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Should You Sell or Rent Your Home?

Should You Sell or Rent Your Home?

According to Brandon Turner with Forbes.com, there are five factors to consider when deciding whether to sell or rent out your house.

1. Will This Property Cash Flow?

The first thing to look at when deciding whether to rent out your house or sell it is to look at the math. I know, math was likely not your favorite subject in school, but luckily it doesn’t require anything more than a fifth-grade mind to understand real estate investment math.

First, ask yourself: Will this property produce positive cash flow?

In other words, when this property is rented out, and I deduct all of the expenses associated with the property (mortgage, taxes, insurance, utilities, management, vacancy, repairs, HOAs, etc.), will the property produce a monthly profit or a loss? If you are looking at a loss, consider selling.

2. What About My Return on Investment?

Next, consider how much you would profit if you sold the property today, assuming you’d lose around 10 percent to agent fees, closing costs, and other sales expenses. If you would make little or nothing, it may be advantageous to hold onto the property, waiting for the market to improve over time. This is especially true if the property will provide positive cash flow in the meantime.

If you would make a profit by selling, consider your return on investment. For example, if you could make $100,000 in profit by selling your house and would only achieve $1,000 per year in cash flow, that’s a 1% return on investment. I would much rather take that $100,000 profit and invest it in something else that could give me a higher return.

3. Consider the Taxes

The United States Government does a lot of things I don’t agree with, but one thing they do that I absolutely love is the potential exclusion from paying capital gains tax on the sale of your primary residence.

Normally, if you sell real estate and make a profit, you’ll have to pay capital gains tax on the sale, which can be up to 20% depending on your tax bracket. However, the IRS allows homeowners (sorry, investors!) to exclude the sale of up to $250,000 (or $500,000 if married filing jointly) of a primary residence if you lived in the home for at least two of the last five years.

Let’s look at another example where this might come in handy. Bob and Marge bought their home in 1990 for $150,000. Today, they can sell the property for $500,000, clearing $300,000 after the sales expenses. If they keep the home as a rental for, let’s say, five years and then sell, they’ll potentially owe $60,000 in taxes. But if they sell now, they can potentially keep that $300,000 in profit without paying any capital gains tax.

Of course, by keeping the property, there is always the likelihood that the property will appreciate in value higher than what the tax would have been, but there are no guarantees when it comes to real estate values.

4. Does the Future Look Bright?

Another important factor to consider when deciding whether to rent or sell your house would be to put on your crystal ball and gaze into the future. What do the next five, ten, twenty years look like for your home’s location? Are things improving? Will your neighborhood decline in value? If the future looks dark, consider selling now to avoid problems later on.

Of course, we don’t have crystal balls, but trying to gauge where the market’s going is not impossible. Take a look at the growth of your city — is it moving away from you or towards you? Are businesses moving into your area? Are homes being fixed up or left to rot? You can’t know with 100 percent certainty, but by analyzing the current trends in your market, you can make a more informed decision on whether to hold on or sell now.

5. Can You Handle Tenants?

Finally, ask yourself: Are you willing to be a landlord? Because honestly, many people are simply not cut out for the life. While some tenants are a dream to manage, others require significant time and patience to deal with. Last week I had to deal with the eviction of a “garbage hoarder.” It wasn’t pretty.

Luckily, landlording is a skill that can be learned and improved upon. All new landlords make mistakes, but if you are the kind of person who is willing to learn, you’ll do fine.

Also, just because you own rental properties does not mean you have to be the person dealing with the tenants. Professional property management companies, like 2415 Property Solutions, exist in nearly every city, and if you can find a great manager, they can cut the stress of rental property ownership down to a minimum.

Source: https://www.forbes.com/sites/brandonturner/2016/10/04/should-you-sell-your-house-or-rent-it-out/#50a766c85a2b

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