Renting your current home as an investment when moving to your “Dream Home” can be a No-Brainer!

dream house

Are you tempted to move up into your dream home while rates are still historically low? As I work with clients, one thing that keeps homeowners from selling their current home is the thought of all the effort associated with putting their house on the market, a.k.a. “showing ready” and with 4 kids, 2 dogs and 2 cats, trust me – that I understand!

If you are looking for both an investment, and a way to dodge the joys of selling, renting your property is a great option. Renting your existing home is a way to own a home you know intimately at your current lower rate. For those in a good cash position, this approach can offer a great win-win for buyers looking simultaneously for a new home and an investment option.

For instance, if you were to go to buy an investment property you would be considering homes that you knew very little about-except what you see on the surface and the inspector finds. If you were to rent your existing home, however, you have an advantage in that you can anticipate likely future repairs and are familiar with known issues. In the rental business, this is a tremendous benefit as it helps give you a better sense of your future costs to keep up the property. In addition, since the home was originally purchased as your primary residence you can continue in your current loan program at a lower rate vs. an investment loan program (i.e., higher rate).

Here’s how to get started:

  • Does Renting Cover your Costs?:
    Renting is a classic case of the 80/20 Rule – you should plan on keeping only 80% of what you rent. Where does the other 20% go? Unless you are in the rental business, I encourage my clients to use property management companies to limit the hassle associated with rental homes – this typically costs 10% of the rental rate. In addition, owners should plan to withhold an addition 10% for maintenance and repairs. Example: The Johnson family has a mortgage of $1,550 and the rental rates in their neighborhood for similar homes are $2,000 a month. In this scenario, they would set aside $400 a month to cover management/maintenance and keep $1,600 to cover their mortgage. Uncertain what the rental rates are and how quickly things rent in your area, your Realtor knows those numbers – connect with them ASAP to find out! 
  • Can I afford my next home without equity from my existing home?:
    Anyone looking to move up, and keep their first home as an investment property, should be in the position the afford the new home without requiring any of the equity from the first. But Conventional loans are still available with just 5% down payment on your future home, and I can set that as an 80-15-5 if you want to avoid Private Mortgage Insurance. Since this home will be your primary residence, the process will generally be the same as you experienced when you bought your original home. At this point, it’s good for us to have a conversation to see what you can be pre-qualified for with and without the rent from your current home. This will give you a good sense of your overall exposure. 
  • Shopping for your Dream Home:
    Congratulations! You’re on your way to having the home you’ve always wanted. The next step is to partner with a Realtor and let him/her know that you plan to rent your current home once you find your next home. This is important information to share as your Realtor may suggest different contract options depending upon what your family is comfortable with and how quickly you can rent your current home. If you don’t already have a Realtor in mind, I can refer you to those who are best suited to help you given your specific needs. 

Keeping your existing home as an investment property as you move-up to your dream home can be another way to invest your money. With rates still at historic lows, real estate still presents itself as a strong investment option for those in the financial position to own multiple properties. One day rates will rise, and fewer people will be able to afford homes in certain price ranges and neighborhoods. The rental market will provide an alternative to those who might want to be in certain areas but may not have the equity to buy the home themselves.

Call or email me today to learn more.

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