When it comes time to sell your home and move into another, should you always sell? There are some situations where the smarter move might be to rent it out rather than sell it. But, as with every financial decision, you need to weigh potential dollars and cents along with your life circumstances to make the best choice.
What if you’re moving to a new home, but the real estate market of your old one is heating up — or has been hot for a while and shows no sign of stopping? You may be giving up significant appreciation of the former home if you sell now. In that case, renting can give you income while you retain the house as an investment.
This is a tough decision. No one can predict the direction of real estate markets perfectly, but to get an idea, ask real estate agents and research the direction of trends. If the consensus does seem to be that the market will improve in the future, you may well decide to keep the home.
Sometimes, people must move before they recoup the existing investment in their home, such as the down payment, initial costs and points. Perhaps your employer transferred you to a different location, or you must move for school or military service. If you’ve just spent $30,000 on a down payment in the last two years, for example, and the property hasn’t appreciated much, it may feel as if you’re leaving money on the table.
As in many situations, you need to sit down and do the math. If you don’t sell the home, can you afford to carry two mortgages? Could you rent the first one to cover the cost of carrying it? How much would a rental likely bring you, once you factored in maintenance and any property management fees? If you do sell the home, are you likely to make any money on it?
Sometimes that are creative solutions that work for situations like these. One is a lease with option to buy. Tenants lease for a certain number of months, then have an opportunity to buy the home and provide a down payment.
Your old home can also become an investment property by providing cash flow in the form of rent. This can happen whether the real estate market is rising or staying stable for underlying appreciation. Note, though, that it isn’t likely to make financial sense if the market is likely to be dropping, as the rent you can charge may fall along with the real estate market.
You need to crunch numbers to make sure that this makes financial sense. First, can you financially carry two homes? You will have to continue to pay the mortgage on the old house, of course, along with maintenance, property taxes and other costs. Second, will the amount of rent you can charge cover your costs reliably? Research what comparable properties in the neighborhood charge in rent. Assume some shrinkage for vacancies.
Factor in whether you will need to hire a property manager or plan to manage it yourself. The latter likely only makes sense if you live reasonably close. Assess how much it will cost to hire a property manager if you need to. If you plan to manage the property, assess whether that is realistic. You’ll need to be on call 24/7 for calls from tenants and response to emergencies, like burst water pipes. Some people feel very comfortable assuming these responsibilities, but others won’t — or don’t have the expertise.
In some situations, you may want to move back to your old home at some point. Perhaps you were transferred because of work, the military or had to go to school in another area. But your dream is to go back to this home or this neighborhood.
Here, too, you’ll need to weigh the financial math and the direction of the real estate market along with your desire to move back. In some markets where the real estate market has risen over the decades, people who lived there at one time find themselves priced out because of high appreciation. The San Francisco Bay area, for example, has many of these kinds of stories. In other areas, such as the Midwest, moving back is relatively easy even if it’s slightly more expensive.
If you want to hold on to your home for this reason, it is likely you need to rent it in the interim for cash flow. It’s also useful to keep it occupied, as this helps prevent the house from falling into disrepair and discourages vandalism. Would rent cover your carrying costs? If not, could you afford both?
In these four situations, you might want to turn your home into an investment property instead of selling it. Be sure to be very careful weighing the financial side with the emotional side. Conduct research to find out how much rental income you could reliably get and how much being a landlord would cost. Good luck!