Renting your own home

[mustache110]

I have been searching around for houses in my area recently for my first rental. One option my agent is floating is renting out my current place (a condo) and moving into another. We would then get an owner occupied second house (with lower interest rate), and either stay there or move back to our condo after a year or so.

Since we are 3 1/2 years into a 15 year mortgage and I prepaid some (when I was a Ramsey-ite), it would cash flow pretty well since interest costs are so low Also, maintenance costs should be minor since I have recently replaced several appliances. What I'm struggling with is, how do I evaluate the return on this vs a pure rental play, especially since there will be an inconvenience with moving (time, money, and we would have to move out from our preferred area as prices have gone up). How do I evaluate the return to compare the two options? I can post more numbers/details if required. Thanks!

[kindviking]

To answer your question, I would add up all expenses and expected income in scenario #1 (you rent your condo, live in a new house, and then move back to the condo after a year) and compare that to the expenses and expected income in scenario #2 (you stay where you are, buy a rental and collect rent). You're looking at money spent relative to money earned. So scenario #1 includes moving expenses, the delta in utilities and however you want to value your time for the hassle. Be thorough, get all numbers and add it up.

That said, personally I would advise against buying a property as a residence that you know you won't live in for more than a year. Any conventional loan (i.e., not owner financing) will make their loan contingent on the occupancy type you indicate. So you would likely be breaking those terms, which is illegal. I know people do it, and you likely could and never get caught, but my view is "breaking the law" shouldn't be a business model.

The other thing I would suggest is to think about these things separately. i.e., what is your ideal house where you want to live? and what is your ideal rental? Usually, those two things are quite different. If you "do both right," you can maximize returns AND be very happy, rather than get a good return and grind through quasi-happiness. Maybe it's just me, but I am tired of living in investments :)

[zephyr911]

I tried this approach. I doubt I'll do it again.
The preferential financing is attractive. But selecting the right multifamily and buying it with an investment loan will generally earn higher returns in the long run than a SFH on owner-occupant financing.
It's all about the spread. Don't get fixated on a 1-2% difference in the APR you're paying when the difference between cap rates on two rentals can be several times larger. We routinely borrow at 5.875% and are still returning double digits.

[Bearded Man]

What priced homes? I think homes that are cheap are not affected as much by interest rates. In my area a 20% down payment is what a lot of houses in the country cost total. Here you would see 6% returns if that.