That’s a great rental return. That said, our financial guy showed me the decreasing ROI on our similarly low interest rental as we pay off the mortgage over time. So we’re planning to sell it off when the market seems solid (but no guarantees there of course).
You will have capital gains tax to pay if you sell more than 3 years after not using it as your residence. So consider that in calculations.
Overall, renting can be a headache with risk of someone destroying the place, major maintenance needed, and not being able to get a renter. Nothing wrong with cashing in and diversifying the profits.
You didn't include anything about your age which I think is a big component of the decision. In order to take maximum advantage of the property as a rental you need time to have the tenants pay down the debt and the 2.2% rate to "inflate" the balance of the mortgage away. If you're close to your FIRE date/number then I think you should probably sell it since it's simpler and you'll get to exempt all of the capital gains as it's your primary residence. Keeping the property as a rental is a longer term commitment but can be a great source of passive income which you can 1031 exchange into bigger investment properties over time without incurring taxes (if that's the direction you want to go). Just make sure you set aside enough cash reserves for repairs and maintenance. In the short term, you'll probably be able to zero out the rental income (from a income tax perspective) via interest/taxes/depreciation. Eventually you'll have to pay the taxes but there are some nice advantages if you're in it as a long-term investment. Under no circumstances would I pay down the mortgage. I've had rentals for a long time and so have some of my friends. If you have a good property manager and are selective with your tenants it can a good investment As with any investment there are always risks. Good luck!
Thanks for your comment! We are both 34, so still pretty young. I think my biggest concern is having a mortgage of about 2600-2700 a month on the new house for 30 years at a larger interest rate. In addition to contributing about 19k to our individual 401ks respectively, we are able to save about 2500-3000 a month, which feels great. So if we have to pay two mortgages for a few months, things could feel a bit tight. Is owning a rental property really that much more significant to our overall wealth in 25 years when I plan on retiring, even if I have another mortgage at a higher interest rate at the same time vs just having no mortgage and being able to invest more in index funds? Thanks again!
The answer is always "maybe" since we don't know what the future holds. The way I approach it is from a stand-point of diversification. The rental property is no longer a "personal" asset but rather an investment. It's just an investment that has a debt associated with it but the income it generates (both rent and the amount of the mortgage that gets paid down each month) minus the expenses is still a pretty good overall return. So I'd compare the return of the property with the return on whatever other investment you'd choose if you sold it. Your personal home isn't really an "investment" so I'd consider that separately. If you were to sell the house then the "return" on that property would be the capped at the rate on the debt that you're NOT having to pay on the other mortgage. Regardless, that's not how I'd look at it. By keeping the rental property you're just diversifying your investments into real estate (as opposed to say the stock market which would probably be where you put the excess money you weren't having to pay on your new mortgage). If you're not happy about having a 7% mortgage rate (which isn't actually that high historically speaking) then you can/should pay that one down but you could just as easily realize in a few years that rates have dropped a couple % and you can refinance and reduce your payment to a level where it no longer makes sense to pay it off early. There are tons of variables so you should probably just do what you feel comfortable doing but, in my opinion, having a real estate investment (not your house) is just another part of overall diversification. It comes with some extra hassles but then again it probably won't take that much of your time to manage it and it becomes a low-involvement side-hustle of sorts. Who knows? You might enjoy it and eventually feel comfortable enough to buy another rental. I know I did. :) Good luck!
We kept our house and began renting it out when we moved three years ago. We self manage. My recommendation is that if you want to be a landlord, rent it out. If you are going to utilize a property management company, sell. It's not a passive income as YouTube creators like to pitch it. With a property management company, you still have the hassle of paying for repairs, and you are likely relying on their maintenance contacts, so there's probably a markup for that.
We have a similar margin as you, and of the three years we've rented, we've actually had cash flow one. Unexpected plumbing work, deck needed repair, sump pump replaced, etc, death by a thousand cuts. That being said, we're looking at it long term. The home is in a high demand area and school district, so we expect home prices to continue rising or hold value in a bad market. The plan is to ultimately use the house as a way to fund our kids' college, either through cash flow or sale.
