Should I Sell My House For Passive Income?

Do you ever have radical ideas about how to make more money in your life? I sure do! It seems like every single day I think of some other crazy way to make money. Often times I just write them down to come back to later (there simply aren’t enough hours in a day to try all these different ways to make more money), but I simply can’t shake this idea from my mind. I’m wondering if it might be a good idea to sell my house and invest the equity in a passive income opportunity.

My House

I bought my house as a foreclosure for $75,000 in August of 2011. I spent over a year making updates (and am actually still making updates yet today – apparently, it never ends) and in its current condition I could probably sell it for $125k. With my loan currently at $55k, this would give me $70,000 to invest in my passive income opportunity.

Passive Income

So what is this passive income idea I’m referring to? I’ve always had a soft spot for real estate, and I would love to try my hand at investing in a quad-plex. In my area, I suspect I could purchase a multi-unit complex for around $170,000. I would put half of my equity down on this property ($35k) to cover 20% of the loan, which would allow me avoid PMI payments on the mortgage. I would put the remaining $35,000 in the bank as an emergency fund on the property.

On average, a 2 bedroom, one bath unit will rent for $700 a month. With all of the units rented out, that would give me a potential income of $2,800 a month, or $33,600 a year. With a 30 year loan on this investment property, I have calculated that I would pay out approximately $700 a month, which includes insurance and property taxes. There will also be other various expenses for these units, which I expect to be about $200 extra dollars a month.

Now, where am I supposed to live?? I suppose I could always crash my parents house for a while, but I think I’m a little old for that, and they would probably rather have the house to themselves now that they are empty-nesters. Most likely, I would rent a small apartment on the outside of town for $600 a month or so.

Rental Income (700 x 4 units x 12 months) = $33,600

Mortgage Expense  ($700 x 12 months) =       -$8,400

My Apartment Rent ($600 x 12 months) =      -$7,200

Net Income Potential                         =        $18,000

Now, this is obviously a best case scenario, but what if I earn only $15,000 instead of $18k? That is still pretty awesome!

Downsides

There are a few downsides to this plan. The first is the fact that I’ll be paying rent money that I’ll feel like I’m just flushing down the toilet. I’ll be paying $600 a month that I’ll never see again. This might be tough for me to swallow. Second, Instead of only having $55k in total debt, I’ll have $135,000 that I’ll owe the bank (but I do have $35k that is in the bank for emergencies, so I guess I could consider this to be more like $100k). Either way though, I am not a big fan of debt, and I’m not sure how I would feel about increasing my debt load with this crazy scheme.

Upsides

The obvious positive is the increase in income. An extra $18,000 in fact. Secondly, my renters will not only be providing me income, but they’ll be paying for my new investment property for me. Finally, I’ll be able to begin investing now instead of two years from now (which is my current plan). By investing earlier, I will have more time to compound my earnings and increase my real estate empire.

So what do you think of this idea? Should I seriously consider it?

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24 comments to Should I Sell My House For Passive Income?

  • Sam

    I would say let it ride, unless you can’t stand the place and want to relocate.

    Interest rates are still too low to generate meaningful passive income.

    Buy and hold for as long as possible and buy some more!

    • Hi Sam. Thanks for the comment. Are you saying that demand for rentals are low right now due to the desire of the average person to buy a house with low interest rates? In other words, once the rates go up, so will what I charge for rentals? Makes sense I guess. But then I’ll be paying more in interest too.

  • How long would you plan to live in an apartment before buying your own home again? I hate the thought of rent too. Would you get a fixer-upper complex? That would be a cost to factor in (plus the time you’d put in).
    We bought our 1200 sq ft 2 br/2 bath condo + unfinished basement for $126k, put in ~$5k to redo the 1977 kitchen & bathrooms (not sure what it would be worth now), and could easily rent it for $1,200/month since we’re near a university campus. I’m hoping we’ll see some passive income from renting it out some day!
    Jessica @ Budget for Health recently posted..Budget Review: April – June 2013

    • I’m really not sure how long I would stay in an apartment. For as long as I can stand it I guess. If I can find a good deal renting, it would benefit me more to rent than to buy for sure, especially if I’m putting my additional income into investments. As for the complex, it would probably be a moderate fixer-upper. I wouldn’t want to be tearing any floors out or anything. Just update the paint and possibly a few appliances.

  • Derek, I was going to suggest living in one and renting the rest of them, but I can’t see how losing $1,200/year of passive income would be worth it.

    A couple of other things:
    1) Don’t forget about insurance that you’ll need for the place.
    2) Transaction costs of about 3%-6% which will tap into that $35k buffer.
    3) Factor in at least 1 unit not renting for at least 3 months to be on the safe side.
    4) Are utilities going to be included in the rental price or not so there may be some costs there.

    Good luck in your endeavor and choice! 🙂
    Chris recently posted..Bankruptcy filing and Detroit woes

    • Hi Chris. I thought about living in one of the rentals, but then there would be that loss of income, plus I don’t think I would want to live among my renters. As for the insurance, I did factor that into the $700 a month. For the transaction costs, are you talking about the business account? I would be shocked if the percentages were that high. Good point about one unit not renting for at least 3 months – that’s really where my $15k (instead of $18k) came from, because obviously they’re not all going to rent out 100% of the time. Thanks for the comment Chris! We’ll see if I’m crazy enough to actually do it!

