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I'm currently looking to buy a house to live in for 2-3 years, and then rent it out. Most recommendations I see are to buy a house if owning for 5+ years, but I'm not sure how that advice applies if I'd like to rent the place afterwards.

Having done some math, it seems to me that the break-even point for me between buying and renting is roughly at the 2 year point. After 2 years, I will have paid $36,000 in rent, and if I would have sold the house after 2 years I would have lost $36,000 in selling the house after closing costs and for opportunity cost for money that I would have put into the stock market instead if I had rented. So after living in the home for 2 years I come out ahead, and if I rent the house then I could earn equity by having a renter.

My math accounts for mortgage payments, property taxes, maintenance, home insurance, home value appreciation, stock market appreciation, the rent I'm currently paying, and tax deductions.

Does this line of thinking seem to make sense, or am I missing another angle at figuring out if this is a good way to evaluate home ownership?

  • When you say "would have lost $36,000 in selling.." what do you mean? Are you saying that you would be down 36k, but you're okay with that since you would have spent that on rent anyways? Also, what do you plan on doing after you move out? Can you get another loan with the current one still standing? – curt1893 Sep 30 '18 at 12:31
  • Yup that's exactly what I mean. That if you take the cost of the home value after appreciation minus the closing costs and any capital gains tax and any property tax paid over that time, it would be -$36,000; but since I'd be down $36,000 in rent otherwise it would be okay. After I move out I'd probably rent elsewhere for a while, so I don't expect any major concern on getting a second loan. – chris.mclennon Sep 30 '18 at 23:10
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Buying a house to live in with intent to rent after a while is a pretty common way for people to get into the rental business. It's the approach I took for my first rental. The idea of staying at least 5 years is based on cost to buy/sell, converting to rental means you don't incur those costs to sell, but there are other factors since you'll need a place to live after you convert it to a rental.

Here are some considerations in no particular order:

  • When you move out, if you intend to buy another property, you'll need to be able to save up enough in the next 2-3 years to cover a down payment on another property.

  • Your income will need to be high enough that you can get another mortgage. Debt to income ratio will limit what you can qualify for, and most banks won't count potential rental income as income. Even after you've been renting for a couple years they will typically only count ~70% of your rental income for loan qualification purposes.

  • Being a landlord isn't for everyone and isn't always a money-maker. It can take a lot of time, effort, and money.

  • A lot can change in 3 years, you could find that it's not practical/possible to convert it to a rental in your planned timeline.

  • You'll need to be able to weather periods of vacancy/non-payment, as well as covering maintenance/repair costs. Might also have to deal with market declines and nightmare tenants.

Do a lot of research before you commit, about being a landlord in general and also about the rental market in your area. If you decide to move forward I suggest buying something on the low end of what you qualify for so you don't have to worry about income/down-payment on the next place. I'd buy in an area that you are comfortable living in for longer than 3 years if things don't work out as planned.

The nice thing about this approach is that it gives you plenty of time to decide what to do next. If you buy a very affordable house that you are content with for a while and that would also make a good rental, then you will have a lot of flexibility in the coming years and should come out nicely even if you don't decide to rent it out.

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what your math does not cover is risk. Your calculations have assumed that you will be able to rent the property out at a rate that will cover the mortgage costs. What if that does not transpire? After owning a property for two years, the principle is roughly the same as the beginning, but the market value may actually be lower (we are near the peak of the real estate upswing after 10 years). Therefore, you could see yourself without renters and a mortgage that is greater than the selling value. But let's assume you put down the conventional 20%, so you won't be forced to sell. Nonetheless, you will be motivated to sell because you will be paying a mortgage for your unrented house at the same time you're paying for a roof over your head somewhere else.

Also consider the hassle factor of being a distant landlord. It's very hard to do, so most people hire it out to a local property manager, which often consumes any net income generated from rent.

If you're only considering staying for two years and not coming back, then renting a place carries much less financial liability and risk.

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