So you’re moving, huh? The obvious decision would be to sell your home. But, what if renting was more profitable? Would you consider hanging on to your property for a couple more years? Here are the main points to consider before making this decision:
1. A Positive or Negative Cash Flow
First, consider the Return On Investment if you sold your home today. How’s the market in your area? Do you stand to make a large enough profit after commissions, expenses, etc. to justify the sale? After making this initial decision, consider the following:
Capital Gain Tax (Sell)
When a homeowner sells their property, they owe taxes on their gain or profit. Luckily, the IRS allows for an exemption from this tax if you fall within certain criteria.
you net $250,000 or less ($500,000 for joint filings) from the sale of your home
you have lived in the home as your primary residence for two out of the last five years
…you are exempt from paying the 20% tax imposed on your profit. That’s a total tax of $100,00 dollars on a property that sells for $500,000!
Let’s say you decide to hang on to your property and rent it instead for 5 years. At this point, since you haven’t been living in the home as your primary residence, you will not be exempt from the capital gain tax.
The promise of potential income from the renting of your home can blind you to the expenses you’ll be incurring during the process. The two biggest profit killers will be your mortgage and your taxes.
How much equity do you currently have in your home? Are you still paying your mortgage? A high monthly payment could diminish your return because the majority of what you’re charging in rent will go towards covering your mortgage.
What about your taxes? Consider you will no longer be able to claim a homestead exemption because you no longer live in the home as your primary residence. This is another potential profit killer.
Other Potential Expenses
Commission (if an agent is listing your property)
Miscellaneous (legal fees etc.)
2. The Health of Your Neighborhood
The housing market experiences rises and falls that can sometimes be anticipated. Consider this and the health of your neighborhood to look into the future.
Are you centrally located? Is your local government improving a park or other aspect of your neighborhood that will add value to your home? Are your neighbors investing in their homes? If so, consider hanging on to your property to allow it to increase in value while you simultaneously rent it out.
3. The Pros and Cons of Being a Landlord
Depending on your disposition, you’ll either enjoy being a landlord or completely despise it. Tenants come in two shades: Easy and Painfully Difficult. If you’re fortunate enough to find wonderful, qualified tenants, you’ll likely not mind the responsibility of being a landlord.
Also, consider that no tenant, easy or difficult, will likely care for your home in the same way you have. The potential for damage to the inside of your home is very real. If you’d rather not leave it to chance, you can hire a property management company that will handle every interaction with your tenants going forward for a small fee (typically 10% of the monthly rent). They’ll ensure your tenant is qualified before allowing them to sign the lease.
Landlords looking to mitigate their operating costs can take advantage of many deductions the IRS allows on your taxes. These deductions can ease the cost of hiring a property management company or help offset the cost of up-keeping the property. Landlordly, a website aimed at informing landlords, has a full list of deductions here.
Rent or Sell?
Like any situation, making this decision is based on a combination of factors. Maybe you’re in a situation where you could actually benefit from having some extra cash in your pocket. Or, maybe you’d like to place a higher down payment on your next home. In these cases, it may be prudent to consider selling instead of renting.
What if you’re moving elsewhere but still want to keep your home in your possession incase the move is temporary? You may want the option of returning home after a few years. In this case, it makes more sense to rent out your home. Consider all the contributing factors and you’ll be sure you’re making a decision that best fits your current needs.