Q: My wife just got a new job out of town, so our family is moving. The job pays well, so we can afford to buy a place in the new city before we sell our old house. My question is, with current mortgage rates so low, might we actually do better to keep the old house as a rental property, rather than just roll that equity into the new house?
A: The low level of current mortgage rates is a factor in favor of what you propose. However, on top of that, there are several other things to consider:
- How renter-ready is it? There may be issues with the house that you have been willing to put up with, but that might put potential renters off. If you will need to put a significant amount of money into the house to make it acceptable to renters, it will increase your risk and lower your return.
- What arrangements would you make for property management? From cutting the grass to making routine repairs, you will need a reliable and cost-effective local contact to look after the property.
- What is your existing mortgage rate? This may actually matter more than current mortgage rates, since effectively that is the financing you have the option of retaining or retiring.
- What taxes and other ongoing expenses do you face? Property taxes, insurance and any ongoing expenses associated with the property will represent negative cash flow for this investment.
- What are rents for comparable properties in the area? To get a sense of what the positive cash flow might be, take a realistic look at what rents are for similar properties in the same area.
- What is rental demand like? In a sense, this is a risk factor -- the weaker the local rental demand, the greater the risk that your property will sit empty.
- What are the tax implications? This could impact both your income and your mortgage interest deduction.
- What do you view as your current home's appreciation potential? If you foresee the potential for a substantial change in the property's value (up or down), the eventual gain or loss involved might offset the interim cash flow issues.
Working through these questions can help you analyze this decision as an investment. Look at the income and costs to generate a net cash flow estimate, and project a future value to see if you have more to gain than you have to lose.
Still, this financial analysis is just part of the decision: The other part is whether you want the distraction of managing rental property for the first time while you are also acclimating yourself to a new job and new city.
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