How long did you plan to stay in your house when you bought it? Many real estate agents will tell you homeownership pays off after five years. But the housing bubble—the ascent in prices that ended in 2006, followed by a steep decline (more than 50% in some markets) and the 2007-2008 recession—disproved real estate’s “golden rule” that home values will only go up. Many homeowners who purchased their homes within the past 10 years are still underwater on their mortgages or have little equity in them.
You could continue to stay put for as long as it takes your local market to recover. But what if you have to move for a job opportunity or due to other big life changes such as a marriage or a growing family? Perhaps you can no longer afford your home due to job loss or reduced income.
In such a case—when you need or want to move but the market isn’t on your side—is it better to sell at a loss or to rent your home until the market rebounds?
Determine your home’s value
Your home’s current value is the first consideration. While real estate sites provide their own estimates, these figures are often inaccurate. It’s also not very helpful to note the current listing prices of homes for sale in your neighborhood. The prices you need are from recently sold properties. This information is available at sites such as Zillow and Trulia. Additionally, a good real estate agent will prepare a comparative market analysis for you. This information lists comparable properties in terms of square footage, number of bedrooms and bathrooms, lot size, and other important factors.
Once you obtain a current market analysis, you can review it and list your home for a price somewhere in the middle of the range, depending on your home’s condition (a recently renovated house may be worth something closer to the top of the range; a “fixer-upper” or so-called “granny house” may sell for a price closer to the lower end).
With a sound estimate of your property’s value, it’s time to do some math. Your seller’s agent should provide you a seller’s estimated net proceeds worksheet outlining estimated closing costs as well as the realtor’s fee and other transaction costs. Note that sellers pay the entire 6% commission for both agents.
Additionally, some real estate transactions have a transfer tax depending on the state you’re selling in. For a rough estimate, plan on parting with 6% to 10% of what your house sells for. After these figures are subtracted, subtracting the current mortgage balance will leave you with the total amount due to the seller.
Is the total amount due to you positive or negative, assuming you get full asking price? If it’s negative, you will have to make up the difference at closing. If it’s positive, that’s how much money you’ll be left with. Is it enough to accomplish your next goal—such as a down payment on a new house or a debt payoff? If not, selling may not be attractive. Furthermore, if you need to move in the next three to six months, your house could take longer than this to sell.
Are you able to wait?
If selling isn’t an attractive option
Think about becoming a landlord if you can’t sell your house easily due to the considerations above. In the best-case scenario, your rent should cover mortgage payments and also leave money for potential repairs. At a minimum, you want a monthly rent that covers the mortgage and tax payments.
But it’s also possible that the market-rate rent won’t cover your entire mortgage payment, or that your tenants will fall behind on the rent. Big expenses (such as replacing the roof or the furnace) could turn up, putting you in a hole before you’ve started.
First, ask yourself if you can afford to be a landlord. Consider the following questions:
- Will you be able to buy or rent a new home without selling your current property first?
- How much rent can you expect to charge? Sites such as realtor.com and Zillow advertise rentals and can be sorted by immediate neighborhood to provide you with a potential rent range.
- If you decide to rent your home through a property manager, they will collect 8% to 10% of the monthly rent.
- Can you carry the expense of two homes if the first home is vacant for two to four months waiting for a suitable renter?
- Do you have savings already set aside for unexpected repair expenses?
- If you end up with nonpaying tenants, how long does the eviction process take in your city? Could you carry two housing payments in the meantime?
Next, write down your long-term hopes for your rental property. Even if you aren’t making a monthly profit on rent, your home is still an asset you’re investing in with the promise of an eventual payout. However, yearly appreciation is hard to predict.
Local home markets increase or decrease in overall value depending on not just the global economy but also the neighborhood the house is in, the local economy (an individual city can have much higher or lower unemployment or wages than another city), and the ability of prospective buyers to obtain financing.
Decide how long you’re willing or able to hold on to the rental property, even if its sales value doesn’t increase. Try to account for a certain annual cost of repairs. (Ten to 20% of the annual rent is a good estimate.) The Rental Property Reporter provides a summary of how to calculate overall return on investment of a long-term rental property.
Finally, expect to pay income tax on the yearly amount of rent you collect, even if you’re only breaking even or losing a little each month. You can deduct mortgage expenses and other costs associated with being a landlord. One last tax to be aware of is the capital gains tax, which you’ll pay when you sell if you haven’t lived in the home for two out of the last five years.
Renting can get you through a tough market
A few years ago, my husband accepted a new job in North Carolina. We lived in Philadelphia at the time, and the home we owned there had decreased in value. Faced with having to bring money to the table if our home sold, we decided to rent it and wait for a market rebound. We used a property manager since we would be living eight hours away. The monthly rent after the property manager’s fee allowed us to break even on mortgage payments.
Renting can turn your property into a more attractive option for buyers
When you rent out your single-family home to tenants, you are creating a passive income opportunity. Although you may not want to continue being a landlord yourself, the fact that you have an income-producing property can make it more attractive to potential investors in a tight real estate market.
Roofstock can help you connect to buyers from around the world interested in purchasing an income-producing single-family home. With that, you have more opportunities to find the right buyer for your property.
Plus, when you decide to work with Roofstock, you will enjoy a more affordable seller experience. Instead of paying a 6% brokerage fee and covering the costs of minor updates, you can sell the property as-is with tenants in place for a 3% commission fee.
You could save yourself thousands by working with Roofstock. And you won’t miss out on the opportunity to cover your mortgage with rental tenants until closing.
After a year, we moved back into our home after the renter’s lease expired. Since then, we have relisted the house after deciding to move; however, having not received a suitable offer, we decided to rent it again. Whenever our current tenants decide to leave, we’ll assess the market again to determine whether to sell or rent again.
Becoming a landlord rarely results in sudden wealth. It can be a great short-term solution and long-term investment, even bringing in income after the mortgage is paid off. Should you rent your house or sell it? Do your research, weigh the pros and cons of your situation, then tell us in the comments what you decide to do.
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