Is Rent Out and Rent the New Way to Move to a Different House?

By in Uncategorized with 0 Comments

I had a conversation with a friend the other day about his current housing situation.

In a nutshell, the home he resides in isn’t large enough for his family, nor does it have certain amenities like a swimming pool.

At the same time, he loves his home and the very cheap mortgage attached. Like millions of other Americans, he’s got a 30-year fixed in the low 3% range.

This has created a dilemma for him and many others, who want to move, but can’t make it pencil at today’s rates and asking prices.

But one thought is to rent out his current home and then rent another, as opposed to buying. Or selling for that matter.

It’s Possible to Rent Out Your Current Home and Rent Yourself

One trend that has emerged of late is the ‘rent out and rent’ scheme.

The way it works is relatively simple. If you’re an existing homeowner, you simply rent out your property to someone else and then go rent a different home.

This allows you to keep your low-rate mortgage intact, and it allows you to rent for less than what a new mortgage would cost.

It works because the PITI on the old house is so low, and asking rents are pretty attractive in many markets nationwide.

Sure, there might be a premium for rent on the new property, but it can still be the cheaper option relative to buying a home.

And the homeowner doesn’t need to worry about a large down payment, or losing their original home, which could now be seen as an investment property.

Let’s Look at an Example of Rent Out and Rent

Current monthly PITI: $3,500 per month

Potential rent for existing home: $6,000 per month

Cost to rent a larger home: $7,500 per month

Cost to buy a larger home: $10,000 per month plus $300k down

Cost to rent out and rent: $1,500 per month

As noted, I’ve got a friend considering a rent and rent out arrangement. Somewhat incredibly, the property he has his eye on is literally across the street.

This makes it easier, at least from a moving point of view. He can probably just lug his stuff over on his own, if he’s up for it.

It also allows him to keep an eye on his old property, which can be helpful but also perhaps a bit awkward.

Anyway, the house across the street is larger, has a view, and has a swimming pool. These are all wants and needs.

However, the price tag is a bit higher, we’ll call it $7,500 per month to rent. The good news is his current mortgage payment (full PITI) is just $3,500 a month.

And he can potentially rent his place for $6,000 per month because he got in cheap about a decade ago with that ultra-cheap mortgage rate.

If we do the math, it would cost $1,500 more per month to rent the larger home, using the cash flow on his existing property to offset the increased rent.

But he gets the larger space, the nicer home, the pool, the view, etc.

Perhaps more importantly, he doesn’t need to buy a home at today’s lofty prices and come in with a massive down payment.

Assuming they purchased a similar property, they’d need a $300,000 down payment and the mortgage rate would likely be 6-7% versus their current 3% rate. Ouch!

This Works When Home Prices Are High and Your Existing Payment Is Low

The reason this strategy works right now is because it’s more expensive to buy a home than rent in many places.

You can thank both high mortgage rates and high home prices, which have moved higher in tandem.

As I always say, there isn’t an inverse relationship between home prices and mortgage rates.

They can both go up together, go down together, or sometimes diverge.

This plan also works because many homeowners like my friend got into their current homes when prices and rates were low.

So they essentially have a lot of wiggle room to cash flow if renting out their existing properties, which can then be used toward a new home.

But instead of buying, they can simply pay a little extra in rent to get what they want, while continuing to enjoy appreciation on the old property.

At the same time, any improvements made on the old home benefit them as well. And they can always move back in the future.

For the record, this strategy can also be employed with downsizing. So a pair of empty nesters can rent out their larger home and go rent a smaller one.

In their case, we’re talking lower rent, potentially leading to some additional cash flow without having to commit to a new home purchase.

There Are Pros and Cons to Renting Out and Renting

It’s not without its risks though. When you rent, you’re at the mercy of your landlord. They might want to sell at some point, at which time you’d need to move.

You could also be limited in terms of making improvements or changes to the property.

In addition, you’re now a landlord yourself, which isn’t always a passive job. And the tenants present new risks, such as failure to pay rent.

It’s also possible to find your old home vacant for a month if you’re unable to find a tenant.

So you could be in a situation where you have to float two monthly housing payments. If you’re unable to, well, you’ve got a problem.

But the advantages are there too. You get the property you want/need for a lot less than what it might cost to buy.

And you get to keep your old home, which could be an incredible investment opportunity.

You’ve also got optionality. You can rent for a while then go back to your old home. Or decide after a while to buy something.

You aren’t necessarily locked in beyond the initial rental contracts in place, which might last a year.

It gives you time to determine your next move, assuming you’re not quite sure what you want to do.

Unfortunately, this also speaks to the dearth of for-sale inventory available in the housing market today.

And the incredible position many homeowners are in, thanks to their low-rate fixed mortgages.

Post Source

Share This

Leave a Reply

SIGN UP FOR A FREE ACCOUNT

When you sign up for an account, you can save properties, receive new listing notifications, and sign up to receive monthly market reports.

Connect with


By providing your number, you are expressly consenting, in writing, to receive telemarketing and other messages, including calls or texts at the number you provided above. This consent is not required to purchase any good or service. Message and data rates may apply. Text STOP to cancel.
SIGN UP FOR A FREE ACCOUNT

When you sign up for an account, you can save properties, receive new listing notifications, and sign up to receive monthly market reports.

Connect with


By providing your number, you are expressly consenting, in writing, to receive telemarketing and other messages, including calls or texts at the number you provided above. This consent is not required to purchase any good or service. Message and data rates may apply. Text STOP to cancel.