When to Sell and When to Rent?
A question we get a lot is “Should we sell this home, or just rent it out?” That’s such a loaded question, and one that has a different answer for almost every client. But if you have a home that you’re considering either selling or renting, and don’t know what to do, take a look at this blog, and maybe we can help answer some of your questions. We may also be able to answer some questions you didn’t even know you had!
What are your plans?
Are we talking about your current residence, or maybe an investment property? Are you staying locally, or moving out of state? What is your tax situation? Is there a mortgage on the home? Do you want the passive income, or do you need the lump sum of equity? What else could you do with the funds from selling? These are all just questions that we’ll want to address and ask. I’ll jump into a few scenarios here though, but a good professional will try to understand the full situation to help you analyze your options. At the end of the day, it’s up to you!
Do you need the funds?
Regardless of whether it’s a primary residence or an investment, do you NEED the funds in order to purchase something else, be it a new home for you and your family, or another investment property? This is the simplest question to ask, and answer. If you need the funds for a down payment, or to use the cash to complete a cash purchase, then the answer is simple, “YES”, you need to sell. However, there are other questions as well. Maybe you don’t need the funds to close, as you have other funds. BUT, will the lender agree you can own two properties? Can you qualify for the new loan, still having a current loan on your books. A quick conversation with a lender can provide you an answer, and it could be a few things. They may tell you that you need to sell, or that you can hold both loans. They could ALSO work on treating your home like an income producing property if you intend to rent it out. Long story short, is there are a few options, but making sure you are discussing this with a lender, if you plan on getting a loan, is a great and important first step. If you’re paying cash, and don’t need a loan, then it really changes, and is entirely up to your feelings.
Are there Tax Implications if you sell?
Taxes happen. But knowing the tax situation BEFORE you sell is important and could save you heartache. If you’ve made a ton of equity on a primary residence, and you’ve owned the home just shy of 2 years, you should wait to sell until you’ve owned the home as a primary residence for 2 years. We’ve discussed this before on videos and other blogs, but it’s a great tax incentive. Ask me questions if you don’t know what I’m referring to.
If it’s an investment property, taxes are a very important question to discuss not just with a Real Estate Professional, but even more so with a tax advisor or cpa. They can offer insight on your specific issues. However, if you have an investment property, and want to purchase another one with the proceeds, there are vehicles like a 1031 Tax Deferred Exchange, to alleviate and push the tax payments down the road. Never forget about taxes when it comes time to discussing selling vs. holding.
Do you want to be a Landlord?
Even if you can qualify or decide to hold onto a home… do you want to? Do you want to go from a homeowner to a landlord? Do you want to deal with someone potentially damaging your home, and even more worrisome, damaging it beyond their security deposit? Sure, carpet is easy to repair, but what if they just absolute wreck a home. You’re now getting legal counsel involved, and know one likes that (sorry lawyer friends).
Who is going to manage the property?
If you decide to go the Rental route, are you going to manage the property yourself, or are you going to hire a Property Manager. Pros and cons of each. You can save money by managing it yourself, but then you’re dealing with headaches and tenant calls. You’re trying to collect the rents, and deal with potential eviction notices. When you hire a property manager, you can offload those responsibilities, but at a cost. And speaking of costs…
Costs of Renting
If you’re going to rent out your property, and you are going to use a property manager, consider the following.
Property Managers generally charge between 7-10% of the monthly rent. Is that worth the peace of mind? Do you have enough cash flow to make sure it works for you. If you have a loan on the home, it’s always a great thought to have someone ‘pay your mortgage’, but keep in mind the following monthly costs:
Mortgage (Principal and Interest)
Taxes
Insurance
HOA
Sewer and Trash Services
If you estimate your rental income, and remove the above, are you positive in cash flow? What about if you add 7-10% of your rental amount to a property manager? Are you still positive with cash flow? Is the number worth it for you?
Costs of Selling
We know the costs of selling, and they are different. You’re going to pay commissions and closing costs. But you walk away from the property. And if you bought in Las Vegas, Henderson, North Las Vegas, or really, ANYWHERE in the United States between 2009 and 2015, you’ve made some great equity in the home.
So when you’re thinking about your NEXT purchase, and you currently own something, there are a lot of options out there for you, and the right answer is not a cookie-cutter answer. Speak with a professional. Lay out your entire vision and your entire holdings, and have these discussions BEFORE you decide your fate. Renting the property out, holding onto the equity in the home, and watching it balloon is a great option, but comes with a lot of unknowns. Liquidating could cost you more in terms of dollars, but you can move on to your next important decision in your life. Our goal is always to provide the right opinion to help our clients decide what they want to do with their homes, and their investments.