If you own your first home now, and are looking to move up to your next home --- I urge you to carefully examine the potential benefits (and risks) of keeping your current home instead of selling it.  Your first home is likely an ideal rental property, and you can see enormous returns if you are able to keep your current home as a rental property when you purchase your next home.  That being said, I know that many people need to sell their current home to use the proceeds of that sale to use as a down payment for their purchase.

Scenario #1 -- Sell After Five Years

We'll imagine that your home was a townhouse bought five years ago for $110k, which is now worth $155k.  In selling the property, you will clear about $42k after closing costs.  (Assumptions: 100% financing at 7% fixed, five years of principal reduction, 6% gross closing costs) 

Net Gain After 5 Years Of Residency = $42,000

As you can see, this is a hefty payoff after just five years.  Certainly, even if you didn't need the funds to roll into your next purchase, it would be tempting to "cash out" by selling your first home.


Scenario #2 -- Sell After Ten Years (total)

We'll again imagine that your home was a townhouse bought five years ago for $110k, which is now worth $155k.  However, instead of selling the property, you rent it for $875/month, with a super conservative 1% per year increase in rental rate.  We'll also assume that your insurance, property taxes, and property value go up 3% per year.

If you keep the property for another five years after moving into your new home, and then you sell it, in addition to getting the roughly $42k out that you would have netted after five years, you'll also likely experience:

• $3,964 of monthly excesses due to increases in your rental rate without corresponding increases in the principal and interest payment on your mortgage.
• $9,151 of mortgage principal paid down by your tenants
  
• $24,697 of appreciation after five more years of 3% per year increases

Net Gain After 5 Years of Residency, 5 Years of Renting = $79,812


Scenario #3 -- Sell After Thirty Years (total)

But what if you kept it all the way until the end of the 30 year fixed rate mortgage?  Then things would be looking excellent!  In addition to getting the roughly $42k out that you would have netted after five years, you'll also likely experience:

• $37,950 of monthly excesses due to increases in your rental rate without corresponding increases in the principal and interest payment on your mortgage.
• $103,545 of mortgage principal paid down by your tenants
  
• $169,536 of appreciation after twenty-five more years of 3% per year increases

Net Gain After 5 Years of Living In, 25 Years of Renting = $353,031


The Risks

Certainly, as in any investment scenario, there are risks.  Here are a few:

1. Buying your second home without the funds from your first home might stretch your budget tight and make it difficult to cover the mortgage payments on your first home if it remains vacant for several months.
2. You'll have to be a landlord, and deal with finding tenants, collecting rent, possibly evicting tenants, and getting calls in the middle of the night about an overflowing toilet.
3. Having your capital tied up in two properties could limit your ability to make other financial moves or decisions in life.

The Benefits

I believe the benefits CAN outweigh the risks, depending on your own personal financial scenario.  Instead of cashing out after 5 years for $42k, you can have tenants pay off the remainder of your mortgage, while you get to enjoy the monthly excesses as rental rates go up, and you eventually get to realize the appreciation of the property.  After 30 years, you are likely to have received a net of $353k instead of just $42k.  Wow!