Deciding whether to sell or rent your current property can be a hard decision, so to help you out — we’ve provided some factors to consider when deciding whether to sell your house or rent it.
Will this property generate cash flow?
The first thing to look at when deciding whether to rent or sell your house is the math.
Ask: Will this property produce positive cash flow?
Which means when this property is rented out, and you deduct all of the associated expenses (mortgage, taxes, insurance, utilities, management, vacancy, repairs, HOAs, etc.), will the property produce a monthly profit or a loss? If it’s a loss, consider selling.
If you would make a profit by selling, consider your return on investment. For example, if you could make $100,000 in profit by selling your house and achieve only $1,000 per year in cash flow, that’s a 1 percent return on investment. Better to take that $100,000 profit and invest it in something else that could produce a higher return.
Consider the taxes.
Normally, if you sell real estate and make a profit, you have to pay capital gains tax on the sale, up to 20 percent, depending on your tax bracket. However, the IRS allows homeowners (sorry, investors!) to exclude the sale of up to $250,000 (or $500,000 if married filing jointly) of a primary residence if you lived in the home for at least two of the last five years.
Let’s look at another example where this might come in handy. Consider the fictional case of Bob and Marge, who bought their home in 1990 for $150,000. Today, they can sell the property for $500,000, clearing $300,000 after the sales expenses.
Of course, by keeping the property, there is always the likelihood that it will appreciate in value to a level higher than what the tax would have been, but there are no guarantees when it comes to real estate values.
Does the future look bright?
Another important factor to consider when deciding whether to rent or sell your house requires some foresight for the future. What do the next 5, 10, 20 years look like for your home’s location? Are things improving? Will your neighborhood decline in value? If the future looks dark, consider selling now to avoid problems later on.
Trying to gauge where the market’s going is not impossible. Take a look at the growth of your city — is it moving away from you or toward you? Are businesses moving into your area? Are homes being fixed up or left to rot? You can’t know with 100 percent certainty, but by analyzing the current trends in your market, you can make a more informed decision on whether to hold on or sell now.
Also, just because you own rental properties does not mean you have to be the person dealing with the tenants. Professional property management companies exist in nearly every city, and if you can find a great company, they can cut the stress of rental property ownership down to a minimum (for a fee, of course!).
So, once again, should you rent or sell your house?
Deciding whether to rent or sell is a choice only you can make after weighing all the options.
If you are trying to make that decision right now, take a look at the five factors outlined above and make the choice that works best for you, your family and your financial future.
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