So you’re looking to move out of your home, onto (hopefully) bigger and better things. You’re probably struggling to figure out what to do with your house: do you sell your real estate and let go, or turn it into a rental property? Well, the short answer is, it depends. You have to consider your financial ability, lifestyle, and the opportunities your property has to offer. There are advantages and disadvantages to each option, it all just depends on your situation. Here are the most important things to consider:
- What will be profitable?
The first thing to determine is the profitability of each option. Are you still paying a mortgage, or is your house paid off?
If you still have a mortgage payment, will renting out your home produce monthly profit or put you at a loss? Research the going rates for comparable properties in the area or consult a real estate agent to get an idea of your home’s rental price. Then factor in all of your monthly expenses, including mortgage, insurance, HOA fees, property management, utilities, maintenance, and taxes. Be sure to leave room for vacancies as well, since it’s not a given that the property will be occupied every single month.
What would be your investment return if you sold? Look into how much you can get if you sell your home now, taking into consideration the closing costs, agent fees, and other sale expenses. If you don’t stand to make much, it’s probably worth holding on to your property, especially if it will produce a monthly profit, even if it is low.
If your house is paid off, you should still compare how much you would make renting and selling. With no mortgage, you should not be in a rush to sell your house, since it is a continuous source of income until you sell. However, the state of the housing market plays a large role in how long you should hold on to your property.
- How is the local housing market?
In addition to calculating profitability at the current moment, it’s essential to take a gander at the future. Consult one or more professionals to learn about local market trends in your neighborhood, city, and state. These trends are not 100% predictable, but depend on city growth, business development, and the national economy. If it looks like your house is starting to decline in value, it’s not a bad idea to sell early.
- Are you ready to let go?
Of course, selling your house means goodbye, forever. Consider if there is any chance you may want or need to return to your house, or if it may prove useful to friends and family, or perhaps future children. Property is a powerful asset in more ways than just financially, so deciding to give up ownership of a home is a big deal. If you don’t feel ready to let go, or you aren’t sure what the future holds, you should probably wait before selling. You can always rent until you feel ready to sell.
- Can you handle being a landlord?
On the other hand, renting out a property takes time and effort. It is highly recommended to hire a property management company, as being a landlord is at least a part time job. At Utopia, we handle everything from day to day tasks, rent collection, tenant communication, repairs, and maintenance, to showings, evictions, and marketing. Property managers also maximize your property’s profitability, making them a smart investment 99% of the time. Either way, renting a property is still a responsibility and a part of your life, so you should consider if you are ready to take that on.
- Taxes
Tax laws are an important consideration to make that can impact the profitability of a property sale. When you sell a home, you are liable for capital gains taxes that can range up to 20%. However, if you are selling your primary residence, you have the ability to exclude $250,000 of capital gains tax, or $500,000 if you are a married couple. That may be of significant value to you, however you can only claim the home as your primary residence for up to three years after you move out or start renting it out.
Similarly, if you are renting out your home, you are only taxed for net income from the rental. That means you are tax exempt from rental income that is spent on rental expenses. Additionally, you can claim a depreciation expense deduction. If your rental is producing a loss, it is possible to offset some of your income. Consult an accountant to determine your specific tax deduction opportunities.
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