Are you thinking about purchasing a new home? Whether you are expanding, downsizing, or considering a move for a myriad of other reasons, you may be wondering what you should do with your current home if you decide to purchase another one. There are many things to consider when faced with this dilemma. Additionally, as with most big life decisions, there are no easy answers. You should weigh your options carefully. Here we will outline some things you may want to consider as you attempt to examine and consider your potential choices.
Option 1: Selling
The very first thing to consider is the equity in your home. Are you going to need to tap into this equity to buy your next home? If you are upgrading to a larger home, you may very well find you need the money from the sale of your old home to use as a down payment for the next one. If this is the case, it may make sense for you to sell your existing home rather than renting it. If you can afford the down payment of your new home without selling your current one, then renting out your old home could make sense. Note that mortgage companies typically ask for 20% down, based on the home’s selling price. Moreover, if you do not owe money on your current home, selling it could give you a substantial amount of cash to roll into the purchase of your new home, reducing your monthly payments. You may also find selling your current home pads your pocketbook with additional money. Funds that can be used for furnishings, updates to your soon-to-be home, moving expenses, or earmarked for other needs and wants.
Another thing one should consider before choosing to sell their house rather than renting it is the current housing market in your area. If the current market is slow, it may make sense to hold off on selling your home until home sales and pricing shifts to more favorable conditions. But, if it is a seller’s market, you may want to choose to make a sale while you can maximize your gains. Sometimes homes that have been utilized as rental properties need more work to prepare them for sale later, so that is something that must be considered when weighing your options.
Option 2: Renting
When considering turning your home into a revenue stream option, you should first consider the potential profitability of renting your home. Add up all your expenses, such as your mortgage with interest, taxes, insurance, homeowners association fees, management fees, vacancies, commission, advertising, and any miscellaneous items such as credit or background checks on tenants. Then subtract that amount from your potential rental income, less any tax breaks for which you may qualify. The bottom line might be the answer.
Next, you should consider if being a landlord is your thing. Would you find answering tenant calls and keeping up with payments and maintenance issues to be stressful? And if so, would you be willing to hire a property manager to help manage your investment? This should be your primary concern after determining the property’s profitability.
In addition, you should determine if you may potentially want to return to your home someday. If you are relocating for work, having somewhere to come back to might provide real security for you and your family, making renting a good option. At the very least, it keeps your options open in the future, especially if that new job doesn’t work out quite as you expect.
Finally, you should think about your dreams and aspirations. Is being a landlord, or owning a rental property, something you’ve always wanted to do? If so, it might be a good option to ponder. Odds are, you’ll be more likely to succeed if it’s something you have long considered trying.
Both options can be lucrative. And being able to walk away after the sale can be quite a relief. Selling now rather than later might help you escape a market with decreasing property values. It might also help you to take advantage of certain tax laws. For example, you may be able to exclude the sale from capital gains tax, up to $250,000, or $500,000 depending on filing status. Of course, there are some tax benefits to owning a rental property too. As always, ask a tax accountant for specific information about different tax situations. And keep in mind, a rental property could be a long-term income stream while you build equity in the property.
Regardless of which option you’re leaning toward, it is always a good idea to consult local experts because there are even more factors to consider that we didn’t have space for in this blog. But don’t worry– the experts at All County Heartland Property Management are happy to walk you through the process. Give us a call to get the best advice before deciding. You will be glad you did!