Scott Burns: Sell the second house or rent it out?

Q: My husband and I moved to Austin, Texas, about five years ago. Tom is 65 and I am 63.

Tom is a marketing-research executive who was laid off in February 2009. In January, he and a colleague started their own consulting firm. We expect this company to be successful.

We used up all our savings to live last year. Our income has been unemployment, my Social Security, which I took at age 62, and rental income from a property we own in Tucson, Ariz.

There is a home equity line of credit (HELOC) on the house in Tucson. We have been drawing on it to supplement income.

We own the house in Tucson outright. We paid $350,000 in August 2004. We moved here a year later and kept the house as a rental (to avoid capital gains if we sold then).

We got the HELOC before we left Tucson, and borrowed $40,000 to make the move here. We have borrowed $50,000 more since then.

With the recession, the value of the home lost whatever appreciation it had. If we sold it now we would probably get $375,000 tops.

After paying off the HELOC we might net $245,000. The tenants will be leaving in the next couple of months. We bought our home here in February 2008 for $250,000 ($50,000 down). We cannot sell this property and buy anything else until Tom has two years of verified income.

Our only retirement funds right now would be Social Security, and we will start receiving an annuity in 2015 that pays a guaranteed 7 percent (about $800 a month). The house in Tucson will provide other funds for income after retirement.

My main question is, do we hold on to the house in Tucson as a rental property? Or do we sell and invest the proceeds in a way that would be safe and profitable?

A: A small consulting business needs cash because it needs to support accounts receivable — the inevitable 30- to 60-day delay between billing and payment for services. So you and your husband can expect to need liquid assets as you build this business and pay your personal expenses.

You also don't want to be managing a rental property from a distance.

While you aren't exposed to the danger of needing to make a mortgage payment on the property, the operating costs on a large house aren't minor, even if no one is living there.

So I suggest selling the house in Tucson and getting on with your life. If you netted $245,000 from the sale, you could use some of the cash to fund the business, and some to buy a smaller house.

If you sell the house in Austin, you might be able to buy a smaller, bank-mortgaged house if you put up a large down payment. And giving up on a bank mortgage doesn't mean giving up on getting a home mortgage.

Owner financing is a real alternative. Many sellers with other assets might be very interested in providing a mortgage at 5 percent, now that their other savings are earning far less.

Questions: scott@scottburns.com