home make a good rental so that we can upgrade our primary residence?
Can we afford this dream house?

Current Primary Residence:

Market Value Zillow Estimate: $186,521
Original Purchase price: $137,240 in 2015
Original Mortgage Amount: $123,516
Interest Rate: 3.75%
Mortgage Term: 30 years
Term remaining: 315  payments
Amount remaining on mortgage: $114,542.35
Gross Rents: Estimated between $1,250 /mo (zillow rent est) or $1410/mo average (rentometer)
PITI:  $759.02
HOA costs: None
Maintenance notes: Will need some electrical work before renting, estimated around $5,000 to move breaker box in garage out from under drainage/plumbing. We are planning to do this anyway so I'm leaving it out.

Here is my estimate for making our house a rental after we move the electrical.

Mortgage Payment (w/ PITI)    $759.02/mo   $9,108.24/year
Est. General Maintenance / Processing Fees 2%      $336.00
Est. Vacancy 5%            $840.00
Est. Repairs 7%      $1,176.00
Est. Lawn 3.5%      $588.00
Est. CapEx 6%      $1,008.00
Yearly Total Potential Expenses:      $3,948.00
Rental Income Potential   @ $1,400.00/mo   $16,800.00/yr
Known Expenses PITI:      $9,108.24
Cashflow with known expenses      $7,691.76
Cashflow Minus Potential Expenses      $3,743.76

Why we want to move:
- Lived in the same neighborhood for 10 years and want new scenery if staying in this city longer
- Would like larger kitchen to avoid stepping on each other
- Current home in great location near university and has cash flow potential

New home looking to make an offer this week:

Asking price:  $325K
Zillow estimate: $318K
Offering: $280K
Estimated mortgage: $1260/month
Total cash reserves: $94K  (includes subtraction for electrical)
Investments, 401K, IRA: Approx $290K
Loans or debt: $0
Cash to close including 20% dp: $65,574
3.75% Preapproval
Remaining cash for emergencies would be: $28,426

Future House:

2BR, 2BA, 1700 sq feet.
One "den" area could easily be made a 3rd bedroom.
On the market for 4 months because it is a unique style home architecturally (vaulted ceilings, city view) which we really like but it's not the norm and likely scares away others. Needs bathrooms remodeled. Has intimidating driveway, no back yard but otherwise a totally amazing dream home with a city view. Also has potential to airbnb the top floor which has a private entrance. Good neighborhood, close to work.
Rentometer: $1,308 however the architecture and "cool" factor make this house more desirable and I think could rent for $1600

Extraneous factors:
- One of us is full time employee the other is freelance with good but variable income
- Dreams of moving to another city or leaving the country but no real plans are in action any time soon. This is the x factor of "we don't really know what our grand life plans are". 

So our mortgage would go UP about $500/ month but the rental would make between $300 - $640/month in cash flow depending on any expenses it may have.

Remodeling of the bathrooms would dip into savings. 

Is this more house than we need?


« Last Edit: June 03, 2019, 03:27:02 PM by AppleDapples »

Another Reader

  • Walrus Stache
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Your expenses look a little low to me.  With taxes and insurance, expenses over time for a single family will generally run 40 to 50 percent of the rental income.  Newer homes with low taxes and few repairs represent the lower end of the expense range.  The general rule of thumb is 50 percent of the gross income will go to expenses and capex over time and the house should rent for 1 percent of the value per month to be profitable.  Your property does not meet the 1 percent rule.  In your shoes, I would be inclined to sell over renting.

The house you want to buy will be difficult to sell when you decide to move. I like to avoid properties that are difficult to sell.  Down markets impact these properties more because there is lower market demand overall.  I would not buy that house unless I planned to die there.

Papa bear

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Where did you get a 5k estimate to move the electrical panel? Do you need to move the main line from the electric company to a new location?  How far is this really going? 

Replacing a panel is about a day of labor for an electrician plus materials.  So figure 1kish based on local rates. If you need to move the location completely, I could see increased costs, especially pulling new wires to the new location.  But shit, Iíve paid electricians to rewire an entire house for less than 5k.

Anyway, point of this being, this eats up every bit of profit for a year on your house.  And it doesnít increase your rent potential.  If you really get into landlording, you need to seriously think about expense management.

Look, your place now isnít a terrible rental. It meets the 1% rule on your purchase price, but not on its market value.  Most here, including me, will tell you that youíre better off selling the place.   Thatís probably the most financially prudent answer.  But this isnít the worst property out there.  There are plenty of people that would buy this place to rent it. But whoa, if you arenít going to do maintenance yourself, this place isnít a cash cow, it will probably barely break even.  And paying for everything? Like 5k for the panel, that kills this place. You bought the place with it like this, whatís the issue?

Plus, do you really want to be a landlord? This isnít all cupcakes and rainbows.  Thereís actual work to do. Sometimes not much at all. You can go months without anything. And sometimes itís oh my god I need to work a million hours this week or everything will collapse. If you have reservations about being a landlord, then sell this place. 

As for a new house? Sure why not, go for it.  We donít have your total financial picture or even have any idea about your FIRE goals, so up to you what you want to do.  Itís not like youíre trying to figure out how to finance a 1.5mm home.

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  • Magnum Stache
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Does our current home make a good rental so that we can upgrade our primary residence?

Others know better than I. My guess, it's meh as a rental. So-so. Not strong enough of a deal or a horror for the old house to drive the decision.

Whether you CAN upgrade to a more expensive primary residence depends on your personal finances and your FIRE goals. What are your goals? What would your savings rate be if you sold Current Home and bought Dream Home? That's a better metric for deciding whether to move.

If you decide to move, I'd suggest selling the current house, but if you prefer to be a landlord, just make sure you have the capacity to handle problems if your estimates are wrong.

Remember also that variances can be large. My friend who owns a 230k rental property had some payment problems with the first tenant. He chose not to renew the lease. Tenant chose to damage walls, floors, fixtures (tore out light fixtures, for example); strip the house of some of its electrical wiring; etc. Friend tells me that tens of thousands of dollars of repairs are being done over a 2 month period to make the property habitable again. Friend hired someone to general-contract the repairs. He plans to sell the property instead of getting a second tenant.


Is this more house than we need?


It's a want. You can have it, but at the expense of other things (quicker financial independence, time spent buying and selling houses, the unpleasant consequences of a higher mortgage payment during the next recession, etc).

If you do things like upgrade houses at the same time as everyone else, you'll pay full price in life. Since your plans are uncertain, you'd probably benefit from doing something else, like enrich your quality of life in your current home. Instead of spending tens of thousands by switching houses, could you move straight to the travel dreams by doing some travel hacking while you live in Current Home? That way, you could travel cheap, travel now instead of waiting, and get a cheaper price sometime on any dream house you buy. (I am assuming that house prices today are in the high-ish end of the economic cycle.)
« Last Edit: June 04, 2019, 03:55:52 PM by BicycleB »