Wednesday, February 24, 2010

Rent or Sell?

This is not your normal debate on whether you should rent or buy, but rather a question about whether you should rent out your home, or sell it.

The Complete Guide to Your First Rental Property: A Step-by-Step Plan from the Experts Who Do It Every DayThe recent economic turmoil inspired me to start looking for a new job in the case that I found myself laid off and unemployed. I had a good job, but I wanted a backup plan because our company was going through several rounds of layoffs during 2009. I polished up my resume and sent it out. I applied to places that I thought I would enjoy working for. It was a bittersweet moment when the interviews started. I liked where I worked. I enjoyed where I lived. But the future was so uncertain that finally I accepted a position clear across the country. We packed up and moved out to the East coast. We were fortunate to find a place to rent but we were faced with the question - What do we do with our home back West?

Like so many people, we purchased our first home at the peak of the real estate bubble. But how were we to know? We were newly graduated, moving into a new area and taking a promising new job. We thought that we were going to be living there for at least the next 20 years. Weeks after moving in we already had 5 and 10 and 15 year plans for what we would do to upgrade and beautify our home. We took on a 30 year mortgage at 6.75% interest. We were lucky enough to put a few percent down, but still had PMI. We felt lucky to refinance in early 2009 down to 4.75% and start saving $200 per month. We were excited to use that amount to pay down student loans.

And then it happened. While we had witnessed the economy going to shreds we still felt good with my work. That was before the first round of layoffs, and then the second....

The house might sell for what we owe on it. But that represents a loss of our down payment and all the upgrades we put into it. It is more likely that the final sale price and realtor commissions will require us to come to the table with money to let go of our first home.

Should we rent instead? We have no experience with this and we are scared to think about managing a rental property from two time zones away. Finally, does it make sense to rent it for less than the monthly mortgage payment?

The Art of the Short SaleShould we walk away? No. Personally, I do not think this is an option for me. While I am able financially to pay the mortgage - I should pay it. Even if that means living on a tighter budget this year. Why? Cause I made the decision to move. Granted, had I not moved and been laid off and been unable to pay the mortgage - I would have walked away. But that was the contract - if I am unable to pay the mortgage, the bank gets the house. Anyways, this discussion could go on and on and I digress from the rent vs sell question.

Let's run the numbers because numbers are not emotionally attached to the home where your first baby took her first steps. The numbers show, if I were to save the mortgage payment I make now after the sale and sock it away into a savings account, that I could easily have a good chunk put away for a future home purchase or a new/used car. The numbers also show that it would take almost two years to bank up a sufficient emergency fund for owning a rental unit that would make me feel comfortable.

Risk versus reward. If I had more cash stashed away I might be more inclined to just rent the house. That is when an opportunity fund comes in handy.

There are several other factors that have not been considered in this question. Is the home a suitable rental? Are all homes potential rentals? After looking at all the rentals we did before we moved into our new home on the East coast I realized that our Western home might not be the best rental unit. So while it really pains me to sell the home at such a loss - I think that is our best course of action for the future.

What do you think? If you own a rental - was it your place of residence first? Share below in the comments.

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