I sold my property with a 3% mortgage rate instead of renting it out – here’s why I’m not crazy

A few months ago I had to decide whether to sell my primary residence or rent it out. At this point, I didn’t own any investment properties (I do now; more on that later) and my goal was to get out of this house and buy a new primary residence for my family.

this decision did not come easilyAnd me Both options and their immediate and long-term consequences are discussed. try your best perhaps As you can tell from the title of this article, I decided to sell the equity and get a deposit instead of converting it into an investment property.

Before you tell me why I made the wrong decision or write a rebuttal, like BiggerPockets Community Manager Noah Bacon did, keep this in mind: Every investor has a point when analyzing a potential trade. There are unique circumstances to consider, such as financial and personal factors that have a significant impact on any decision.

Let me explain my situation so you can better understand why I do this.

Background of the property

I purchased my own property in the summer of 2020 as my primary residence in a transitional community in a not-so-nice area of ​​Atlanta. At the time, I was about three years away from divorce; real My finances were affected – not only by cuts to my savings and pension, but also by coping with day-to-day expenses that suddenly included huge child support payments. I’m in an incredible rental house great part of town used for theft so i can Slowly building up the money for the down payment so that the rest of my savings aren’t completely depleted.

When I was ready to buy, the COVID-19 pandemic was in full swing and prices is decreasing rapidly. After missing out on a few homes from investors and people who were willing to waive unexpected fees (there was no way I was buying without an inspection)I find my house.

It’s an older, approximately 1,350 square foot former flip house with two bedrooms, two bathrooms, and a bonus room – perfect for me and my two elementary school-age daughters Size, they are still young and not yet married. The bonus room can’t be used as a bedroom – it’s an old patio fenced in by flippers – but is perfect as an office nook.

I paid $225,000, only lay down 3.5% so I can use some money to fix a few things that I know need to be updated. The best part: I locked in a mortgage rate of 2.75%.

As the months went by, I started to notice things that needed attention. There were some typical home repairs like heat pump and furnace replacement, but also other more annoying things like rats deciding to move into my basement and attic and the insulation in the master bathroom being almost non-existent. I fix anything immediately main This brought up security issues and fixed other issues where I could afford it, but the list of small fixes kept growing.

Analyze whether to rent or sell

Fast forward to 2023. Not only are my kids grown, but I’m also engaged soon I have another person (and dog) in my life. Her primary residence is a one-bedroom apartment that we have decided to rent out.

We took stock of our situation and learned about my house. also impossible. This is not a practical living space for four people (two persons). Who among them has worked stay at home full time), and I have some concerns about safety in the neighborhood. My kids may soon realize those popping noises aren’t real Like I told them, fireworks. We need to decide whether to sell my house or buy a second rental property.

We estimated the house was worth about $300,000 and I had about $207,000 left on the mortgage. (It actually closed at $290,000.) I ran the numbers and determined that I would have a net profit of approximately $55,000 at closing. Closing costs——The money comes quickly and easily, but there is no potential for wealth growth.

On the other hand, I used BiggerPockets Rent Estimator and find me My property can be rented for approximately $1,950 per month. Considering my PITI payment is about $1,350 plus funds for capex reserves and maintenance, I would cash flow Starts at about $300 per month. Assuming rent increases of 3.4% per year, I would exceed the sale proceeds in about eight years (10 years if I was a property manager).

This prediction assumes a few things:

1. I put it aside total $200 per month for landlord repairs or improvements.
2. Rental prices are increasing by 3.4% annually. According to the latest news Rent.com ReportAtlanta rental prices are currently up 2.8% compared to the same period last yearso This estimate may be a little It will be very radical in the short term, but I believe it will quite Accurate long term.
3. I would not reinvest the proceeds from a home sale. In this case, the money would be used for a down payment on a new property, so the forecast remains the same as it won’t grow over time.

Selling is the best decision for my situation

If my goal was long-term wealth growth, then owning and renting property would be a no-brainer. Although it would take eight years to exceed my sales revenue, the cumulative cash flow would double after a few years and quadruple by year 15. Taking into account appreciation and amortization, the property’s equity will be well over $1 million.

However, my goal is to help finance the purchase of a new primary residence, not to accumulate as much wealth as possible. These personal considerations also influenced my decision:

1. House can easily become money pit

When making rental and sales forecasts, I estimate annual maintenance and improvement costs at $2,400. This will be accurate once a tenant is in place, but the house will need repairs before I can list it. this It would probably cost me $10,000 in repairs, which I honestly wouldn’t be willing to do because it would further reduce my down payment.

There’s a lot that could go wrong. The property had an old detached garage that looked like it was going to collapse in the next strong wind. I use it to store lawn equipment and tools, but I don’t trust putting my truck or anything of real value in there.

the property Also surrounded Next to tall trees that occasionally fall some nice ones big branches. Turns out my fence had been repaired several times and it was only a matter of time before the fence fell off the roof.

If one of these things happens, or we discover something unexpected during the initial repair, I’ll have to throw my predictions out the window. I’m just not ready to take the risk just yet.

2. My lack of experience question

Although I had done a lot of research over the past few years, since real estate investing had always been an interest of mine, I didn’t have any first-hand experience when I made this decision. I have never owned a rental property or owned any Property management experience.

I mentioned that we were renting my wife’s apartment. We think this is a good Our first step was deciding we didn’t want to go from zero properties to two. Wednesday quite Expand at a slower pace to suit our comfort level.

Between these two properties, the condo has better potential as an investment property. It was worth $350,000 and only about $80,000 remained on the mortgage. Using the same perimeter as my main analysis, plus accounting for HOA payments, we estimate we will earn $500 per month in rental income. Once the property paid off In 10 years we will have cash With annual traffic exceeding $25,000, our net worth will double.

Anyone here can easily point out that adding this cash flow to the potential I can create in other properties means more wealth. I can’t argue with that. But again, my goals are not centered around creating wealth.

Of course, I want to make money. But I want to do it responsibly. This means don’t overexert yourself and don’t jump into the deep end without floating.

3. I prioritize today tomorrow

do we have Absolutely Will my home equity be needed for a down payment? No, we could have found it cheaper Home In a less than ideal area away from the city but we didn’t want to do that.

I don’t have any ambition to live frugally or fire lifestyle. We want to enjoy our homes and neighborhoods, which means finding a walkable area That is Activities available and safe/fun for my kids to participate in. We found that, but I had to leverage my equity to make it happen.

While I’m giving up the opportunity for additional future wealth, I’m confident in saving for retirement using traditional means (such as a 401(k)) as I have been throughout my career. I also believe that as new real estate investors, our condo is in a great position. If we enjoy it and become successful (which I have no doubt it will), we could use some of that equity to invest in another property if we want to scale further.

final thoughts

if we only Focus on dollars and cents (as many investors do). on the market podcast When I discussed my scene with co-host Henry Washington in February, he blatantly told me this. Over a healthy time frame, I wasted hundreds of thousands of dollars in potential earnings for a minuscule one-time profit.

But I will again point out my situation and personal goals for this deal. I achieved what I hoped for. I got rid of the property I was tired of dealing with and purchased a nicer primary residence while turning the other residence into a (hopefully) cash flow rental property. My wife is happy, my children are happy, and I am happy. In the end, that’s what matters.

Get the best loan now

Find trustworthy, investor friendly A lender who specializes in your strategy.

Notes on BiggerPockets: These are the opinions written by the author and do not necessarily represent the views of BiggerPockets.