Buying your first house is an exciting experience, but as many homeowners can attest, you may quickly outgrow your home. Whether it’s having children, relocating for a new job opportunity, or a sudden financial windfall, such as an inheritance, you may need to expand your horizons and “buy up” as they say in real estate parlance. The question then becomes should I rent my old home or sell it?
Owning Two Homes Simultaneously
Although owning two homes can be tricky, renting out the previous home can be a lucrative proposition. Keeping the house will allow you to begin accumulating wealth through a combination of cash flow and equity. There are, of course, a number of factors to consider.
The first consideration is whether the property will generate positive cash flow. When you rent the property and deduct the related expenses, such as mortgage payments, taxes, insurance, maintenance, and management fees, will the property produce a profit or a loss each month?
If you stand to lose money, you will probably be better off selling the home.
At the same time, it is important to consider how much you would profit by selling the home now, after factoring agent fees, closing costs and other sales-related expenses. In other words, you need to ask what is the return on investment (ROI). If your ROI will not be significant, it may be best to hold onto the property until the market improves, especially if the property is generating positive cash flow.
What about taxes?
As you know, when you sell real estate at a profit, you will be required to pay a capital gains tax of up to 20 percent depending on your marital status and income tax bracket. It is worth noting that homeowners are allowed to exclude up to $250,000 ($500,000 for a married couple) on the sale of a primary residence, provided that the dwelling is owner-occupied for at least two of the last five years. So, you must be able to determine whether the tax consequences will be greater now or in the future.
When deciding whether to rent or sell your house, another important factor to consider is the future of the neighborhood. Are things improving? Are the homes occupied by owners or renters? What condition are the homes in? Are businesses moving into the area or leaving? Is the average income of the residents rising or declining? How will things look in the next five or ten years? Analyzing these trends will help you make a decision whether to hold onto the property or sell now. In short, if the neighborhood is headed for a decline in value, it is probably wise to sell now to maximize your returns and avoid problems in the future.
Finally, it is crucial to consider whether you can handle the responsibility of being a landlord. This means collecting rents, possibly dealing with late payers, and other landlord/tenant issues. What happens if you need to evict tenants for lease violations? Are you prepared to deal with the legal expenses, court costs and time involved? Although some tenants are easy to manage, being a landlord can become a hassle. One way to take the stress out of the process is to enlist the services of a professional property management company.
The Bottom Line
In the end, deciding whether to rent your home or sell it depends on what works for you. If your income and financial status enables you to own two homes at once, being a property owner can be the key to accumulating wealth. As with any real estate matter, it is wise to surround yourself with a team of professionals, including financial advisors, accountants and real estate attorneys. Together, you can analyze all of these factors and make the best decision for you and your family.
About the Author:
Roman & Piccinnini, PLLC is a civil and real estate practice serving clients throughout the five boroughs of New York City, and Long Island, including the Hamptons. We pride ourselves on approaching each client as an individual with unique needs, knowing that successful communication and legal representation both require good listening skills. Based on your particular circumstances, we develop strategies we know will work well, always remaining focused on meeting your goals. Writer: John Piccinnini.