When it’s time to move or upgrade to a larger house, the question that is always asked is, “Do I rent it out or sell it?” Over the past couple of weeks I have spoken with many people stumbling over this dilemma. As an investor who is trained as a financial analyst I have found I see things differently.
The lower interest rates mean that it is cheaper then ever to borrow money even though you still need to fund the down payments. From my conversations, I don’t think people realize that it might be just as good or a better financial move to rent and buy another house with as little down as possible.
As a transparent landlord and empire builder, I am a huge believer in using actual numbers. For discussion’s sake, let’s evaluate our situation using the numbers from Case Study Number #4 and my dream for the Hanford House that we just purchased. While no numbers are exactly perfect, I tried to make sure the numbers were as close as possible.
Case Study: House #4 Numbers:
- Current Mortgage: $161,722
- Approximate Value: $210,000
- 7% Real Estate Fee (6% realtor, 1% VA non-allowables): $14,700
- Profit After Expenses: $195,300 – 161,722 = $33,578
- Mortgage Payment: $981
- Rent: $1425
- Earning: $444
- Principle Portion of Payment: $279.39
Case Study: House #7 Numbers:
Since we own more than four houses and this was a short sale; the best loan we qualified for was a 5% down conventional loan. Others would qualify for 0% if it was a VA loan and some banks such as Navy Federal have a 0% loan.
- Selling Price: $238,000
- Down Payment of 5%: $11,900
- Interest Rate: 4.25%
- Mortgage Payment Including Escrows: $1415.20 This payment does not include the PMI (Private Mortgage Insurance) we took at a higher interest rate to avoid it.
If we applied the rent to our new mortgage, our payment would be $971.20. That would in fact be less than our old mortgage payment. This was for a house in a better school district with a pool, three-car garage, office, and 400 more square feet.
If we had sold house #4 and rolled the money into the loan here’s what it would look like:
- Selling Price: $238,000
- Down: $47,600 (Use the 5% down payment and the proceeds from the sale of the house to get 20%)
- Interest Rate: 4%. This is a lower interest rate because the down payment was much larger at 20%.
- Mortgage Payment with Escrows: $1,194.99
So by not keeping your house in the cash flow alone, you are paying $223.79. When you add in the principle pay down that is a loss of $503.18 for selling your house.
The great thing about having a rental is you can write off a lot of your expenses so that $503.18 a month or $6,038.16 a year is almost pure profit.
Assumptions About Renting Your Home
1. You Can Qualify for a Second House.
Definitely shop around as we have found different brokers have different rules regarding how they count the rental.
2. Major Repairs.
Houses do need to have repairs so you will need an emergency fund. There will be some months where you won’t be able to pocket the entire amount of profit.
We have done very well to banish vacancy, but this can happen and it’s important to prepare in case it does happen.
We manage our houses and save those fees.
Remember that this is not even including appreciation! Yes, if you don’t sell the house in the 36 months you have to pay capital gains, but you can always flip the house into another house using a 1031 exchange which would delay the payments.
Yes, there are tons of ways this situation won’t make sense. My point is simply that WE personally get more from renting than selling our home for down payment money. You might be surprised as you too might make more money renting your house than selling it!
What has been your experience?3