My wife and I are expanding our family in a few months and are moving to Lake Highlands next week. We own a home in East Dallas near the Arboretum and White Rock Lake and I'm toying with the idea of turning it into a rental property after it has sat on the market for a few weeks (dropped asking price once and now only asking slightly above the county appraisal value - interest rates are really starting to slow things down). While the equity from its sale would be nice in the short term, we don't need it for the new home purchase.

We purchased the home in 2018 and have about ~$225,000 left on the mortgage. If we make it an investment property, I'd prefer a 15 year loan to be able to pay it off faster. The area has rental listings from $1900 to $3500, I'd probably ask somewhere in the middle.

I'm hesitant to pull the trigger because of some home improvement that would completely wipe out any profit in the first five years. The house was previously updated before we bought it but there are some large expenses looming:
1. Roof is ~15 years old
2. A/C unit is ~15 years old
3. Furnace is ~15 years old
4. A majority of the plumbing is cast iron that is original to the house will need to be replaced eventually (we have to snake once a year)

All that being said, I would appreciate any wisdom from this crowd as my wife and I try to make a decision of what to do.

Without diving into a deep discussion... First, what's the market value for the property? What's most important to you - cash flow or equity?

Lastly, I'm finding out some challenges of refinancing a primary as an investment. Definitely discuss details with your lender.

Market value is ~$455,000 based on DCADs 2022 appraisal.

Right now, I care more about cash flow. My wife is a stay at home mom so any sort of additional income would be helpful.

Thanks for the heads up about your lender challenges. What issues are you having?

As Steve said unless you have a high rate on the existing loan just stay in that loan.

In theory, you're 15 years behind earmarking money for those unfunded liabilities. Your rental rate needs to include an amortized amount for those necessary expenditures, or there's no reason in renting it out. But you're not going to be able to compress 35k in maintenance expenses into a 3 or 5 year outlook when those units really start causing problems. In reality, they're only going to be able to cover about 15-20% of those cost through renting, the rest of the cost will be covered from you as it happened under you.

So you're real decision point is can you hold it long enough to gain back the costs of these replacements or can you find a sucker to buy it from you without demanding some consideration for those three things. Which I don't think you're going to find a sucker in todays market.

Sea Speed said:

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Get with red pear and run the comps on your house and see what it will rent for, that should be step 1. You will know what you can expect to get and whether you will cash flow or be able to put more towards the principal every month or both.

I just closed on our 2nd home and turned our primary residence in to a rental a couple months ago and Jamie was a massive amount of help. As a matter of fact I've been meaning to make a thread on this board about it.

Our goals weren't the same as yours, as my goal wasn't to cash flow really, I just wanted someone to pay for the home and I look at it more as a portion of my retirement account. We were already in a 15 year mortgage and our rent is enough to cover it plus some, so that helps.

I'll tell you though that it feels great to have that diversification and the new house we bought feels so much more like home, oddly enough, that it was probably one of the best decisions I ever made.

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Same. I'm breaking even on cash flow, but I'm 10 years away from paying my rental off, and my kid goes to college in 9, so the cash flow will happen at the right time. It's another asset in my retirement account, and the thing has appreciated way better than my primary home. In fact, it's now worth more.

Jay, you 100% are the only reason we were able to make it happen due to the products you offer! Absolutely couldn't have made it happen without yall. I'll keep touting your company on this board and will def be going over that whenever I get around to making the recommendation thread. The only reason I didn't mention it here is because I figured OP would be doing himself a disservice by refinancing in this situation.

OP, 2 years ago we did what you're considering, and I don't regret it one bit. My timeline and highlights:

Nov 2008, bought our first home @5.25apr
Refinanced to 3.25 a few years later
Feb 2020, bought our current home
Mar 2020, moved and began getting former primary ready to rent
Jun 2020, signed lease with current tenants (just resigned for a 3rd year)

I owe just over $100K on the rental. It's appreciated about $75K the last 2 years.
I'm getting a little under market rent but the tenants are really good and take care of the place, do minor repairs, etc.
I'm in it for cashflow, appreciation, and a sort of longterm savings account. I've got a lot of equity in it so when the time is right I may tap into that to invest elsewhere.

