I currently live in a house that I own with my parents. 2 years ago I got a job which lets me work remotely,and since then I wanted to move out of state because this house is in an state with killer property taxes (currently paying $1000 a month). Right now we cannot sell this house (for some complicated reasons), so the only way I can move out is if we rent it out.

I also want to buy a house in the state which I move into. This house will cost around $200,000 and my down payment will be $50,000 (a good chunk of my savings). If I can save around $500 in less taxes and make around $500 in profit from my rental first house, then would this be a smart move? Assuming I stay in my new house for at least 10 years.

Would it offset the cost of my down payment, interest payments on the second mortgage, closing costs, moving, and the headache and risks of being a landlord?

In other words, would an extra $1000 in my pocket every month be worth buying a second home and the trouble of renting out the first?

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    Is that $500/month in positive cash flow from your rental after all typical expenses (mortgage, insurance, hoa, property taxes, etc), or just $500 over the mortgage? If you can't sell, want to move, and can have positive cash flow with a rental, it sounds like a solid solution. I'd want an emergency fund big enough to cover both mortgages for a period if the tenant flaked out or there were major repairs needed. – Hart CO Jun 29 '17 at 4:18
  • Yes there is $500 a month profit from renting out the first house after all expenses and an additional $500 that can be saved in paying less taxes on the second home? Would you say that is a smart move financially? – AbuMariam Jun 30 '17 at 16:15
  • I'm a fan of rentals, my first rental was a townhouse I lived in for a while before buying a 2nd house. If you can rent it and come out with $500/month extra, you'll likely do quite well with it as a rental. Whether it's a wise financial move depends more on your income and savings, could you afford it if a renter stopped paying rent and it took months to evict? Could you afford major repairs on day one? If so, then it could definitely be a wise decision, but don't gloss over potential costs and risks. – Hart CO Jun 30 '17 at 16:51
  • When you talk about saving an extra $500 in tax, do you just mean that the total cost of the place you'll buy is $500 less per month than what you spend now? Because you aren't saving on taxes when renting, you still have that burden it's just offset by rental income. – Hart CO Jun 30 '17 at 16:53
  • Pyramids in Egypt were someone's wise investment. – sanaris Jun 30 '17 at 20:57

It might be "wise" to do it with little to no debt - the more debt you add, the riskier the proposition.

When you add debt, you add monthly debt payments, which eat into your returns and increase the risk that you won't make enough income to make the debt payment, at best causing you to make up the difference from other savings, at worst resulting in foreclosure.

On top of that, houses are expensive assets, whether you live in it or rent it. You need enough cushion in your cash flow to deal with maintenance, deal with renters, etc.

There's no pure mathematical way that I know of to determine if a situation like yours is a good idea. If you have a lot of ability and tolerance for risk (meaning you have cash reserves to handle losses and don't make unwise decisions when times are bad) then you might come out ahead. But many people end up either losing one or both of the homes, or find that the money tied up in the rental is not worth the lower returns after debt payments.

To be fair - you asked if this was "wise". That's a fairly subjective question, but if you look at it from a risk/reward standpoint, figure out how much return you'd get in the best case (always fully rented, reasonable maintenance costs, etc.) then figure out what happens if you go months without a renter. Or the A/C goes out. Or you have a termite infestation. All of those things introduce risk. Debt reduces your return without reducing risk- you have a payment that you have to make whether you rent the place out or not.

It might be hard to quantify the risk and expected return, but compare them to a stock market investment that earns about 8% on average, and can range from -30% to +50% in a given year. Now look at the possible downside of your housing investment. Can you lose more than 30% there? If so, does it generate enough return (on average) to compensate for the extra risk?

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  • But what about the money I save in paying less taxes and the profit from my rent which should come near $1000, doesn't that offset the monthly debt payments and operating expenses of owning an extra home? Plus when the mortgage is paid off I have one more asset in the second home right? – AbuMariam Jun 30 '17 at 16:14
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    To save $500/month in taxes you'll need to pay about $2,000/mo in interest. There's no way you'll save that much in tax with a $1,000/mo mortgage. More like $150/month or less. Figure out what would happen if you go 2 months without a renter. Then 4 months. Then 6 months. Those are real possibilities, not just worst-case scenarios. You might be OK and make some money, but you might lose both houses. – D Stanley Jun 30 '17 at 16:24

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