It’s time to move, but you own your house. Should you sell it now and move on? Or should you hold onto the house and lease it out for the next 6 to 12 months?
These are common questions that I get throughout the year. The answer can vary from person to person, but it’s important that you understand the consequences of choosing one or the other.
If you intend to purchase another home to move to first, you’ll need to determine if you can afford owning both your current house and the new house you want to buy. If you plan to finance the new house with a home loan, you may be required to sell your current house in order to qualify for a loan to purchase the new one. Then the question becomes whether it’s best to make it a contingency to sell your current house in order to purchase the new one (i.e. you would be a “contingent buyer”), or you can sell first and then buy later. The latter may entail living in an apartment or with relatives/friends for a few months while you search for your next home. Such a decision is something that requires its own separate discussion.
Confused yet? Bottom line is this: get clear on your financial situation by talking with a trusted lender. You may find that you’ll have to sell your current home in order to purchase the next. In that case, the plan to lease your home may be off the table after all.
For those who have the financial “luxury” of holding onto your property and moving to another home elsewhere, the decision to sell vs. lease then becomes the key issue.
Here are 5 questions to consider in order to gain clarity on what you should do in this situation:
1) Do I need the money from the home sale right now in order to move? Although you may be able to afford buying another home right now, make sure you’re not stretched too thin financially.
2) If I lease out my property, will I eventually have positive cash flow? Although you may be able to get a nice write-off on your income tax return by renting out your house, make sure that you have ample cash flow every month to cover your expenses. Consider vacancies at your property and any potential repairs that may be needed in the near future too. Don’t forget to also get proper insurance for a rental dwelling; it’s not unheard of that a tenant may accidentally burn your house down (ask my client who is now selling her house after dealing with such an incident last year). Be prepared for the unexpected.
3) Will I need to move back into the house at some point in the foreseeable future? Some people need to move just for a year or two for a special job assignment. Others may want to travel the world for a couple of years and then return “home” to settle down. In those instances, holding onto your property may be a good idea if you don’t need the cash from selling it right now. Also consider the income tax consequences concerning IRS Section 121, where you would need to live in your property for two of the last five years in order to exclude your capital gain on sale from your income tax return (restrictions apply).
4) Can I handle making payments on a vacant property for at least 3 months? Make sure you have enough cash stashed away for vacancies, especially unexpected ones. Also consider the cost of leasing your property each time, such as cleaning fees, Realtor fees (if using one), paying the cost of utilities while the property is vacant, and so forth.
5) Am I able, ready, and willing to be a landlord? Being a landlord is easy…when you have a perfectly clean and courteous tenant who always pays on time, and your house never needs any repairs or maintenance. Can you handle dealing with a tenant if he/she doesn’t pay rent on time (or at all)? If the toilet overflows (regardless of who is at fault), are you able to address the problem immediately? You can always hire someone to help you with different aspects of being a landlord, but that will lower your monthly cash flow slightly, which you may or may not be able to financially handle. And, not all property managers are created equal, so you’d need to get some good references on ones that will serve your needs effectively. If you fully take on being a landlord yourself, make sure you have the flexibility with your time and energy to screen and find good tenants and address their needs effectively.
Based on these questions, you may find yourself leaning one way or the other. Whichever path you decide to take, just make sure that you give yourself some financial “cushion” just in case. Also, having some flexibility with your timing will lessen the stress that may result from either selling or leasing.
For more information about selling or leasing your home, feel free to contact me. Thank you!