Should I Sell My House Or Rent It?Are you worried you will make the wrong financial move? When it comes to deciding whether you should rent or sell your house, here is how to make the right move.
Suppose you have recently purchased a new home, selling your old home seems like the smartest financial decision. Although, in some cases, turning it into a rental property may be the best option.
What it really comes down to is your financial situation when making the decision of “selling vs. renting” however there are some more factors to consider, including:
- Local Market Conditions For Rental Homes. (Every Market Is A Rental Market)
- Your Future Housing Plans
- Are You Cut Out To Be A Landlord?
- State And Federal Income Taxes.
- Current Home Values. (Pay Close Attention To Market Conditions)
So, You Believe Home Prices Are On The Rise?
Hypothetically, if your rental income does not cover all your expenses (mortgage, property taxes, repairs, maintenance, and tenant rollover), you will make up that loss because of appreciation as the value of your home grows over time before you sell it.
For instance, you have a home that is worth $100,000 today and your expenses are $1,000 a year more than the rent you collect. Over 10 years, you will “lose” $10,000 ($1,000 x 10 years), however, you must account for appreciation. Which means when the house sells conservatively it will sell for $110,000 on the low end and upwards of $200,000 on the high end, so you will make money despite the $10,000 loss in expenses over 10 years. More so, your annual losses are tax deductible, saving you more money on the tax bill.
Do You Plan To Buy A New House?
How permanent is your move? If you are simply taking a prolonged vacation and not a permanent relocation it may be more affordable to rent your house while away. Doing so will save you a sales commission from a realtor to sell your current home and purchase another.
Temporary Job Relocation And Need To Sell Or Rent?
Suppose you have recently bought a home and have lived in it for the past two years when your job suddenly requires temporary relocation for the next 3 years. This is an ideal scenario to rent your home out for those next 3 years and then sell on the 5th year. The reasoning behind this is because federal law says if the owner lives in a home for 2 of the 5 years of owning it and sells on the 5th year they will not pay any capital gains tax of 30% on the resale value.
Logically it would make sense to rent the home for the next 3 years to pay the mortgage and generate rental income. Then on the 5th year the option to sell makes the most logical sense as the home most likely has gained some appreciation and the owner can avoid paying capital gains tax on their equity.
Will The Rent Cover Your Mortgage And Maintenance?
Renting your home can turn into a passive income machine that will expand on your wealth over time. Each month your tenant is paying down the mortgage, possibly giving you a little surplus, and equity is rising all at no cost to you. Not only will the cash flow go up over time but the equity, rents, and property value will rise over time as well. Any income generated from the rental is tax-free if you have enough expenses to offset it (like mortgage interest and repairs costs.)
Keep more of your income generated from a job when you depreciate the liability (as the government considers it) on your tax return. When the mortgage is paid in full in 30 years or less you have the option to sell the home and reap the benefits of massive equity and appreciation, we are talking retirement money. On the other hand, continue renting it for 100% positive cash flow and generate passive income on a monthly basis.
How Tax Deductions Work
As I was saying when renting you have can depreciate the home on your taxes as a liability, here is how it works. Begin with, dividing the purchase price, plus the cost of major improvements, minus the land value, by 27.5 the number of years Federal Tax Laws state a home must be depreciated to arrive at your annual depreciation.
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What Condition Is The Home In?
When you rent the home you do not have to make improvements like you would when selling a house, a renter knows the home will not be in spotless condition.
Save money on improvements renting the house and allow your tenants to make improvements as they wish.
Sell The Home And Roll The Profit Over Into A Larger Home
If you have little ones on the way and need a larger home then sell your current house and use the equity as a down payment on a larger one.
If you have some money saved and do not need all the equity from selling your current house, then take out a home equity loan or refinance into an investor loan. Put the proceeds from the loan to use as a down payment and still keep your smaller house as a rental property.
Do You Fear Tenant Damage And Repairs?
When someone rents your home and lives it in there will be wall scuffs, burn marks, and overgrown landscaping when they move out. If you are afraid of tenants from hell than sell your house to someone you can trust.
Landlords have to maintain the house and are responsible for paying the plumbers bill. If you are afraid or simply unwilling to get your hands dirty here and there to make some repair, being a landlord is not for you. Many of these pestering headaches can be avoided when hiring a property manager but as we know they will take 10% of the rent or more.
How Much Can My House Rent For?
The amount of rent you charge tenants should be a percentage of your home’s market value, for example, many landlords follow the 1% rule so for a $100,000 home they charge $1,000 per month for rent. On average, the market rent landlords charge fall between 8% and 1.3% of the home’s value.
Do You Have To Live In Your House Before Renting It Out?
Traditionally, if the home was financed through a bank or financial institution the homeowner must live in the premises for at least 1 year. Failure to doing so may cause legal charges of fraudulent nature to be filed against the owner. In rare cases, the owner may be able to rent the home before living in it make certain to check with your lender before doing so.
How Do You Calculate The Value Of A Rental Property?
To determine if a potential rental property is a good investment the investor must run their numbers thoroughly, honestly, and accurately. Remember, keep emotions out of the deal and make your offer strictly based on the numbers.
The best way to determine if a rental property is a good investment is to base your numbers off the positive monthly cash flow the property will generate today. To get this number you must factor in the purchase price, repairs, taxes, insurance, outgoing payment, and the outgoing interest payment. Add the repairs to the purchase price and divide the outgoing payment/interest, with the taxes, and insurance included in the amortization period of the loan. Next, take that number and divide it by 12 to get the monthly payment. If the monthly outgoing payment minus the market rent is a positive number high enough to set aside some for repairs while paying down the mortgage then pull the trigger.