Peter Dunn: Should you sell your current home or rent it out?

Dear Pete,

We just bought a home, and I’m trying to figure out what to do with our current home, which is worth about $850,000. My original plan was to keep it as a rental, but recently I feel more compelled to sell the home and be done with it. I don’t think I have the time to be a landlord. Obviously, my new mortgage rate is higher than my old mortgage rate, and I’m trying to figure out how that plays into it. Also for what it’s worth, we have plenty of cash, and we could stomach a few months of vacancies. What do you think?

—Cooper, Cincinnati

Ah, yes, the old organic real estate mogul play. I’ve tried that. It’s been about five years since I ended that experiment, and I’m still not sure I’m glad I ended it. That home’s market value is now $160,000 more than it was when I sold it. I can feel the patron saint of Indianapolis real estate Bif Ward’s disappointment.

Let’s examine the advantages and disadvantages of this portfolio-building technique to help you decide if it’s the right one for you. And to help us compare apples to apples, I took the liberty to calculate a rental rate on your current home; it’s about $4,000 a month.

To even begin to consider keeping your current house, you’re going to have to come to terms with the equity that is currently in that home. Without selling it, you won’t be able to easily access the equity to make a down payment of any size on the new home. There are ways around this roadblock for sure; some involve cash, and the rest require a web of loans with higher interest rates than you want to deal with.

The next consideration is the interest rate on your current home. If it’s really low, that mortgage loan is an incredible asset. It will allow you to build wealth with very cheap borrowed money, especially when a renter is essentially handling most of the heavy lifting.

It’s important to explore a couple of other nuanced considerations. First, is there a market of renters at the $4,000-per-month price point, and how will that market be affected by the shifting U.S. economy over the next few years? This question is likely best answered by a local real estate agent. You’ll also want to ask that agent how long a $4,000-per-month renter tends to rent. Different price points can present different time dynamics.

You can’t forget about the pain-in-the-neck factor. Are you in both the physical and mental position to deal with maintenance problems at any given hour of any given day? Sure, you can hire a property manager, but that eats into your margins and still doesn’t completely alleviate the mental burden of being a landlord.

Ultimately, this was the factor that did in my mogul-dom. Whether it was one of the major mechanicals going out, a frozen pipe, or simply a renter getting behind on rent, my brain could no longer handle the drama. Would I have continued to deal with it for five more years had I known $160,000 more was on the other side? Yeah, probably.

However, if you have a really good use for the equity that’s currently in your home, maybe selling that home now is the better choice. This is especially true if your new mortgage rate puts you in a cash flow crunch based on the size of the loan. By using the proceeds from the current house to purchase the new home, you’ll lessen cash flow constraints.

Clearly, I’m typing out of both sides of my mouth. There’s just so much to consider. The only way this scenario is a no-brainer is if you have tons of cash, tons of cash flow, tons of patience, and at least a little bit of time. If you’re short any of those essential elements, you have a much more difficult decision ahead of you.

And there is one more scenario that has my brain stimulated—if you don’t have a mortgage on your current house, you have plenty of cash, and plenty of cash flow, selling your current home now becomes more attractive. You can likely get a better return on the equity of your current home via alternative means.

Good luck! And may you not bail too early like I did.•

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Dunn is CEO of Your Money Line powered by Pete the Planner, an employee-benefit organization focused on solving employees’ financial challenges. Email your financial questions to askpete@petetheplanner.com.