If you’ve made the call to move—whether you’re upgrading, downsizing or simply looking for a change—you need to do something with your previous home. But what do you do? Sell it? Rent it as an income property? Keep it as a second home? In this article, I’m going to try to give you answers to some common questions that may come up when it’s time to move.
- I’m planning to move to a different area. Should I sell my home or rent it?
- Generally speaking, I recommend you sell unless doing so would cause you to take a significant loss that could be mitigated by holding the property for a period of time or you want to be a landlord and own a home in an area where you do not live. Real estate is a great investment; however, there are other ways to own real estate that alleviate you of the responsibility of day-to-day management.
- What are some unique challenges that can accompany renting vs. selling a property?
- Being a landlord is not for everyone. There are various challenges, including advertising for tenants, handling leases and deposits (In some states interest must be paid on a rental deposit) and the big one, especially if you live far from the property; maintenance. It is advisable to hire a property management firm if the owner does not want to handle these responsibilities; however, it comes at a cost. Another potential negative to renting your property; the tenants are unlikely to treat your former home with the same care you would.
- Why would renting be advantageous?
- If you own a property in an area with significant appreciation, renting your property can generate a significant gain long-term. And even in areas where appreciation isn’t significant, if you can generate enough rental income to cover you costs, someone else is paying off your asset for you.
Finally, do not be afraid to take a loss on a property to get out from underneath a mortgage, especially if you do not want to be a landlord or if holding the property as a rental makes it difficult or impossible to obtain a mortgage on a property where you are living next.
The debt on the rental property impacts your debt-to-income ratio, a factor in obtaining a mortgage and banks in general do not consider the rental income in total or at all in their calculation of your ability to pay both mortgages.
It is important to remember that three months—or worse, a year—without a tenant can dramatically increase your monthly expenses and impact your own financial independence goals.