“Hi Gary. We just bought a new construction home in San Marcos. We’re moving soon and can’t decide if we should sell or rent our home in North Park. It’s worth $575,000 and we owe $319,000 with a monthly payment of $1900. It’ll rent for $2,000 per month, so we’ll have a small positive cash flow. Rent or sell – what do you suggest?”
Answer:
First, let’s clear up a common mistake. Many people compare loan payment to rent to determine cashflow. This forgets details like vacancy, tenants who don’t pay rent (it happens), management, repairs & maintenance, property taxes, insurance, HOA fees, etc. Expenses typically run 20-40% of rent.
So with $2000 in rent and $1900 in mortgage plus expenses, expect a negative cashflow.
Next, ask yourself these questions:
1. Do I ever plan to move back to the house?
2. Do I have any children who I think will have the desire and income to own the home within the next few years?
3. If I didn’t already own the home, would I buy it because I thought it was a great investment opportunity?
If you answered “yes” to any of these, perhaps you should keep the home.
If you answered “no” to all 3, sell and put the money elsewhere, perhaps into apartments for greater cashflow. Otherwise, you’ll have some $250,000 in “dead equity” providing minimal return for you.
And remember, IRS Section 121 lets you receive tax-free gain of up to $500,000 (couples) or $250,000 (individuals) when you sell your principal residence.
