I live in an area that is rapidly growing. My current house (based on comps) has appreciated $50k in two years to give an example. I currently have an opportunity to buy another for a reasonable price in the same area. I have the cash on hand and the income to do it as well. I'm debating renting the original. Here's the issue: the average rent in my area is the same as my mortgage (which is fixed rate). So, with all things considered, renting would mean a loss. My question is this: given how rapidly the area is growing, does it make sense (or could it) to eat the loss for a while counting on 1) rent eventually increasing 2) the gains in the value of the house?
You are betting on the value of the property increasing.
Tax issues regarding rental property have a few subtleties.
the average rent in my area is the same as my mortgage (which is fixed rate).
Don't forget property taxes and any HOA or condo fees. Some people forget that. For the typical homeowner these don't have any tax issues, but for a rental property these expenses are used to reduce taxes on the income. These expenses can also go up over the years. Some jurisdictions give a tax break to owner occupied properties, which the rental property would not qualify for.
The principal portion of the monthly payment doesn't reduce tax on the rental income.
This can mean that the rental property owner can lose money each month via cash flow, but still owe taxes because a portion of the monthly mortgage payment.
Good news, you have to depreciate the property.
That will help reduce your taxes. Of course when you sell the property that depreciation will be recaptured.
If you buy the new property, and turn it immediately into a rental property, then determining the expenses preparing it to rent, and determining the base value for depreciation is more straight forward. The downside is that the lender will require 20% down, and might charge a higher rate.
If you rent the original house handling the transition is more complex. You probably don't need a new loan, but if in the future you do want to refinance the lender will treat the loan differently.
Don't forget that you will have expenses with each new tenant, plus you could have a month or two without a tenant. Never forget repairs and maintenance.
The question is how long can you hang on with loss each month to make it worthwhile? Remember future increases in value are not guaranteed. People in my neighborhood took 10 years to get back to the peak after the 2006-2010 drop in prices.
You say that since rent would be the same as your mortgage, you'd be operating at a loss, but that mortgage money doesn't disappear. Instead, you'd be trading ready cash for added principal on your mortgage. Is that worth it? Maybe. If you calculate that you'll lose $200/month in order to make a $1500/month mortgage payment, that's a reasonable tradeoff, and a different calculation than the one you seem to be making.