I own my current home that I have lived in for 20 years free and clear. It is worth approximately $175,000 - $200,000. I plan to build a new home for approx $235,000 on a piece of land that I purchased with cash a few years back. My questions is should I build the new home using the proceeds from selling my existing home or should I rent the existing home applying the rent to the monthly mortgage payment? I also plan on putting $75,000 down toward the construction of the new home which will leave me with a 15-year mortgage of around $150,000. I could rent my existing home for approx. $750per month.

The main questions are where you live during construction and how much cash do you have. If you have enough cash to start the construction, then stay where you are. If not, you need to sell and find a place to live.

Personally, I'd sell the home.

What happens if you can't get a tenant to rent your home?

Maybe you can get one now, then they leave and you have none.

Real estate prices are declining in the US, so you should also consider that.

It depends on the amount of risk and potential reward you wish to take on.

I would opt for selling the home. If it sold for $200K, and we assumed selling costs and concessions of about 10% your net would be $180K. Assuming rent of $750/mo x 12 divided by your net equity = a gross (not net) return of only 5%. If you have never been a landlord, just one bad tenant can trash a nice home and be a nightmare. If you rented the home out for too long, you would lose your tax free gain on the sale of your residence. Appreciation on that home will be less than in the past, as the market assimilates the rapid price increases of the last few years. As to whether you should apply those funds to the mortgage on your new home, depends on the interest rate of your new mortgage, alternative higher yield investments, the chance to open a Roth IRA etc. etc. Check with your financial planner. If it turns out that you decide to throw a big chunk of money at your new $150K mortgage afer it is in place, most Conventional lenders will allow a one time principal reduction (at a cost of about $250) with a reduction in your monthly payment because of the lowered principal amount. I hope this provides some food for thought.

When considering a rental house,

Will you be doing the up keep or have to hire it done, What price can you rent it for, and how much interest would you make on that money.


Also the biggest question, if you did not own the house would you spend that much money out of your savings to buy a rental house ?