At the same time, our now primary home has also appreciated a lot since we bought. We've even thought about the idea of downsizing back to the old house once our kids move out.

Happy to help turn you into a landlord!

landlords are overrated, slumlords are what's cool now days.

Where is this ?

Feel free to pm me

One other aspect you should consider is the potential capital gains tax consequences. You need to have had the home as your primary residence for 2 of the last 5 years to avoid capital gains taxes.

Tax Aspects of Home Ownership: Selling a Home

Thank you! I was reading up on this as well and luckily we get to avoid capital gains taxes for this sale.

Went ahead and accepted an all cash offer, buyer is representing themselves so save the 3% commission. We're in the option period so now we wait.

Congrats on accepting a sale. Awesome to hear it is all cash. I've heard a number of stories of deals falling through due to financing with the recent increase in rates.

I'm debating whether to do this. Bought my house in 2014 for $350k, 10% down at 4.25%. Refinanced at 2.5% in April 2020 but then paid it off in March 2021.

I just closed on a new house for $850k, 25% down at 5.75%, and that monthly payment (with taxes rolled in) is going to be about $5200 a month. I think I could probably get $3500 a month for my old house in rent, but I could also probably sell it for $550k and dump it all into my new note to really lower the amount of interest I'm paying. That is what I'm inclined to do because I hate having debt, but I guess as long as the rent from the old house is more than the taxes on it plus what I'm paying in interest on the new house, I'm making money but I still have a hard time stomaching $600,000+ in debt.

I'm bad at these kinds of calculations and decisions.

Where is your old house? Rental prices aren't slowing down.

A lot of my friends who would otherwise be entering prime time for purchasing a first house (double income no kids, late 20s, early 30s) are pushing that decision off because of home prices and rates. They are renting houses instead.

Fear InoculAg said:

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I'm bad at these kinds of calculations and decisions.

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This. No matter how much I try and get better at it, financial stuff just seems to get more complicated.

North San Antonio.

Thanks for your kind words Sea Speed! I'm stoked for y'all and the future you've created for your family on this path. I'd be honored to help y'all again any time.

Regarding the financials, don't let anybody convince y'all this stuff is rocket science. My grandfather was a rocket scientist in mission control at NASA, and I can confirm, this isn't that. The two best/easiest metrics you can use as a landlord are:

1. Cash on Cash (CoC) Return
Net cash in your pocket each year / your total cash investment
So if you buy a house for $300,000 with 5% down, and your monthly cash flow (rent less ALL expenses) is $400, then your Cash on Cash Return is [($400 x 12) / $15,000] or 32%. That is before you take into consideration appreciation, mortgage pay down, or tax benefits. The stock market historically gets about an 8-10% annual return, so if you are getting a 32% CoC, you are beating the stock market by close to 4x. Then those other three are just icing on the cake!

2. Return on Equity (ROE)
Similar calculation, except you take your total monthly profit and divide it by your equity in the asset. This one is designed to make you think about how to best allocate your resources. Two examples:

A. You own a house worth $300,000 with no debt, and it returns $1,400 per month. Your ROE is just 6.0% [($1,500 x 12) / $300,000). Not good. In this example, you get richer by $1,500 each month.

B. You take the house in example A above, and do a cash out refi at 75% LTV. You pocket the $225,000 from the cash out, then take it and buy three more houses, all of which cash flow, appreciate, and pay down the mortgage at the exact same rate. Your new ROE is calculated as: [($1,000 x 12) / $75,000] = 16%, PLUS, you have three more houses that make you richer by a total of $4,000 per month.

Finally, if y'all haven't seen this report that HAR just published, check it out. Rental market seems primed to explode:

https://www.har.com/content/newsroom?pid=1866