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Sell, buy, rent? That is the question

Chris Farrell Jul 7, 2011

Question: My wife recently got a new job and it is farther away from home then she would like to drive everyday, so we are looking at moving. The question is with the current market conditions would it be better to rent out our current home and purchase a new one closer to her work, sell our current home and purchase a new one, or rent out our current home and rent a place closer to her work. We bought our current home for 175 and could sell it for 180 and owe 140. The homes we are looking at buying are in the 110 range. We have two dogs so finding a rental is not easy. We make a combined yearly income of about 140 before taxes and have roughly 100k in retirement savings. We are 27 and 25 years old with a 7 month old baby. We could feasibly rent our current home for around 1000 a month. Let me know if you need additional information and your thoughts. Sincerely, Chris, Nashville, IN

Answer: My first reaction is that you have a lot going on. A new job. A baby. A move. Whew!

Now, I have a particular perspective on questions like yours. I lean toward solutions that give you the most financial flexibility and the biggest money cushion should you face an unexpected setback. In other words, I’m going to come back to you with a number of questions to think through.

My first question is whether you think it makes the most sense to sell your current home, stash the cash cushion in a safe place, and rent closer to her work until your wife is more comfortable in her new job? The price of this approach is you’ll probably end up living in a rental apartment you don’t like all that much. But you’ll also minimize your risks while your wife learns her new job.

My second question is do you really want to be a landlord (or hire a rental management company to manage it for you)? A rental property is a business. Like all small businesses, you’ll get some tax advantages. If the business does well and generates decent cash flow you should build up some wealth.

Yet like all small businesses there are downside risks. Any landlord will tell you that the business is dependent on the quality of your tenants. It’s a highly regulated business. There are the costs associated with maintenance, bookkeeping, and property and casualty insurance coverage. Landlords are sued more than any other group of business owners in the country.

To be clear, I think owning a rental property can be a smart investment. Lots of entrepreneurs do well at it. Question is, is it a business you want to run?

Last, if you really want to own–and there is nothing wrong with that–it would be simplest to sell your current home and buy a new place closer to work.

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