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My wife and I currently have a mortgage on one house with a little over $4k left on the loan with 6 or 7 payments left. We are buying a new house (with a mortgage, 80% LTV financed at 2.875%, 15 year fixed).

I am leaning toward keeping and renting the house, while my wife wants to sell. The old house needs a new furnace, central air conditioner and a basement leak sealed, and would cost around $5-6k to remedy everything. Property taxes once we lose our homestead exemption on this property will be around $4k/year. We've been told we would have no problems renting for $900 / month and we think we could probably get at least $1100 / month in our market. We bought the house for $120k in 2012 and have $4k left on the loan.

My wife argues against renting purely on the merits of the house sale price vs what we can rent it for, e.g. if rental price / our sale price > 1%, it is a good deal, otherwise it is a bad deal. To her, this means if the rental rate cannot exceed 1200 month, it is not worth renting and should be sold. Her math is predicated on the scenario of buying a property as a rental property, which I don't feel applies to a home we bought as a primary residence that we have 96% equity in.

I see a house that we could probably sell for $120k, of which we lose $7.2k to a realtor and another $2.3k to the sellers portion of closing costs in our area (transfer taxes and 1 year of owner's title insurance). This would net us $110.5k, assuming it sells at $120, which neither I or our realtor is confident of.

To keep the house will cost us $5-6k up front for HVAC updates and fixing a minor basement water intrusion. We'll spend $4k/year on property taxes. We may spend 10% on property management. Until October we pay $661 / month for the mortgage, a smaller November payment and then the loan is payed off. If we look at May 2016 - May 2017 our costs to own the property are around $14k. Our potential rental income, if continually occupied, ranges from $10,8k to $14.4k (900 to 1200 / month, no property manager). This means, at best, the first year is a wash and realistically it is a loss. In subsequent years our costs go down to $4k / year fixed (taxes) plus a maintenance budget vs 10-14k rent, yielding a decent profit.

I'm willing to suffer the loss during the first year to see the profits from every subsequent year. After November we are less exposed if the property is unoccupied as the mortgage is paid off. My wife sees the big expenses coming up and the not-so-good looking first year combined with her <1% == BAD DEAL logic and wants to get out and sell.

So my question is then, sell or rent? Is there anything in my reasoning that I've overlooked? Is the first year loss "worth it" in the long run, or should be bail? Is my wife right?

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So either scenario has about $10K upfront costs (either realtor/selling expenses or fixing up for rental). Furthermore, I'm sure that the buyers would want you to fix all these things anyway, or reduce the price accordingly, but let's ignore this. Let's also ignore the remaining mortgage, since it looks like you can comfortably pay it off.

Assuming 10% property management and 10% average vacancy (check your market), and rental price at $1000 - you end up with these numbers:

Equity:         $120K
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Annual Rent:    $9600 (deducting vacancy/management)
Property Tax:   $4000
Maintenance:    $2400 (assuming $200/month average)
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Net Income:     $3200
ROI:            2.7%

I took very conservative estimates both on the rent (lower than you expect) and the maintenance expense (although on average over the years ,since you need to have some reserves, this is probably quite reasonable).

You end up with 2.7% ROI, which is not a lot for a rental. The rule of thumb your wife mentioned (1% of cash equity) is indeed usually for ROI of leveraged rental purchase. However, if rental prices in your area are rising, as it sounds like they are, you may end up there quite soon anyway.

The downside is that the money is locked in. If you're confident in your ability to rent and are not loosing the tax benefit of selling since it sounds like you've not appreciated, you may take out some cash through a cash-out refi. To keep cash-flow near-0, you need to cash out so that the payments would be at or less than the $3200/year (i.e.: $266/month). That would make about $50K at 30/yr fixed 5% loan.

What's best is up to you to decide, of course. Check whether "you can always sell" holds for you. I.e.: how stable is the market, what happens if one or two large employers disappear, etc.

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