Rent or sell first home

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Rent or sell first home

Post by soloekahi » Mon Jul 09, 2018 10:25 pm

Alright...long time reader but first time poster so take it easy on me. This site is awesome for financial info and advice. I'm trying to decide on which path to take on my first home and whether to sell or rent out. I know others may have more insight as in been there and done that so here it goes. I'm about to close on my second home which will be my primary residence and I'm trying to decide on what to do with my first home. Details are below.

Location: San Diego,CA
Paid - 500k put 20% down in 2011
Estimated house value today - 800k
Outstanding mortgage left - $360k
Interest rate - 3.5%
Mortgage/taxes - ~$2400/month
Rent it out for approximately $3,200 - $3,500/month

Don't need the equity for the second home but all the equity in cash would be nice. Home is in a great neighborhood and the question is whether to take the equity and run or rent it out and keep home for rental income. Due to the low cost and low interest rate, it could be a great home to have as kids get older or future retirement. Both homes are in the same neighborhood about 1 mile apart so any issues I can deal with or source locally to get fixed and be nearby. What do y'all think?

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Re: Rent or sell first home

Post by runner540 » Tue Jul 10, 2018 6:52 am

Will you be able to get a mortgage for your new house while carrying the other mortgage? Other landlords can comment on what other costs besides mortgage and taxes you need to consider.

How much of your networth would the two houses be? I wouldn't be comfortable with a significant portion of my networth concentrated in 2 homes in the same neighborhood. Familiarity breeds comfort, but it doesn't remove risk. WSJ had an article yesterday about how many upscale neighborhoods across the country have lost value after the FAA changed flight paths over major airports, resulting in noise where there wasn't any previously. That's not something anyone could have predicted 20 years ago, or hedged against, except by diversifying their assets.

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Re: Rent or sell first home

Post by Pajamas » Tue Jul 10, 2018 7:12 am

Doesn't make a lot of sense to me to keep so much tied up in something illiquid with concentrated risk for such a low return even without considering the time and effort involved but apparently you're okay with that, so:

Is your mortgage company okay with you converting it to a rental property?

If you've decided to start a business as a landlord, would you buy this particular house today to use as a rental property?

If not, sell it and buy a more appropriate property.

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Re: Rent or sell first home

Post by Swarm Trap » Tue Jul 10, 2018 8:30 am

Congrats on the second house! No offense, but it seems a little late to just start considering what you might do with your first home now. If you have had no experience or desire to be a landlord before , why start now? Ideally, with any investment ,you'd want to fully understand it before getting involved and I'm guessing that you are not. Have you read much about it, researched the laws etc? will you manage it yourself, or hire a property manager? How will you deal with vacancy, bad tenants, maintenance? It's certainly not as passive as some people make it sound.

There are a lot of assumptions above, so please don't take it the wrong way. I became a landlord because I had to, and not because I wanted to. I've held a property now for 12 years. While I haven't lost any money, I really haven't gained any either (at least not enough to offset the stress). It's been noted above that you should ask the question "if I was looking for an investment property to rent, would I pick this house".

If however, you are passionate about becoming a landlord and have aspirations of owning rental property, there are tons of resources, podcasts etc. Bigger Pockets comes to mind.

If you do rent it out, here are a few recommendations:

-Create a business plan and treat it as a business
-Screen the tenants thoroughly
-Wait for the right renter
-Don't rent to family or friends, just don't
-Create a maintenance plan and stick to it
-Discount rent slightly for direct deposit of rent
-Require the tenant to hold renters insurance
-Don't allow pets over a certain weight
-Call your bank and insurance company and discuss what changes are needed and how that might impact your rates

Best wishes!

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Re: Rent or sell first home

Post by jminv » Tue Jul 10, 2018 8:52 am

I might be inclined to rent the house out and I am not, in general, a fan of real estate. The number one thing for me is that you live a mile away. As long as you treat it as a business, don’t hire a property management company, and are ok doing small repairs yourself it doesn’t sound like it would be so bad (and find good tenants). Your cost basis on the house is low so you could afford a regional housing downturn and hold until whenever you retire or beyond. I might be less interested in renting it out if it was a situation where you were close to retirement or if your job is unstable. It could be unpleasant to lose your job and then have your tenant lose theirs too.

This is a concentrated risk given that you would now have two homes and a job in the area. The benefits you’d get from the house would be more a factor of your leverage and the home appreciation.

Of course, this assumes no problems getting the new mortgage.

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Re: Rent or sell first home

Post by soloekahi » Tue Jul 10, 2018 9:47 am

Thanks all! Great input and insight.

A few responses to some of the questions.

There should no issue with getting second mortgage while carrying this one.

As for if I'd buy this home if I was going to start a rental business today.... I live close to a university and in a decent school district so there are always tenants. If this home came up for the price I paid in 2011, I'd probably jump on it but then again, I wasn't actively thinking about becoming a landlord.
In saying that, I'm well versed in the laws, tax implications, etc... (I thought about it a while ago but never made the jump). I would manage it myself and deal with any minor maintenance issues.

All the points regarding concentrated risk are my exact concerns but this area is actively improving with home prices continuing to climb and with the interest rate and cost so low, this could be a great home to have in retirement or to pass down when I'm older.

In saying all of that, I'm leaning towards selling it and moving on.

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