[USER]

How do you evaluate whether its worth it to rent out an existing home with mortgage or sell when buying a new house?

I have a condo that I bought in 2011 with mortgage, property taxes, and HOA fees at around $1000 per month (4.2 interest rate, 30 year mortgage).

We will likely buy a new house in a couple years. Current rental rates on this property are $1300-$1500 per month, and the tenant would pay all utilities since its a townhome and not a high rise type condo.

Repairs and home insurance are also minimal and would be limited to indoor only. Is there a certain profit per month that makes sense versus not?

On the flip side, not cashing out the equity would mean significantly less down payment for new hours (around $130K in equity after loan payoff of around $75K), It would be paid off in 2041 at the lastest, which means greater profit then and a nice supplement for retirement income.

Since interest rates will be higher over the next few years, it wouldn’t make any sense to pay off early and make more sense to keep cash for next down payment.

This is a low cost area in the midwest and the price point of this alone would keep undesireable renters away.

It also seems like this same money could be invested in mutual funds and a lot less hassle and more liquid if needed than a rental property., assuming returns were equivalent.

I know the stock market is up and down, but have enough cushion to weather through any down years and still working full time for the next 10 years, so wouldn’t even be considering this as passive income until that point, at which time rents would be much higher and mortgage/HOA likely only slightly higher.

UPDATE: While I realize its not signficantly profitable in the near term with the mortage, my thought was more that renting out would cover my mortgage and a little more, and then in 15 years when the mortgage is paid off and rent prices are significantly higher, it would be good passive income in my 50s when I’m looking for more passive income – since my costs would be limited to property taxes and HOA fee, along with minor repairs/insurance.

Or are rentals only really profitable if bought with cash?

[Barbie]

I’m keeping anything with a low interest rate. Chances of you getting another 4% rates are almost 0

[Bill]

I’m not clear on the current use of the condo. If its your primary/homestead residence you can sell and probably have no tax liability on the profits.

But if you convert it to a rental, you could lose the homestead exemption, and be responsible for income taxes on any increases in value since you bought it in 2011.

[Joy]

Is that $1300-$1500 plus the $1000 HOA fee? I’d say no rental with an hoa. It’s unpredictable.

[Jacquie]

Google the Bigger Pockets Four Square method. I think the biggest mistake is not accounting for all of the expenses beyond property tax, insurance, hoa, mortgage, etc.

[Juliana]

I went through the same thought process last year with a condo with high HOA fees.

While the idea of “passive income” was nice, it ultimately would have been not very much (and I would have been very strapped for years), and the advice I got on here was: if you don’t REALLY want to be a landlord, do NOT be a landlord.

It was great advice!!

[Karah]

The % return sounds nice but when you look at the actual dollars – $300 to $500 a month at best – it’s not great. Say you want a property manager, you’ve just cut that “profit” in half.

Also figure you need at least $5k in emergency fund (probably more like $10k) to avoid paying out of pocket for repairs – how long would it take to reach that level of safety?

And remember every month it’s not rented is out of your pocket.

Reasons to keep it – you think you may want to return to it in the future or have some other personal/future use for it, go for it, you should at least break even.

But is it a money maker? Probably not. Just my 2 cents.

[Tony]

Nope, I’d sell in a heartbeat. You’re forgetting HOA special assessments, landlord/liability insurance, scheduled upgrades of appliances and other cosmetic updates, tax increases, and ’emergency’ late night calls to fix things that often aren’t emergencies but getting a service person in to fix will cost 2-3x more last-minute because renters have a lower threshold for dealing with issues than owners.

At a best-case scenario of $3,600-$6,000 in rent a year it’s just not worth it regarding the time in your mind it takes up, and I’d rather have that money working for me stress-free in the market.

[Dustin]

The way I look at it would be how many months would it take in rent to equal the payout from the sale? So, unless you really want to be a landlord or are anticipating a large appreciation…

the selling is more favorable.

[Wallace]

I’m a former landlord for a reason… never discount the damage a bad tenant can do…

[Audrey]

You also need to factor depreciation, which will offset your gross rents. I’m partial to holding on as long as you are breaking even or close to and ride the equity appreciation.

[Carol]

I do not have a mortgage on my and considered Air B&B it but when I calculated the cost and it possibly not performing as expected there was very little profit margin so I’m selling.

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