What To Do With Your Starter House When You Purchase Your Dream Home

Whether you’re moving to a new town or simply upgrading to a different neighborhood in Seattle, purchasing your second (or third) home brings a host of financial decisions to the forefront. One of the most significant questions is: What should you do with your starter house?

This decision can feel like a crossroads for many high-earning professionals (especially those in their 40s). Do you keep your current home as an investment property or sell it to free up equity for your dream home? Each path has its own financial implications — and the right choice depends on your unique goals, circumstances, and risk tolerance. 

Let’s explore the options and considerations.

Option 1: Sell Your Starter Home

When you’re wondering what to do with your first home, putting it up for sale might be the first thing that comes to mind. A big reason is that selling your current home can simplify your financial picture when purchasing a new one. Doing so frees up equity for a larger down payment on your dream home and reduces the risk of carrying multiple mortgages. (Not to mention, you won’t have to deal with maintenance or tenants).

However, it’s essential to factor in the Seattle housing market before listing your home. Is now the right time to sell? Or, would renting it out with the assistance of a property management company be worth it in the long run? For scenarios like these, a financial advisor can help you weigh the costs of selling (like closing fees and potential capital gains* taxes) against the benefits of reinvesting your equity.

When selling might make sense:

• You want to reduce debt obligations
• Your starter home has appreciated significantly in value
• You’re not interested in being a landlord

*As a reminder, for a married couple, there is a capital gains exclusion of $500,000. What that means is a primary residence can be sold with up to $500,000 in capital gains before getting taxed. For example, homeowners who have held their homes for ~10 years could have gains that exceed this exclusion amount.

Option 2: Rent Out Your Starter Home

Keeping your starter home as a rental property can diversify your income and build long-term wealth. Seattle’s strong rental market makes this an attractive option for high-earning households. However, becoming a landlord comes with its own set of responsibilities and considerations.

Renting out your old home can be a smart move if you see long-term value in holding onto the property. If you’re comfortable handling landlord responsibilities (or paying someone else to do so) — such as finding tenants, managing maintenance, and navigating legal requirements — renting could provide a steady income stream. It can also help offset the costs of owning two properties, making the transition to your new home more financially manageable.

However, there are risks to consider. Owning both your primary residence and a rental in Seattle means your financial future is heavily tied to a single real estate market, reducing diversification. Additionally, real estate is an illiquid asset — if you suddenly need cash, selling a property can take time, making it harder to access funds quickly. Understanding these challenges can help you decide if renting is the right choice for your situation.

Key factors about renting out your starter house to keep in mind:

• Seattle-specific landlord rules: From tenant rights to rent control regulations, Seattle has stringent rules for landlords. These laws can impact everything from security deposit limits to eviction procedures.
• Property management options: Decide if you’ll manage the property yourself or hire a manager. While a manager can save you time, their fees (typically 8–12% of rental income) will reduce your profits.
• Tax benefits: Rental properties come with potential tax perks. You can deduct mortgage interest, property taxes, maintenance costs, and even depreciation. Depreciation allows you to recover the cost of the home over 27.5 years, potentially lowering your taxable income.

Keep the 5-year rule in mind when deciding whether or not to keep a rental. Basically, if you have lived in the house for 2 out of the last 5 years, you can take advantage of the $500K capital gains exclusion for selling a primary home. If you rent it out for more than 3 years, you lose that efficiency. Our team usually does a check-in at 2–2.5 years into renting with clients to ensure they are in it for the long haul as a landlord.

Option 3: Keep the House for Family Use

Some families choose to keep their starter home as a living space for elderly parents or adult children. While this can be a meaningful way to support your loved ones, it’s essential to weigh the financial trade-offs.

Pros:

• Provides a safety net for aging parents or children pursuing higher education
• Keeps the property in the family
• Don’t have to deal with renters (strangers)

Cons:

• Missed rental income opportunities
• You’ll still be responsible for property taxes, maintenance, and upkeep

For some of our Seattle clients, navigating what to do regarding aging parents means considering options for relocating them to be closer. Our team at Northern Lights Advisors is here to walk you through all the scenarios to help you find the best solution for your financial and emotional future and that of your loved ones. 

Pro tip: Make sure you discuss with your financial professional and/or accountant to ensure that you are charging either market rent or reporting below market rent correctly. 

How Much Should You Spend on Your Next Home?

One perk of a tech salary is that chances are you can probably afford the house you want. However, keep in mind that the bigger the home, the larger the associated costs. Oh, and if you’re keeping your starter home, plan on ongoing expenses for that house, too. (If you are trying to do some math, there are a few fun calculators out there. We like the one from Nerd Wallet since it’s a little more agnostic, but most lenders do have their own version).

Before committing to your dream home, account for the ongoing costs of owning two properties — assuming you are keeping the first one. Maintenance, property taxes, utilities, and insurance for both homes can add up quickly. A financial advisor can help you build a realistic budget and determine how much house you can truly afford without overextending yourself.

How the Financial Team at Northern Lights Advisors Can Help

Navigating the decision to sell, rent, or repurpose your starter home requires careful financial planning. When you work with a financial advisor, you gain a partner to help you make informed, strategic decisions tailored to your life goals. 

At Northern Lights Advisors, we can help you:

• Analyze the tax implications of each option
• Evaluate how owning two homes fits into your overall investment strategy
• Plan for long-term liquidity and diversification
• Determine the most cost-effective way to achieve your housing goals.

It can be well worth your time to walk through various scenarios with a trusted advisor (who may or may not have encountered this one in their own, personal life). If you’d like personalized guidance on managing your real estate decisions, reach out today. 

Northern Lights Advisors is a fiduciary, fee-only Registered Investment Advisor (RIA) firm based in Seattle, Washington. The information in this article is not intended as tax, accounting, or legal advice. Read the full disclosure here.