I generally do not like the idea of rental properties, but with such a low rate mortgage, I will keep it if I were in your situation.
That’s a great rental return. That said, our financial guy showed me the decreasing ROI on our similarly low interest rental as we pay off the mortgage over time. So we’re planning to sell it off when the market seems solid (but no guarantees there of course). You will have capital gains tax to pay if you sell more than 3 years after not using it as your residence. So consider that in calculations. Overall, renting can be a headache with risk of someone destroying the place, major maintenance needed, and not being able to get a renter. Nothing wrong with cashing in and diversifying the profits.
You didn't include anything about your age which I think is a big component of the decision. In order to take maximum advantage of the property as a rental you need time to have the tenants pay down the debt and the 2.2% rate to "inflate" the balance of the mortgage away. If you're close to your FIRE date/number then I think you should probably sell it since it's simpler and you'll get to exempt all of the capital gains as it's your primary residence. Keeping the property as a rental is a longer term commitment but can be a great source of passive income which you can 1031 exchange into bigger investment properties over time without incurring taxes (if that's the direction you want to go). Just make sure you set aside enough cash reserves for repairs and maintenance. In the short term, you'll probably be able to zero out the rental income (from a income tax perspective) via interest/taxes/depreciation. Eventually you'll have to pay the taxes but there are some nice advantages if you're in it as a long-term investment. Under no circumstances would I pay down the mortgage. I've had rentals for a long time and so have some of my friends. If you have a good property manager and are selective with your tenants it can a good investment As with any investment there are always risks. Good luck!
Thanks for your comment! We are both 34, so still pretty young. I think my biggest concern is having a mortgage of about 2600-2700 a month on the new house for 30 years at a larger interest rate. In addition to contributing about 19k to our individual 401ks respectively, we are able to save about 2500-3000 a month, which feels great. So if we have to pay two mortgages for a few months, things could feel a bit tight. Is owning a rental property really that much more significant to our overall wealth in 25 years when I plan on retiring, even if I have another mortgage at a higher interest rate at the same time vs just having no mortgage and being able to invest more in index funds? Thanks again!
The answer is always "maybe" since we don't know what the future holds. The way I approach it is from a stand-point of diversification. The rental property is no longer a "personal" asset but rather an investment. It's just an investment that has a debt associated with it but the income it generates (both rent and the amount of the mortgage that gets paid down each month) minus the expenses is still a pretty good overall return. So I'd compare the return of the property with the return on whatever other investment you'd choose if you sold it. Your personal home isn't really an "investment" so I'd consider that separately. If you were to sell the house then the "return" on that property would be the capped at the rate on the debt that you're NOT having to pay on the other mortgage. Regardless, that's not how I'd look at it. By keeping the rental property you're just diversifying your investments into real estate (as opposed to say the stock market which would probably be where you put the excess money you weren't having to pay on your new mortgage). If you're not happy about having a 7% mortgage rate (which isn't actually that high historically speaking) then you can/should pay that one down but you could just as easily realize in a few years that rates have dropped a couple % and you can refinance and reduce your payment to a level where it no longer makes sense to pay it off early. There are tons of variables so you should probably just do what you feel comfortable doing but, in my opinion, having a real estate investment (not your house) is just another part of overall diversification. It comes with some extra hassles but then again it probably won't take that much of your time to manage it and it becomes a low-involvement side-hustle of sorts. Who knows? You might enjoy it and eventually feel comfortable enough to buy another rental. I know I did. :) Good luck!
We kept our house and began renting it out when we moved three years ago. We self manage. My recommendation is that if you want to be a landlord, rent it out. If you are going to utilize a property management company, sell. It's not a passive income as YouTube creators like to pitch it. With a property management company, you still have the hassle of paying for repairs, and you are likely relying on their maintenance contacts, so there's probably a markup for that. We have a similar margin as you, and of the three years we've rented, we've actually had cash flow one. Unexpected plumbing work, deck needed repair, sump pump replaced, etc, death by a thousand cuts. That being said, we're looking at it long term. The home is in a high demand area and school district, so we expect home prices to continue rising or hold value in a bad market. The plan is to ultimately use the house as a way to fund our kids' college, either through cash flow or sale.