What would you do - Rent out or SALE your old house (rental)

[ceci123]

Hi,

I own a home valued around $80k and its currently paid off. Total taxes on this home is $3,800. Insurance is $600.

I am buying a new home for $170K. I just got approved for a interest rate of $3.5 for 15 years. I am putting 20% down to avoid PMI. My monthly payment will be around $1,500/month including taxes and insurance (escrow).

Realistically I can probably get $900/month or $10,800/year for it. Thus, after subtracting the costs...

$10,800 (Rent/Year)
- $3,800 (school and property taxes)
- $600 (Home Insurance)
- $1,620 ($10,800 - $1620 income tax on rent at 15% bracket)/year
--------------------
Total $4,780 ()

Now $4,780 doesn't look too bad right? To see what happens to this number let's one more thing that I almost forgot. The interest rate that I would be paying the bank.

If I were to sale my house and use that $80K towards the purchase of the new house then things don't look as good anymore.

So, If I rent it out I would get $4,780. But i would be paying 3.5% interest on that $80K () which would be something like $2800 interest (0.035 * $80,000 = $2800).

Here is the final number:
$4,780 rent old house
- $2,800 interest on $80,000
---------
$1,980

After a closer look at the actual numbers it looks like I would get $1,980/year or $165/month income.

Keep in mind I have not included Capital Gains yet!

Assuming that I did not miss anything in my calculation, would you recommend renting or selling the house?!! BTW... the price of the houses where I live stayed the same the past 8 years and I don't see that changing.

[JSmith11]

You left out maintenance costs. New roof every 10 years or so, paint or new siding, etc.

Your income tax calculation is off as well. Taxes would be calculated on your profit after deducting things like property tax, insurance, maintenance, etc. Income taxes are also progressive, so you can't simply multiply your income by 15%. The first $9,075 of your income is taxed at 10% and then anything above that up to $36,900 at 15%, etc. What about state income tax?

I don't have a recommendation one way or the another. Renting out your old house will (probably) bring in a net positive income, but it will also bring the hassles of being a landlord. In your shoes, my decision would be based on whether I liked the idea of being a landlord, more so than any specific calculation of costs.

[Checkered24]

I would not do it.

Jsmith is right, the tax issue is far FAR more complex than you have stated. You have to deduct allowable depreciation, if you sell at a certain point that can front load back on you. Then there is all the maintenance, upkeep, etc, which can be very significant. So you have to take the rental earnings and save some of it too. It cannot all be applied to your new mortgage. Or you will have no liquid assets available when it comes time to do maintenance or repairs to the building. (Could be roof, furnace, etc, or just repairing, recarpeting, painting, etc. between tennants. Also, you cannot count on never having periods where the building is empty, and thus generating no income while being a tax and utility liability.

One other factor to consider in this equation.

That down payment for PMI is sizeable. $34,000. That is a lot of liquid assets to tie up in your new property. Those assets could be used for other things, or earning interest on their own. So that is a consideration.

Or, if you want to tie them into the equity of the new property, and sell the current one, you could end up with a very small mortgage anyway. Total down would be $114,000 in that instance, leaving you with a principle of just $56,000 on the new house. You would not be paying much in interest, and with the monthyl payment reduction you could go to a 10 year mortgage to reduce your interest costs even further.

My decision would be made here based on the time and hassle of being a landlord, versus the limited income benefit of having one rental property with only one potential income. It is a lot of work, a lot of time, can be a BIG hassle if you have bad tennants, and the fact it comes with some financial risk (which is greater when you only have a 1 unit rental, since being empty is a 100% financial liability).

[BuffaloTransplant]

Do you want to be a landlord or have a huge downpayment on the next house? Or, sell and put down a smaller amount and invest the rest?

Figure that one out and you easily get an answer.

[Nickel_City_Buyers]

You haven't considered other options - This is speaking as a Property Owner. When Renting a property you have to consider the UTILITIES ie Water if you intend to pay. User Fees, City and County Taxes.Rental Registration Fee and Rental Property Insurance which is more expensive than DWELLER'S insurance. Also consider a surplus for repairs that ALWAYS come up. As someone previous mentioned you have to deal with Maintenance and general property upkeep. I don't care if you have an airtight LEASE, depending on the tenant(s) they might trash your home no matter when it might be located.

[genoobie]

I've got a few rental properties, you are missing some stuff. Rent if it suits you and you are handy (being your first property) because you probably won't make enough to pay someone every time something goes wrong (and that is often). Whether you have to snake a drain, paint, refinish floors, etc. All those things add up and unless you can do some of it yourself you're probably going to lose money to begin with. The real benefit of ownership happens when the mortgage is paid off (more like a retirement setup or leaving a legacy to your kids). Good luck!