  • Derek- That’s a great idea! I feel the same about the opportunity for passive income in the form of real estate. Maybe you could have up until you can have enough to buy a house outright THEN do this. That way you’re not renting another place. Just a thought. I plan on waiting until my condo is paid off but that will be 10 years unless I really start attacking it!
    MonicaOnMoney recently posted..How To Be Frugal When You’re Not

    • That was the original plan (to wait till I pay off my house), but I have to say, I’m getting a little antsy. At the earliest, I will have my house paid off by the end of next year, and that’s a long time to wait! 😉

  • Derek,
    I have to go with Chris as far as living in one and renting out the other 3. The difference of $1200 between the rent you pay out and rent received would likely be negated by several factors.

    1. As an owner-occupier, the property is considered by most banks as well as governmental authorities, to be a personal residence. Interest rate on a loan would be cheaper and thus may very well make up most of the difference.
    2. Capital gains would be tax free provided you live in the house for the required amount of time (double check with a tax attorney).
    3. Costs will likely be less with the tenants knowing that the landlord is always watching them so noise and destructive behavior will be down.
    4. Finally, your rent is going into your pocket and not some other landlord’s. Your unit will never be vacant until you sell.

    I would live in one and rent the other 3.
    JT recently posted..Delay Your Gratification and Grow Rich

    • I like your idea, Derek, I do. At first I was going to side with renting your own apartment and renting out the four units for income. However, upon reading JT’s thoughts, it occurs to me that all of his points are relevant but #3 might be the most important in the long run.

      When I was renting (not that I’m a bad renter, mind you), anytime I saw that the landlord lived on the property, my first instinct was, “Oh boy. I can’t make any noise (again, not that I have big keg parties or anything) and they’ll be constantly watching my every move…” I’m sure I’m not alone in that feeling.

      That being said…you will attract a certain demographic of renters if you do occupy the premises. And I think that would be a benefit for you, over the long-term. You’re not likely to have people who disrespect your property or cause havoc, etc. If you’re there, then you’re going to know first (and in time to defuse the situation) if, say, there’s a domestic dispute or there’s a party getting out of hand, etc. — if it even happens. And, the money you save by nipping that in the bud (either because of the pool of renters you attract or because you’re simply present)…is going to be significant, in repairs, in potential fines, in eviction/legal issues, in having an empty unit, etc. Just something to consider.
      Kristin @ Keenly Kristin recently posted..How Easy Is It To Get Hacked?

      • JT does make a good point, and I very much appreciate his advice! Thanks for your tips too. It definitely makes sense to live next door. I’ll have to take that into consideration when I find this quadplex. 🙂

    • Great points JT. It does make sense to live next door, but I would think that it would be a little strange. I don’t know how I would feel about that. Great other points though. I will seriously consider it if I find the perfect quadplex. 😉

  • Derek, Really impressive post the way you nailed down to make $18K per year by investing $35K is pretty good. Though debt of $135K seems pretty huge to me. Nevertheless I would bet on it keeping in mind the emergency fund. Sounds like a good plan to realize. Good luck
    Rita P @ Digital Spikes recently posted..Debt consolidation and facts to know before debt counseling

    • Thanks Rita! It does seem like a good idea, and it could really propel me into real estate investing. We’ll have to see if I can actually pull the trigger on something like this. It’s a big decision!

  • Kim@Eyesonthedollar

    I would not sell my house to rent an apartment. It would suck to be a tenant after owning. I like the idea of renting one if the multiplex units. I like the idea of renting your current house while you do that. You could either save up the down payment or get a HELOC on your current home to use as a down payment or for emergencies. It would mean more debt but I think that’s how serious real estate investors do it.

    • Yeah, that would be the hardest part! But, like JT has mentioned, it would be a good idea to rent one of my own units. So are you suggesting that I take on the debt of my quadplex and keep the debt load on my house while I rent that out too??

  • Tim

    You could come live in my basement for minimal rent ($100/month) if you can handle all the crying babies and screaming toddler. You could even live for free if you wanted to help finish the rest of the basement…

  • As a former landlord, I love income property! Just recognize the income generated is not guaranteed and you do have to work for it. It is mostly front end work and then just repairs and maintenance.
    krantcents recently posted..College Confessions: How College Students Save

    • I think I would enjoy it though. I loved doing the work on my own house, and once school is over in April, I will have the time in the evenings to do whatever is necessary. It actually sounds like fun!

  • Casey

    Hey!

    There are other downsides to renting out property that you have to consider. Maintenance, is one factor, plus not everyone itreats their home with respect, and one bad tenant can cost a lot of money. Yes you have a security deposit, but sometimes the damages surpass these and taking them to court costs time, money, and if they no longer have an income you may never see the money they owe.

    Most people aren’t that bad, but it happens… Frequently.

    The market is going up! Yay! We just bought our first home in April and our home is already up in value in just a few months. That being said, if you wait awhile the value may increase more. There is a risk however that it he market may crash and your house could decrease in value, you never know.

    Rent is terrible, and I understand your concern. When my husband and I bought our first home, we calculated all the rent we had paid since we had lived together (11-2004) turns out we paid 57,000 in rent, money just gone.

    It depends on your house also, are you happy there? You could pay your house and live mortgage free, then save money and invest. Or you could sell, buy a multi complex home, and live in one of them.

    Either way just go with your gut, and what you feel you would be happy with.

    • I think I just need to be careful not to invest in low income property, as that seems like the most likely place for someone to damage my property. I think you are right that I should probably just wait a bit and stay in my house that I have worked so hard to mold to my tastes. Once I’m living mortgage free, I’ll have plenty of money to invest. Good points here too. Thanks!

  • It’s always a tough decision, but one that could be worthwhile. i always think of the saying,m nothing ventured nothing gained, and it’s the truth. If you’re not willing to take some kind of a risk it’s going to be very hard to get ahead and really gain. However, you also have to correctly weight the downsides. For example, when you consider rental properties you have to calculate in the fact that you will not have a 100% rental rate.

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