One of the reasons home prices here in Frisco, and across the country, have remained strong is the imbalance that exists between supply and demand. There are simply not enough homes for sale compared to the number of people that want to buy.

For over a decade, not only have new home builders built fewer homes per year than the historical average, but existing homeowners have also brought fewer homes to the market than we traditionally see.

When mortgage rates were at an all-time low, and home prices were rising rapidly, many would-be sellers chose not to sell their existing homes, choosing instead to take equity out to use as a down payment when purchasing a new home and turning their existing home into a rental property.

This made a lot of financial sense as the rent received was usually enough to cover all monthly expenses on the original home, even with a home equity line of credit payment, allowing you to earn equity gains on two homes while only having to pay for one yourself.

Rent or Sell?

Now that mortgage rates have more than doubled, does renting your current home when buying a new one still make financial sense?

Maybe yes, maybe no.

Every situation will be unique.

In order to find out the first thing you will want to do is see how much equity you have in your current home. You can easily do that using my free online home equity checker.

Once you know how much total equity you have, you’ll want to calculate how much tappable equity you have.

Lenders will generally allow you to use up to 80% of the equity in your home. For example, let’s say your existing house is worth $500,000. The total accessible equity would be $400,000 ($500,000 x 80%).

Next, you have to deduct your current mortgage balance to arrive at the tappable equity amount.

For our example, we’ll assume your outstanding mortgage balance is $175,000. When you deduct that from the total accessible equity you arrive at the tappable equity amount. $400,000 - $175,000 = $225,000.

Now that you know how to determine how much tappable equity you have to use as a down payment on a new home you can determine if it’s worth renting your current house out or selling it.

Ideally, you will want to make sure the amount of rent you receive covers all of your expenses. To do this take your existing mortgage payment, remember to include taxes and insurance, then add the payment for the equity loan to determine your total monthly cost. Compare that amount to the amount of rent you could expect to receive on a monthly basis.

While rising mortgage rates have made it more difficult to be cash flow positive, or at least break even, it can still work depending on how much equity you need for a down payment and what your current mortgage balance is.

Rentals Come With Other Responsibilities

While owning multiple properties, especially when tenants are covering the costs, is a great way to build long-term wealth, there are other factors to consider when contemplating becoming a landlord.

As an article from Bankrate explained;

Managing a rental property can be time-consuming and challenging. Are you handy and able to make some repairs yourself? If not, do you have a network of affordable contractors you can reach out to in a pinch? Consider whether you want to take on the added responsibility of being a landlord, which means screening tenants and fielding issues, among other responsibilities, or paying for a third party to take care of things instead.

If your current property is subject to a HOA you’ll want to keep in mind that many HOA’s require you to get approval before renting your house out and often have a cap on the number of rental properties that can exist within the community.

Bottom Line

Converting your existing home into a rental property isn’t a decision you should make lightly or without doing your research. If you decide that selling your current home is the better option for you, let’s schedule a call to see how much you could expect to sell your home for in today’s market.

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