My wife and I are debating whether to sell our current home or turn it into a rental property as we buy a new house. If we sell, we’d make around $200,000 in cash, which we could put into the Vanguard S&P 500 ETF. Considering our long-term financial goals (10+ years), we’re not sure which option would give us the best returns.
If we rent out the house, we estimate we could make $2,800 a month while our mortgage payment would be $2,550, giving us a small positive cash flow of $250/month ($3,000/year). With a 3% annual appreciation rate, the property could go up by about $171,000 in 10 years, along with the equity paydown from tenants.
Mortgage balance: $300,688.67 with a 3.625% interest rate.
There’s also news of a major $7 billion plan to revamp the area near our house, linked to the United Center.
On the other hand, if we sell the house and invest the $200k in the S&P 500, with a 7-10% yearly return, we could see the investment grow to between $393,000 and $518,000 over 10 years. We might need $20k to clear off some remaining student loans.
We could really use your advice on whether the rental income and property appreciation are better than the stock market returns. And any tips on risks and taxes would be great, too.
Thanks for your help!
Fondly,
The Homeowners
Response from THE MONEY MINDER:
Hello There,
Congratulations on the exciting journey of purchasing a new primary residence! It’s clear that you’ve put a lot of thought into whether to sell your current home or keep it as a rental property. Considering your long-term financial goals, it’s crucial to weigh the pros and cons of each option carefully.
In your case, selling the home and investing the proceeds in the Vanguard S&P 500 ETF could potentially offer higher returns over the next 10 years, especially considering the estimated 7-10% annual return. This strategy could grow your investment significantly and help you achieve your financial goals, including paying off remaining student loan debts.
On the other hand, keeping the home as a rental property offers a more conservative approach, with the potential for modest positive cash flow and property appreciation over time. However, this option also comes with risks such as tenant turnover, maintenance costs, and fluctuations in the real estate market.
As for tax considerations, selling the property may subject you to capital gains tax, while rental income is taxable but comes with potential tax deductions for expenses related to managing the property. It’s crucial to consult with a financial advisor or tax professional to understand the tax implications of each scenario.
In conclusion, both options have their benefits and risks, and the decision ultimately depends on your risk tolerance, cash flow needs, and long-term financial objectives. It may be a good idea to run detailed financial projections for each scenario and consider factors such as market trends, property management costs, and potential appreciation.
I hope this guidance helps you make an informed decision regarding your current home. If you have any further questions or need additional assistance, feel free to reach out.
Best regards,
[Your Name]
THE MONEY MINDER
