Rent or Sell Your Aurora Starter Home Before You Move Up?

Keeping your current house as a rental when you move up can sound like easy money. Sometimes it's a smart move. More often it turns into a second job you didn't expect. If you own a starter home in Aurora and you're getting ready for the next one, here's how I'd decide, with numbers instead of hope.

Step one: what the rental would really net

Start with the rent you could realistically charge, not the best number you've seen online. Subtract the mortgage payment, property taxes, insurance, a vacancy allowance and a repair reserve. If you won't manage it yourself, subtract property management too.

If what's left is thin or negative, you're betting on appreciation, not earning income. That can still be a decision you make on purpose, but call it what it is.

Step two: the part that surprises people

When you buy your next house, a lender counts the payment on the house you're keeping. Rental income may only count in part, and often only when you can document it with a signed lease or tax history.

So if you plan to keep the old house, talk to your lender before you write an offer on the new one, not after. It can change how much house you can buy. With the 30-year rate averaging 7.32% according to Freddie Mac's October 22 survey, every extra dollar of monthly payment matters.

The case for selling

Selling turns your equity into the down payment on the next house. That can mean a smaller loan and a lower payment. It also removes the repair risk and the landlord duties. If your cash reserves will be thin after the move, selling is usually the safer path.

The case for keeping

Keeping makes more sense when you have a low rate you'd never get again, strong reserves after the new down payment, and a house that rents easily and doesn't need a big repair soon. Even then, I'd only keep the old house if you're comfortable owning it as an investment, because that's what it becomes.

Before you decide, ask yourself a few honest questions. Do you want to screen tenants and handle a 10 p.m. call about a leaking water heater? Do you know what the city requires of rental owners? Will you be close enough to deal with problems, or will you need to pay someone? If the answers make you uneasy, that's useful information.

Holding costs add up faster than you think

In an article I wrote on rehabbing, I pointed out that taxes, utilities and insurance eat away at your bottom line every month a property sits, and that a vacant property is a target for vandals and thieves. The same is true for a former starter home that sits empty between tenants, or sits empty while you decide what to do. Budget for the months it won't be producing rent.

Prepare the house either way

I've renovated more than 50 properties as an investor, and one rule has held up every time: gauge your improvements to the neighborhood and price range. If you rent, make the repairs that keep tenants and skip the ones that only look good in photos. If you sell, do the work that helps buyers see the house the way you do. Over-improving means you won't get the return you expect. Under-improving means a lower price and a longer time on the market.

A hypothetical example

These numbers are made up to show the method, not an Aurora rent quote. Say the house could rent for $1,900 a month. The mortgage payment is $900, taxes are $300 and insurance is $100. Set aside 8% for vacancy ($152) and 10% for repairs ($190). That leaves about $258 a month, roughly $3,100 a year, and that's before any big repair or a long stretch without a tenant.

Now ask whether $3,100 a year is worth the work and the risk, or whether that equity would do more for you as part of the next down payment. There's no wrong answer, as long as it's a real answer.

Taxes and what to do this week

Selling a primary residence and renting it out have different tax outcomes, including how long you lived in the home and how depreciation works. Talk to a CPA before you decide. This article isn't tax advice.

Then do three things this week. Run the rent-versus-sell numbers on one page. Ask your lender how they'd treat the old house. And get a current market value so you know your real equity. Choose with the Owner's View in mind: value, condition, cost, risk and what happens next.

If you'd like a current value on your Aurora home or help running the numbers, schedule a time with me or someone on our team at 21mike.com.

Mike Ferrante
The Mike Team at LPT Realty
www.21mike.com
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