Question:

My Wife and I(both 33) make around 400-450k a year. A little variable since she’s in sales. I bring home 200k that’s stable.

Our assets:

180k in stocks 80k in high yield savings account&checking Current home 580-610,000 value and paid off All cars are paid off 0 cc debt etc., every month all cards are paid off Idk what either of our 401ks current value are but I will also have a pension of 33% of my salary when I retire @ 50.

New home will be $1,140,000. We’ve currently put down about 200k towards the house in deposits so far.

We are trying to figure out if it makes financial sense to rent our home out or if we should just sell it and either invest or put the money towards the new home. Any advice is appreciated. I know we would be giving up lots of long term gains in the market but I’m currently leaning towards selling and putting at least 450k towards the new home.

Answer:

Evaluating Whether to Rent Out or Sell Your Current Home

Making the decision to rent out or sell your current home involves several financial, tax, and personal considerations. Below is a comprehensive analysis to help you assess which option aligns best with your financial goals and lifestyle preferences.

1. Financial Considerations

a. Equity Utilization

Reducing New Mortgage Amount: Selling your current home and applying the proceeds (estimated at \$450,000 after costs) toward your new home reduces your mortgage amount to around \$490,000 (\$1,140,000 – \$200,000 deposit – \$450,000 from sale).
Interest Savings: A lower mortgage principal results in significant interest savings over the life of the loan.
Monthly Payments: Reduced loan amounts lead to lower monthly payments, increasing your cash flow and financial flexibility.

b. Rental Income Potential

Market Rent Analysis: Research the local rental market to estimate potential monthly rental income for your current home.
Cash Flow Consideration: Subtract expenses (property management fees, maintenance, taxes, insurance) from rental income to determine net cash flow.
Return on Investment: Compare the net rental income against potential returns from alternative investments, such as stock market investments or paying down your new mortgage.

2. Tax Implications

a. Capital Gains Tax Exclusion

Primary Residence Exclusion: The IRS allows you to exclude up to \$500,000 of capital gains from the sale of your primary residence if you've lived there for at least 2 of the last 5 years.
Timing Matters: Converting your home into a rental property may jeopardize this exclusion if you sell after the exclusion period expires.

b. Rental Property Tax Considerations

Rental Income Taxation: Rental income is taxable, but you can deduct expenses like repairs, maintenance, and depreciation.
Depreciation Recapture: When you eventually sell a rental property, depreciation deductions you've taken are “recaptured” and taxed as ordinary income.

3. Lifestyle and Management Considerations

a. Being a Landlord

Time Commitment: Managing tenants, maintenance issues, and legal obligations can be time-consuming.
Stress Factors: Dealing with late payments, property damage, or vacancies can add stress.
Property Management Companies: Hiring a management company can alleviate some burdens but will reduce your net income due to management fees.

b. Peace of Mind

Financial Simplicity: Selling simplifies your finances, allowing you to focus on your new home and other investments.
Risk Reduction: Eliminates risks associated with property management and real estate market fluctuations.

4. Market Conditions and Investment Strategy

a. Real Estate Market Outlook

Current Market Value: With your home's value between \$580,000 and \$610,000, assess whether the market is favorable for sellers.
Future Appreciation: Consider the potential for property value growth in your area if you retain the home.

b. Investment Diversification

Asset Allocation: Evaluate how owning additional real estate fits into your overall investment portfolio.
Alternative Investments: Selling the home provides capital that can be invested in diversified assets, potentially yielding higher returns.

5. Financial Projections

a. Mortgage Comparison

With Sale Proceeds Applied:
- Mortgage Amount: Approximately \$490,000
- Lower Monthly Payments: More manageable and less financial strain.
- Interest Savings: Significant reduction in total interest paid over the loan term.
Without Sale Proceeds Applied:
- Mortgage Amount: Approximately \$940,000
- Higher Monthly Payments: Greater financial commitment.
- Interest Costs: Increased total interest over the life of the loan.

b. Opportunity Cost

Investing Sale Proceeds: If not applied to the new home, consider potential returns from investing the \$450,000 in stocks or other assets.
Comparative Analysis: Weigh the potential investment returns against the interest savings from a reduced mortgage.

6. Personal Goals and Future Plans

a. Retirement Planning

Early Retirement: With a pension starting at age 50, reducing debt now can enhance your financial independence later.
Cash Flow Needs: Lower monthly obligations increase your ability to save and invest for retirement.

b. Family and Lifestyle

Stability: Owning one primary residence simplifies your lifestyle.
Flexibility: Financial liquidity offers more options for future opportunities or unexpected expenses.

Conclusion and Recommendations

Based on the information provided and your inclination for peace of mind, selling your current home and applying the proceeds toward your new home seems to be a financially sound decision. This approach offers:

Debt Reduction: Significantly lowers your new mortgage amount and monthly payments.
Interest Savings: Reduces the total interest paid over the life of the loan.
Simplification: Avoids the complexities and responsibilities of being a landlord.
Tax Benefits: Allows you to capitalize on the primary residence capital gains tax exclusion.

Next Steps

Consult Financial Professionals:
- Financial Advisor: To evaluate how this decision fits within your overall financial plan and retirement goals.
- Tax Professional: To understand any tax implications and ensure you maximize available deductions and exclusions.
Conduct a Market Analysis:
- Real Estate Agent: Obtain a comparative market analysis to determine the optimal listing price for your current home.
- Timing: Assess whether current market conditions favor selling now.
Review Mortgage Options:
- Lender Discussions: Explore mortgage products that align with your down payment and financial situation.
- Interest Rates: Lock in favorable rates to maximize savings.
Plan for Future Investments:
- Diversify: Consider allocating some savings to diversify your investment portfolio.
- Retirement Accounts: Maximize contributions to your 401(k)s and consider other retirement savings vehicles.

Final Thoughts

Your strong financial position, with stable high income and no significant debts, provides you with flexibility. Prioritizing peace of mind and financial simplicity appears to align with your personal and financial goals. Selling your current home to reduce your new mortgage debt is a prudent move that can enhance your financial well-being in the long term.