You own your home but you’re ready to make a move. Most people in this position start thinking about selling their existing home, but have you considered renting it out? Renting can be a great way to bring in extra income and maintain the equity in the home you have now, rather than starting over again from zero. Is this a feasible option for you? While it may not be a walk down easy street, it is possible to not just make the situation work, but to make it seriously profitable. Keeping your old home as a rental can help you build wealth both through equity and a monthly cash income. Can you handle owning two homes (and likely paying two mortgages) at one time?
First, think about how much you would profit if you were to sell the house. Consider how much you paid, how much you have left on the mortgage, what housing prices are doing in your area, and what similar houses have sold for recently. Also, bear in mind that you will lose around 10% of your total profit to fees and costs. If you could just break even, or only come out a tiny bit ahead, keeping the property as a rental could be beneficial for you in the long term.
Next, compare how much you pay in mortgage each month with how much you could reasonably charge for rent. If the yearly total profit from renting is negligible, selling may be the better option. If you can make even $25,000 in profit from a sale but only $1,200 per year in rental profits, it’s probably wiser to sell and invest that money in something that can give you a demonstrably higher return.
Another thing to think about is taxes. No one likes taxes, but in some cases, they work out in your favor! The IRS will exclude you from capital gains tax on up to $250,000 for an individual ($500,000 for a married couple who file jointly) on a home that has been your primary residence for at least two of the last five years.
If you keep a property as a rental and sell it seven years down the road, you will end up having to pay capital gains taxes on your profit. If you sell it now, you will likely avoid having to pay them. There is an exception to every rule, and tax laws are not always straightforward, so please consult your tax professional before taking any action based on this advice.
No one has a crystal ball, but it’s worth taking the time to try to predict the future. Is the city growing towards your home, or away from it? Are there a lot of homes being built or renovated, or are older homes falling into disrepair? Are there many businesses under construction or opening in the nearest commercial zone, or are local stores and restaurants closing down? Of course anything can happen, but it’s possible to make an educated guess. If the future looks bright, hanging onto your house as a rental and selling in the future may be a more lucrative choice.
Lastly, are you willing to be a landlord, or can you afford to hire a property manager? Managing your own rental property can be very difficult, not all renters are easy to handle and a touchy situation, such as evicting someone, when you have no experience can be challenging. That said, a skilled property manager can do all the heavy lifting for you, from finding tenants, managing repairs, and doing the post-move deep cleaning without causing you a moment of stress. They do, however, cost you a percentage of the rent and sometimes add a service charge to maintenance work arranged by them as well.
There are definitely pros and cons to both options, but the best thing to do is talk to a real estate professional and/or a mortgage banker to find out which one is right for you at this time. Whether you’re selling your home, renting it out or buying a new one, you’ll need an experienced title company to finalize your transactions. Setco would be proud to provide you with top rated title and closing services, custom-tailored to meet the needs of your specific situation.
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