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I am moving from Portland, OR to SF Bay area and therefore contemplating whether to sell or rent the house. I am not planning to move back to this house.

Property details:

• Bought for : $267,000


• Paid special assessment for major building repairs : $36,000


• Current cost : $320,000 - $330,000

My loan status is:

• Amount borrowed : 236,000


• Current Principal (2 years into the loan) : 222,000


• Interest rate : 3.5%


• Term : 30 years.

My projected rent is,

• $1850 - 8% property management = $1702

My monthly expenses would be:

(my current mortgage split is 649 (interest) + 412 (principle). I am including the interest part as an expense)

• Mortgage : 649 (interest part)


• HOA : 510


• Property tax: 352



• Estimate of monthly repairs : 100




• Total = $1611

That means my monthly income is $91 at present. In other words, each month I add $412 to my home equity out of which $91 come from rent and rest from my pocket.

I have a few questions to the community:

1. Is my calculation correct?


2. Does it make sense for me to keep the house (I would get decent value
   
   
   • the price now is 10% more than my purchase price)
   
   


3. If I change to 15-year loan, that will decrease my interest share of the mortgage and my equity will build quickly. Will it make sense then?

Thank you. Appreciate your answers.

Is my calculation correct?

More or less. Your list of expenses is not complete and repair/maintenance expenses can vary wildly. You'll also depreciate the house (not the land), so with your current numbers you could be running a loss for tax purposes which can offset income tax on other income and basically act as a discount to your cost of equity, so instead of paying $412-91 for $412 of equity each month it could be a bit less. This depreciation will be recaptured if you ever sell.

Does it make sense for me to keep the house
(I would get decent value the price now is 10% more than my purchase
price)

Probably not. Unless you have confidence the housing market in that area will continue to grow and you can comfortably afford to cover rental losses (periods of vacancy, major repairs, etc.). I have properties that generate paper losses (profit if not for depreciation) that are great investments, but your rent to price ratio is not appealing given management fees/HOA/taxes.

If you're willing to give it a go, you can rent it for a couple years and then sell without losing your primary home sale capital gains exemption. Personally, I have funds on hand to cover a zero-income scenario for 6-8 months (all tenants stop paying rent, job income goes away). If you aren't sufficiently liquid then it's not an experiment worth trying.

If you're intending to buy in your new area in addition to a down payment you'll need sufficient income to qualify for a new mortgage. The banks will not consider your potential rental income in their debt to income ratio calculation. After a couple of years of renting they will start counting a percentage of your rental income.

If I change to 15-year loan, that will decrease my interest
share of the mortgage and my equity will build quickly. Will it make
sense then?

At 3.5% you aren't likely to get a significantly lower rate at 15-years, and it would drive your cash flow further into the red. I don't see this as an option.

Does it make sense for me to keep the house

Are you willing to be a landlord for $91 a month? What happens if your house goes unrented for 3 months? 6 months? How will you pay its mortgage?

In my opinion, you don't have enough buffer to make this worth the risk. If you could afford for it to go unrented for 6 months then it might be a good investment in the long run. But you'd need a lot more return to make it worth it.

Think about it this way - if you didn't own the house, would you buy it (with a new mortgage) just to rent it out? Or would you buy a difference house in your new area?

If I change to 15-year loan, that will decrease my interest share of the mortgage and my equity will build quickly. Will it make sense then?

No, because you can't afford a higher mortgage payment with that rent price. You won;t see any real benefit until you sell the house and cash in the equity.

If it were me, I would just sell the house and put what little equity you have in it to your new house. When you have enough savings to cover emergencies, then you can start looking at real estate investment.

Without knowing your financial goals, income, other assets, etc, I can't make a recommendation. For example, do you have a sufficient emergency fund to cover both the expenses for this home and your new one should you lose your tenant and/or your job?

However, one part of the calculation you did not mention is tenant turnover. Does your projected rent include the possibility of vacancy between tenants?

Three additional things to consider.

(1) Are you planning on buying a house in the new town you will be moving to or are you renting? If you choose not to sell your old house and buy a new house you will have less money available for a down payment, which will result in a longer mortgage at a higher interest rate.

(2) This assumes you will be able to have a renter 100% of the time, if you are unable to fill the space how long will you be able to continue carrying the house at a loss?

(3) If the house has increased in 10% over the last two years do you expect this trend to continue? If so that suggests that the value of your house is increasing by 0.397% per month. That means that you could add $937 per month as expected equity gain, which sounds good, though you could probably see a similar or higher rate of return if you took that extra cash and invested it in a low cost index fund.