Should I SELL or RENT my primary home?

First of all, thank you for reading this.

Sale scenario:
Bought our home 10 years ago. Age of home is 30 years.
If we sell it today we will have a gain of $270k.

Rental scenario:
Mortgage - $2800
HOA - $300/month
Property Tax - $800/month

We can rent it for $4,500
Will likely have it update bathrooms at a one time cost of $20,000 but the idea is to use it as a deduction.

Case for selling:
No capital gains as we have lived here longer than 5 years and can start the ticker on the next home that we buy down the road.
Have a secondary home which we airbnb as temporary fallback for a few months.
Want to downsize to smaller home.

Case for renting:
The home is in a very desirable location and is slated to appreciate in value in the next 10 years.
Can update the home and use it as tax deduction to offset salary.

Please share your thoughts. Thanks!

I posted this exact question 9 months ago. Got some fantastic responses. So what changed?

  1. There is a lot of development happening in Johns Creek. A new park is getting built and another ‘Avalon’ esque open mall is getting built in the next year.
  2. JC household income has been steadily going up so potentially higher rental rates.
  3. We LOVE the area (not the house as much) so it’s kind of hard to let go.
  4. At the same time property taxes went up by 40% this year.

Basically want to see if people think differently of the market today vs almost a year ago. Thank you again for your advise.

Well, the gain on your primary is non-taxable at the level you mentioned. If you convert to rental you will need to 1031 Exchange to get the same treatment. I have a lot of experience in real estate investing, so lets look at it like an investment.

Whats it worth now?
How much equity do you have ?

We can then work that against your $4,500 / month income estimate above. At first glance, your cash flow situation doesn’t look all that great.

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Sorry about the delay as I had notifications switched off.

Whats it worth now? Zillow says $1.1M, but I have it for sale at $980 as it needs to be updated some.
How much equity do you have ? I have a mortgage of $350k. Home is valued around $1m. I’ll net $275k after all expenses if it sells.

Alright, so we have numbers. I know the area as I used to live OTP North of Atlanta and all my rentals are west of you…

Who is going to pay $4,500 to live in your home? Is it going to be families living there for the school districts or is it going to be corporate executives short-term rental? That’s going to impact your turnover. Would you manage yourself or hire it out? Also, your bathroom renovation would have to be capitalized, not expensed.

On a cap rate basis, you have $54k gross income, less taxes of $10k, HOA of $4k and estimating insurance cost of around $3k for landlord policy. If you are going to have someone manage it then deduct another $7k. That leaves you net operating income of $30-37k as debt service is not included. Thats a cap rate of less than 4 in the best case scenario. That is not high enough.

On a cash flow basis, you are looking at close to break even with $4,500 income less $2,800 mortgage, $300 HOA, $800 taxes, and probably $300 insurance. That leaves you with $200-$300 per month, which is not enough. With a 30 year old house…you are looking at roof, siding, and HVAC repairs that would wipe out your free cash flow.

On the top line, you are getting $54k revenue from a $1M asset. That’s not enough revenue to justify it being a rental. On the equity side, you have a $1M asset with a $350k mortgage, so how would you only net $275k ? Seems like it should be closer to $550-600k. Using my number, I would then calculate your Return on Equity of around 5-6%. Thats not high enough considering you can make 5% in Treasuries with zero risk.

So basically…by any measure…this is not a good rental. Also, as you said, your gain from the sale of the property would be tax free. Hope that helps !!!

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I’d sell it if I were you.

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First and foremost, THANK YOU and I would honestly love to buy drinks/dinner at Avalon if you are in the area.

There were several things that went way over my head and I’m a bit ashamed to admit. But since I have the anonymity of being the internet, I might as well ask if you don’t mind.

Who is going to pay $4,500 to live in your home? Mostly familes for the school district.
Would you manage yourself or hire it out? I didn’t expect to ‘manage’ it as I intend to do a good job in qualifying the tenant (might be fooling myself)
Also, your bathroom renovation would have to be capitalized, not expensed - Since I expect to spend $30-40k on the bathroom, was hoping to use it as a writeoff on the gains of the home plus reduce the burden from my salaried income.

On the equity side, you have a $1M asset with a $350k mortgage, so how would you only net $275k - Purchase price of the house was $610k. Add to it realtor fees, maybe a reduction in sale price, I imagine netting a profit of between $275-$300k or so.

Every single thing you said makes 100% sense so no questions there.

Only thing is I was hoping to bring down my taxable salaried income using mortgage interest, property taxes and cost of repairs on the house. Also that way I wouldn’t be forced to sell it right now as the market has cooled off considerably. 10 days and no offers. May have to take off another $20-30k.

After reading everything you have written again, it would make no sense to hold on to an asset that has its best years behind it.

Your welcome. Always glad to share my knowledge around real estate. I used to be not too far from Avalon, but now live on the West Coast of FL in a small beach community. Put me down for a raincheck. Addressing some of your followups…

Even though real estate is considered a passive investment, managing tenants is NOT a passive activity. You can use your major reno as an addition to your cost basis whether you rent or sell the property. If it becomes a rental, you will then take depreciation against your cost basis every year that reduces income.
FULL DISCLOSURE: I am not an accountant

OK, I see the confusion on my part. In your original post you said you would “net” around $275k. I thought you mean net proceeds, but you actually mean net profit. Your net proceeds will be closer to $550-$600k.

You would definitely be taking tax losses with this property. In addition to the mortgage interest, taxes, and repairs, you would take depreciation against you basis. Have a look at Schedule E to see how everything would flow through to your tax returns.

You are a treasure to the Clark Howard community. Too bad you are not in Atlanta but I certainly hope to meet you someday in the future and thank you for your wisdom.

GREATLY appreciate your thoughts!

Thanks for the kind words! There are some sharp people on this board and a few more that I wish would return from the previous board.

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