I am trying to decide whether to sell or lease a property.

The property is my current home on a 3.5% mortgage. Monthly payment is $1,645 (includes taxes and insurance) with $170K left of a 30 year note. I estimate the property would sell for $320-$380K and lease for $2200-$3000 per month.

The property I am moving to has a $3,300/month mortgage at 6.99% with 350 remaining payments.

Can someone help me analyze this situation to decide whether to sell the property and roll the proceeds to the 7% mortgage, or lease the property and take the monthly proceeds towards the other mortgage?

I would suggest getting a better understanding of the rental property monthly amount: $2200 to $3000 is too large of a range. If $2200, once you factor in some maintenance reserves and other expenses that go along with rental property, it would not be worth it to keep IMO. But, if you are going to be $2500 or $2700+ on the rental rate, that changes things. You get your rental property note paid for and other expenses related to it and still have a few to five hundred a month that you could throw directly at principal on your higher interest rate note, which I would do. If $2800-$3000 it seems like a no brainer to keep and use that to cram down principal on the higher rate property.

What build year is the rental property and the one you are moving into?

What is the HVAC systems and Water Heater systems conditions at each property? new, 3 years old, 5 years old, 10 years old, 10+ years old

It looks like the numbers work for you to keep it, if you want to. I know this sounds simple and may not work if you have an analytical mindset but what do you want to do? Thats really what a lot of owning rentals comes down to. Keep it, and in 20 years, I promise the numbers will show that you made a good decision. BUT, you have to be ok with the potential work and stress that can come from dealing with a rental. Some people dont mind it, some people hate it. A lot of it comes down to you, the person, rather than just the numbers.

If it were me, I'd keep it, and then at some point in the future, possibly sell it and use the proceeds to PAY OFF your new home. I definitely wouldn't sell it and use the proceeds to pay a portion of the current loan. All that does is put the bank in a better position on your new house without providing you any investment growth.

MS08 said:

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I would suggest getting a better understanding of the rental property monthly amount: $2200 to $3000 is too large of a range.

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Great point, that I missed. Number 1 rule of rent houses, know how much it will rent BEFORE you step off in it.

Thanks for the input. I left a wide range on the lease rate because I don't know what I will get until I put it on the market.

I'm trying to run the numbers to see what lease rate will justify keeping it.

I know there are formulas for evaluating these type deals. Looking for some help with the numbers.

Rental built in 80s but I totally renovated. It's nice. New home built in the 50s but even more renovation. New plumbing, HVAC, spray foam, windows, and finishes. It is pretty much a new house.

Sounds like a couple nice properties, and the rental, you have put additional work and investment into to add value.
Standard rental property investment metric is if your monthly rent is 1% of investment (acquisition cost and renovation cost) then it is a great deal/great buy/worth the hold. In the recent years, this ratio has even been adjusted down to 0.8%. However, even if you are not at that ratio, your low interest rate can move the needle in your favor.

I would turn the rental analysis over to a leasing agent/realtor. I would also turn over the leasing of the property to that same realtor. They can do proper tenant screening of applicants efficiently and effectively and tenant selection is vital in rental property.

You can dial in that number much better with a good market analysis. On the 5 leases I have signed on my rentals we leased within days to weeks on each one at the exact number we came up with in the CMA.

If you are in Houston, I'd be happy to help you run numbers. I'm an investor myself as well. My cell is in my profile. Shoot me a text and we can discuss/meet up to see it.

The real estate market is going to continue to decline. I would only keep if willing to hold long-term.

Another data point is if you sell and make a large principal reduction two outcomes are possible.

1. Most lenders will reset your current mortgage payment for a small fee. The term stays the same and you get a significantly lower payment moving forward.

2. You can make the principal payment the same and significantly reduce the term to pay off the note. Think reducing your 30 year note to a 15.

It your decision which is best and make sure your current lender will reduce the payment. Most will but not all so check first.

another thing to keep in mind is the capital gains treatment. Once you have leased the property out for an extended period of time, you will no longer get the primary residence exclusion.

Depending on when you moved out, you could rent it for up to 3 years before that exclusion would vanish (in reality less as you would need time to market and sell it).

CaptnCarl said:

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Thanks for the input. I left a wide range on the lease rate because I don't know what I will get until I put it on the market.

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But, that's not really true. A good agent can run comps and narrow down that range. Like previous posters said, $2,200 - 3,000 is wiiiide. You can check Zillow, HAR, etc. and at least see what others are asking for rent in your area.

The big thing that hasn't been addressed is what is your financial situation? Can you afford 2 mortgages if it sits vacant for months? If you need a total AC replacement?

If your current income/job situation and reserve funds are decent, I say do it. We kept our last house as a rental when we moved 6 years ago. One of the best decisions I've ever made.

If you keep it, I strongly recommend having a GOOD agent handle your initial listing, tenant screening, etc. But don't hire a management company for just one rental. Have quality contractors lined up for when stuff breaks (plumber, roofer, AC guy, electrician).

harrierdoc said:

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Question is, would you purchase this as an investment if you did not already own it? If yes, then consider it as an investment. If you would not, then sell it and get the equity out of it and apply it to your new home.

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You can purchase as a primary home and legally convert to investment property if your circumstances change. This is a perfect scenario to convert.

SteveBott said:

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You can purchase as a primary home and legally convert to investment property if your circumstances change. This is a perfect scenario to convert.

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I agree, if it makes financial sense. My question to him is, if he was looking for an investment, would he pick this particular house (his previous residence) as an investment or not. If he was living at his new home that he is going to purchase, and thought that this would be a good house to purchase for an investment, then more power to him. But if not, with all the variables of a second mortgage, insurance, being a landlord, etc., that he should not keep it as an investment/rental and put the equity into his new home.

Is it a desirable area

Sounds like improvements have been made

If you live close by and are handy, I would keep it.

Are you interested in being invested in real estate?

If not, then sell.

A desire to have a portfolio of properties you manage is one thing. Keeping one property because you think that is the better "value" play is another.

Stick with what you know and don't create a timesink just to squeeze out an extra percentage point.

Several things to consider:

1. You lose your homestead exemption on your current home if you rent it out, so be sure you know your monthly fixed costs. That also includes calling your insurance company and finding out what a change to a commercial/lessor's policy will do to the premium. P&I isn't the only consideration here. Someone said to know your rental income possibilities. Sure, but know your expenses.

2. Factor in 2 months of vacancy, at least for the first 2 years. You need to additionally budget for eviction costs and lost rental income should that become an issue.

3. Know what the hell you're doing with respect to allowing someone to rent your place. If you don't -- or don't think you know, get professional advice before stepping foot into this.

4. Same is true with ongoing rental issues. Even if you self manage the property, you need to look into the right software, lease contracts, etc. You really need an attorney who knows residential rental real estate and the potential pitfalls before doing something like this. If you had a string of properties, the chances of all of them going bad in terms of tenants is virtually zero. You can possibly use the other properties to manage overall risk like multi-family unit owners do. However, if your only property goes bad, it can be devastating if you're not ready for it.

here is what Gemini said:

https://docs.google.com/document/d/1kmGNnG6JVkpjmFz7UqbdeWukm21-36uh45oKkfjB7EQ/edit?usp=sharing