To Renovate, or not To Renovate

My fiancee and I just had the first anniversary of being in our first home. My fiancee chose the home (he bought it just before I moved here) because it was in a well-established neighborhood with good schools and custom built homes with nice trees. Good home values with slow, but steady appreciation.

The suburban dream, really.

Only problem is, we’re both 24. We don’t care about school systems and lots of space. In fact, once our roommate moves out, 2,800 sq. ft. is entirely too big for us. We want a younger, hipper part of town where people are more active and we can walk to a restaurant.

More urban, if you will.

The previous owner did a lot to update the home, but he never touched the most important part - the kitchen. And some of the other things he did, like the bathroom renovation, are ghastly. So, now here’s my question: do we move out, rent it, and rent downtown for a year, then buy downtown? Or do we renovate now, stay for an extra year, then sell?

We want to make some changes before we sell, regardless. The question is, sell now or later?

We bought this home for $135,000 (gotta love cheap homes in Texas!). If we were to rent this house, we can make it cashflow for about net $200-300 per month, so let’s say $3,000 over the year. Plus, if we were renting downtown, we figure we can knock our expenses down somewhere between $100-250/mo. or about $1,800 in a year because we are renting and our power would not be as much. So in a year, we could save around $4,800 in a year by moving and renting.

We figure we have about $10,000 to put it in to get this bad boy up to snuff, so really, I guess our break-even is somewhere around $153,000 for closing costs, etc.

Homes in the area are starting to list (and sell) for around $155,000+. I think it would be worth our while if we could get somewhere in the neighborhood of $175,000 or more for this. We want to be out within five years (for the statute of limitations for rolling capital gains), so I guess we just need to watch the prices to figure this out.

Any thoughts?