Renting up instead of buying up

[el_beardo]

Hi guys,

I would appreciate your input into our situation as we are considering renting a larger place and renting out our townhome instead of selling/buying.

We bought our 3BD townhome in 2010 for 250k with 20% downpayment and now it sells for 350k. We owe 180k on it so we have about 170k in equity.

Since the purchase we added an extra kid and our family of 6 feels constrained, and there is no yard. Rather than sell and buy another larger home at a higher market price, paying commisions and higher appraised tax values I'm thinking we could rent a 4BD and try it out.

Our PITI payment is $1350. Any place we move into is going to be $2600-$2800 a month.

Trying to balance out the family enjoyment of life with my FI goals:

Age: 37
Salary: 140k
Occupation: Software Engineer
Location: SoCal

Assets:
401k balance: 220k
IRA balance: 30k
Roth IRA: 5k
Wife's IRA: 20k
Brokerage accounts: 95k

Debts:
Mortgage: 180k ( @ 3.5%)
Car: 8k ( 2 years to go at 2.5%)

Currently maxing out my 401k + company match, and funding my wife's IRA. And we save 30k additional each year.

I'm hesitant on pulling the trigger on a bigger house - we have looked around and the ones we like range from 500k - 560k price tag. I'm trying to keep our monthly fixed costs down. I have 3 kids ages 10,7,3 that will be going to college in the future. Our oldest is 18 and will be going to community college.

Kind of looking for a middle ground between selling and staying and that means becoming a landlord and a tenant. I've told my wife we could rent for a year and see how we like it. Eventually we could live in any of the nearby neighborhoods if we like it.

Our townhouse rents for 2000. If we can find a 4BD in the 2300-2600 range I would only increase my expenses by the difference. The townhouse will serve as a hedge against rent increases going forward.

There is also the cost of being a landlord, mistakes could be made. But I'd rather make a 10k mistake than a 500k one.

On the other hand the equity is just sitting there doing nothing.

Comments appreciated.

[Setters-r-Better]

Ive had similar thoughts after reading here that so often expensive homes can be rented for so little.  I would do it if 1) you want to be a landlord real estate investor,  and 2) the property you live in is one you think is a good rental for you to own.  However,  2000 doesn't sound like enough rent on the townhouse to be worth it if you could really sell for 350k.

[humblefi]

From a purely conceptual point of view, here is what I see:
+ You seem to have bought your current town home when the housing market dipped. Hence the $100K equity gain. Selling it now is not a good financial move...people wait for years to build up such equity.
+ The housing market is on a big tear right now on the west coast...the prices have passed the 2007 bubble years by a mile in many areas of NoCal....you may want to check in your area. The conservative me says that the housing market has to come down...so, investing in a house is probably not a great idea. It all depends on where the market is in your area.
+ Your kids aged 10 and 7 are school going. Are you disrupting their schools? If so, then moving frequently may not be good for their schooling (imo). So, wherever you go, you may want to stick around for >= one academic year.

Considering the above, I like your rental option...wait for the market to go down...your townhome is earning its keep in the meanwhile. The only other option the conservative me sees is to stick around in the townhome until the market dips. In the meanwhile, save aggressively towards a home downpayment fund and when the market dips, buy your dream home in a down market, just like you bought your townhome. If you can sacrifice for a year or two, you may get a sweet deal that will set you up for life.

Hope it helps.

[el_beardo]

Thanks for the replies - We would try to move into the same neighborhood so schools remain the same

There are a lot of pains associated with being a tennant (with kids) again. People asking how many kids you have, saying no if you have a dog, dealing with nosy landlords, moving costs.

Then on the landlord side if anything goes wrong ( vacancy / maintenance) I may have to eat a month or two worth of rents or deal with costs.

Prices have gone up around here. Basically whatever increase the townhouse got is what all the other single family homes moved up by.

I'm ok staying in the townhouse. Less maintenance, low utility bills, low property tax base, can't fill it up with extra "stuff" - all of which allow for more savings. We will probably not rent for now, but it remains an option.

Just wanted to share and see if anyone had faced that choice before.

[money_bunny]

How much longer until the 18 year old is gone :).

Any space you can appropriate into a third bedroom?

[SunshineGirl]

I think renting up is a great idea in your situation, vs. buying.

[Bicycle_B]

How much longer until the 18 year old is gone :).

Any space you can appropriate into a third bedroom?

I like the point that the 18 year old may leave.  In turn, the others will grow up too.  And you're not apparently near FI yet.  Financially, the best move would seem to be to bear through the current situation without adding an expense. 

Maybe one day you'll miss the closeness you have now.  Enjoy 'em while they're home, even if it's irritating for a bit. 

If it's a little packed in, it might encourage the older ones to get their own place soon.  Anyway, one day you'll want a cozy place when the current nest gets emptier.  Hold on to this place you've got!

Maybe someone can tweak the current living space.  Hammock, anyone?

[MissPeach]

One of the blogs linked on the MMM main page (I think madFientist or J collins) has an article about how he was a landlord and a tenant the first time.

I've in a similar boat. I would like to get in the RE market but the cash flow perspective makes not sense.

i think the rental sounds like a good solution if you must move. The only other thing I thought I would mention... the renters will not take care of your condo like you would. I remember my parent rented a place they couldn't sell and it was let filthy and some other things they couldn't really charge for. So you may have to put in some time rehabbing it if you decide to move back.