Expert: Connie Wildasinn-Broker,GRI,Realtor® - 12/12/2011

Question
QUESTION: I purchased my first home, but it is becoming a bit much for me financially. I am not underwater by any stretch, I'm just trying to explore my options. Do you think it would better to rent out my house to cover the mortgage and move into a rental that was less expensive? Or would it be best to sell the home?

I don't want to make any rash decisions, I'm just trying to prepare myself in case I need to make that decision. I appreciate any guidance you can offer. Thank-you.

ANSWER: Hi Michael,

It all depends is the best answer I can give you.

1. How much have you money is your property worth today compared to when you bought it?
2. If you sell can you cover all Closing Costs? 7.1%-11% (depending if you have to help a buyer out with closing costs
3. do you have 'per-pay' on your loan? (most no longer do)
4. Can you rent for a Profit? Don't go under to support a tenant
5. How will renting effect your bottom line with taxes? talk to your CPA/account
6. What will happen if I loose my tax deductions? Again speak with your CPA/account
7. Can I really be a landlord? Can I evict someone who can't pay me due to health, financial or other issues and still sleep at night (you better be able to)
8. Is my situation temporary or is this strain going to go on for years to come? In other words can you get through this and emerge OK and keep the property?
9. Can I buy again if I keep this in my investment portfolio?
10. Have you lived there for 2 of 5 years so you don't have capitol gains tax to pay?

Just some thoughts.... good luck

---------- FOLLOW-UP ----------

QUESTION: Thank-you Connie for all the insight. If I may, I'd like to give you answers to your questions to see if this tips your advice one way or the other:

1. Bought for $275K, put 3.5% down on FHA loan, owe $266K, worth $275K still.
2. Depends on sale price, but most likely not.
3. Not sure what this is. Would have to find out.
4. Probably rent would just cover mortgage, property taxes, insurance, etc. Little to no profit other than tax write-offs.
5. Will check with CPA but should be fine without if I sell the house.
6. Will check with CPA but should be fine without if I sell the house.
7. No, would need to hire property management company.
8. Situation is "temporary" but I feel like I'm living just a little beyond my means.
9. I could not buy again if I kept the property in my investment portfolio.
10. I have lived here only 8 months.

What is your opinion now? Thanks.

Answer
1. the price is way high for a rental and the 'profit' just covering means upside down, since you have to consider down time, repairs etc.  

2. To sell you have to cover the seller closing costs and perhaps help a buyer (that goes to the higher % if your area demands seller contribution for most of your target buyers)  If you are loosing money, then figure out where your break even point is 'how many months' and if could hang on that long keep the property instead.

4. doesn't sound like enough honestly but again check with your CPA... and get a real good grip on rents, so you are competative and right on the money, even $20 to high will cause you an extra month of caring if the target tenants can do better on another unit

7. now consider an additional 10% overhead monthly to rent rents, and management
8. how a bout a temp roommate?
9. even with FHA you can buy again, just speak with your lender on time frame...
10. you will have capitol gains unles you have ?hardship? and gave to sell - IE job relo, twins and there are a couple other (at least there were last year, I'm not a CPA so check whit them)