Should You Rent or Sell Your House?

February 26, 2015

Should You Rent or Sell House San Diego

When it comes time to upgrade or move due to work many of us wonder what we should do with our current home. Should I keep it and rent it out, or sell it?

There is a lot to consider and I’ve broken it down to the main points to help guide you. It could be a smart financial move depending on a few key items. Lets cover them and see what you should do.

The most important factor to consider…

Will the rent cover the mortgage? If it will rent for $1750 and the mortgage is $1700 don’t even dare try telling me yes. Properties need maintenance, repairs and don’t forget about those occasional tenants who would prefer an eviction on their record rather than paying rent to you.

A good rule of thumb is 40% expenses off the rent. So if you are collecting $1750 in rents, you want your mortgage to be no more than $1050 this leaves you a safety net to handle those repairs and should things get tricky and you need to evict you are covered.

If you must pay out of pocket to keep a rental property functioning you are taking a big risk. Should you lose your other source of income it could put you in the uncomfortable situation of having to decide what bills to pay each month. Be calculated on your decisions and plan ahead.

All thoughts below should ONLY be considered IF the rent will cover the mortgage and expenses. If not, stop right here. Do not pass go, do not collect $200 and setup plans to sell your property.

Are you well funded?

This falls into the category above but needs to be mentioned more specifically. Do you have an “oh crap” budget? Should a water heater go out or any other big ticket item need addressing can you pay out of pocket for it? Many states have strict laws on the living conditions you must provide and you must always be ready to handle repairs and emergencies right away.

Are you ready to be a landlord?

If not, that’s okay but you’ll need to employ a property manager. That will eat up 10% of the rent collected and usually increase the costs of repairs as they mark up their services as the project manager. There’s nothing wrong with hiring a good property manager, but it is an added cost to take into consideration.

Being a landlord can be a really rewarding experience, you will be faced with tough decisions and awkward conversations. If you are the type person who dislikes these types of confrontations be prepared, if you ignore them with your rental it will have negative results.

Tax implications… 

Depending on where you are in your career, owning a rental can be a great write off. That doesn’t mean you want it to lose money, but mortgage interest is a write off. You can earn a property and tax benefits by keeping a rental as long as you are prepared for the work involved to manage it.

On the flip side, we have a thing called capital gains tax in the United States. Thankfully some legislator created a nifty loophole for homeowners that shouldn’t be ignored. You can avoid taxes on capital gains of up to $250,000 per individual ($500,000 for couples) as long as you have occupied a home for 2 of the last 5 years.

Strategically this will make the most difference if you live in an area that has appreciated well and what your time line is. It is wise to consider the tax amount you would be forced to pay should you sell your home after that window has closed. In some cases it makes more sense to either sell now or hold but only within that five year window.

Are you planning to come back to the area?

If you are relocating but think you could return, it may be wise to keep the home. Sentimental attachment can make it hard to part with a property, but if its a great home and you could see yourself moving back into it one day it may be worth keeping.

Just be prepared, your tenants will not love your home like you do. Typically we aren’t talking major repairs, but be prepared to spend some money when you come back to turn the house back into your home.

Basic rules to keep your sanity if you do rent your home

1. DO NOT let family live there for free. First of all you aren’t renting it and secondly they become entitled quickly. Should you suddenly need to charge rent it won’t go well.

2. DO NOT ignore your property for extended periods of time. Tenants seem to love living in deteriorating homes and never notice those water leaks until its a river. Make quarterly visits or have a handyman check for you. Preventative repairs can save you thousands.

3. Keep that emergency fund and DO NOT tap into it for anything besides your rental property.

4. If you have a property manager, keep tabs on them. I’ve seen homes destroyed by tenants while the owner was none the wiser because the property manager was supposed to be watching things.

5. Treat your tenants how you would like to be treated. We’ve all had that horrible land lord before. Don’t be that person, demand rent on time and respect for you and your property but always take care of your tenants. They are paying for your house after all.

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