When to rent vs when to sell, since that's all this sub has been lately it seems like.

I've seen tons of posts lately that are basically questions about if they should rent their house out or sell it. A lot of the questions people are asking have nothing to do with the real economics of being a landlord, and instead are in the weeds about original loan terms, etc.

I want to separate out a few things first for people. First, you do your mortgage through something like FHA, VA, etc., do a very low down payment, and they require that it be your primary residence from the time you close. They also require that the house appraise well and be free of defects that would keep you from safely inhabiting it on the day you close. It is OK to have your circumstances change though. It is OK to live in a house you bought FHA 5 years ago and later on rent it out because you got a new job out of state or your family grew, whatever.

BUT what about the economics of it. As a basic "table stakes" thing, you aren't going to be renting something you have basically no equity in, realistically... the economics of that wouldn't be great with rates at 3%, but they are just effectively impossible for loans at 5%+ like we've had lately. This isn't how investment/income properties with leverage work at all. You don't borrow the entire transaction amount or 97% of it or 95% of it. The reason you don't do that is because then your total mortgage/PMI/escrow is going to compete with the rental rates you can actually get.

Now, you might be thinking "well, I'll just break even" but you won't. That's because you will often give up some cut of rent to a property manager. Whether you do that or do not, you will still have periods between renters, you will have periods where renters do not pay some or all of rent, you will have maintenance issues like a 12K HVAC changeout, a 6K plumbing problem, a tree will fall and cost you a few grand to get cleaned up and removed, etc. You cannot legally just wait around until some other windfall comes in to fix those things for your renters.

In summary, if you owe more than 80% of what the house is worth, you're selling it, not renting it (in general). Edge cases exist, but if you are reading this, you probably aren't the edge case, you're probably the "rule" case that just needs to not be "cute" and try to hobby as a real estate investor who is leveraged up to their eyeballs and carrying all the risk of that not working out for you. Even when we had a home we owned free and clear with no mortgage as a rental, there were months where we were cash flow negative on it due to standard, regular maintenance or repairs between renters or pre-paying insurance to get a better/discounted rate. I appreciate that everyone thinks their situation is highly, highly unique and that they can pull things off that on paper don't originally make sense. But, my advice is, save yourself some financial and mental gymnastics and view your situation objectively and logically. A 7 year exit plan on a rental you are starting with no equity in? Not worth doing the math on, that doesn't work.

submitted by /u/FinTecGeek
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source https://www.reddit.com/r/RealEstate/comments/1tvu2q8/when_to_rent_vs_when_to_sell_since_thats_all_this/