The Move-Up Buyer – Rent or Sell
This is the framework I would use as a homeowner looking to make their purchase, and evaluating whether to sell or keep and rent out their current residence. It should be a more thoughtful analysis than quickly determining if the rent will cover the mortgage, and this post aims to show you how I would look at it. This is not financial advice, just my opinion.
- Get a rental estimate from a property manager.
- Get a valuation range on your home from a Realtor
- Explore Option 1 – Selling – Find your last mortgage statement and see what the balance is. Multiply the conservative side of the valuation range by .93 (roughly 6-7% for selling costs, then subtract your loan balance. That’s your equity and can be your new down payment. You can try to buy the new home contingent on the sale of your current home, but in this market that has been a very challenging strategy for buyers because of the amount of other qualified buyers in the market who won’t have that contingency. You might consider moving into a rental for a few months or a year while you look for the right home, then make the purchase without the sale contingency, creating a stronger offer.
- Option 2 – cash out refinance – Send your lender the mortgage statement and ask them how much equity you can pull out to use as a down payment for the next home. The cash out refinance pays off your existing loan balance, puts cash in your pocket, and replaces the old loan with a new likely higher loan on your current home. The benefit is that you’ll get to use some of the equity in your home as a down payment for your next house. Compare the rental estimate to your new payment. Ask the property manager how fast they think it will rent so you can estimate how long you’ll be making two mortgage payments before rent checks start coming in. Is the rent estimate still higher than what your new mortgage on your current home would be after your cash out refinance? If so, by how much? Ask the property manager what percentage they would take if you turned over management to them, and ask them what vacancy rate they would estimate for your home. This is the amount of time between a tenant moving out and a new tenant moving in where you are not receiving rental income. Keep in mind you will have repair expenses, and if you decide to use a property manager, they will oftentimes take a large percentage of the first month’s rent as a lease fee. I would also consider getting a home inspection and pest inspection so you can familiarize with the condition of the home to give you a clear idea of what large expenses might be coming your way that would cut into your rents. In determining whether or not to use a property manager, the question is how much time you want to spend being a landlord, and whether you’re willing to part with some of the rental income. If you have a busy schedule and answering tenant complaints or coordinating with contractors for repairs would bring you stress, a property manager can provide a great service that simplifies being a landlord, and we have some great contacts here on the Monterey Peninsula who can help you if you decide to go that route.
- Option 3 – No refinance, and no sale – You might decide you want to wait to buy something else until you have a down payment that works with your desired estimated monthly payments on a new home without selling or refinancing to pull cash out of your current home. You would probably receive more cash flow from your current home since your mortgage will stay the same. You could also refinance without pulling cash out to lower your rate if rates have gone down since you purchased, then use the cash flow from the rental to help with your new larger mortgage on the new house.
These are a few ideas on how to make your next real estate transition as a move-up buyer. If you have any questions, our team is happy to assist.