Saturday, June 29, 2013
Considerations For Renting or Selling a Home
Suddenly out of the blue you have found out that a new position has opened up within your company and they are asking you to relocate your family to the other side of the country. The job opportunity is too good to pass up so you decide to take the position. You realize with an impending move you are going to need to either sell or rent your home.
Considerations for renting or selling a home
Anyone who is considering selling a home in 2013 and has bought in the last seven or eight years faces the real possibility that they will be losing money on the sale. The thought of losing money is never pleasant but unfortunately is part of today’s Real Estate reality. In my experience the immediate thought process of most home owners is to rent the home and not sell for a loss. This is kind of similar to the stock investor who hangs on for dear life with their losing picks but sells their winners instead.
In many cases they will ride the loser for an extended period of time until they realize it will take a very long time for that stock to come back to where it once was when purchased. Anyone who has ever invested in stocks including myself has been guilty of this. It is hard to give up on a loser because there is always the thought that it will come roaring back. So is renting the home really the best move or should you unload this asset that is working against you?
Where is the local Real Estate market headed?
One of the considerations of whether to sell or rent your home is to find out from a local Real Estate expert where they feel market values are headed both in the near term, as well as longer down the road. A knowledgeable Realtor that has been in the business for a while should be able to help you determine the trend of where the market is headed at least in the short term. Crystal balls are a hard thing to come by in Real Estate. Those that are lucky enough to have one are often times millionaires. Unfortunately knowing exactly when the Real Estate market will turn around requires one.
Most economists believe that once Real Estate markets do hit bottom the climb back up will be a slow and steady one. The opinions of most are that yearly appreciation will return to more normal historic levels of 3%-4%. Of course this is an average and states, cities and neighborhoods that are desirable could rise at a slightly higher clip.
As a home owner what you should be trying to figure out is how long will it take you to get back to a break even point or even something you can financially stomach. You should also be asking yourself is the time it takes to get back to break even worth it to you?
For example, lets say you bought your home for $500,000 and it has dropped in value by 25% and is now worth $375,000. Lets further assume that the Real Estate market beats the economists predictions and rises by 5% yearly. Do you realize it would take seven years to get back to break even?
If you have equity in the home you need to figure out if you would be better off taking the loss and putting your equity somewhere that could potentially earn you more money. If you don’t have any equity you would need to figure out if you have the necessary funds to bring to the closing table or would need to explore other alternatives like a short sale.
What is the local home rental market like?
Again you should consult with a local Realtor to determine how well the rental market is performing. Has the rental market done as poorly as the Real Estate market or is there demand for rental housing? Some areas rental markets have done very well.
There is a good possibility there are folks who would like to rent a nice home rather than commit to purchasing if they feel they could be transferred in a short time period or feel market values are still sliding and don’t want the risk.
The rental home becomes an investment property
Relocating home owners need to remember that a rental home becomes an investment property. Owning a home as an investment property has the potential to help or hurt you tax wise. This is definitely something you would want to consult a tax professional for guidance.
Although you will be taking in rent you need to remember that you will still have principal, interest, taxes and insurance to pay. If the property is a condo you would more than likely also be paying the condominium fees as well. As a landlord you will also be required to maintain the property and fix any necessary issues that come up.
Many landlords that have relocated out of state will also consider hiring a property manager. The typical charge for management services runs around 8-12% of the rent. So if you are charging $2000 a month for rent you can expect to pay a manager in the neighborhood of around $200 a month. There are some excellent tax deductions for rental property that could play a factor in your decision making.
Taking on landlord responsibilities
As a landlord one of the 1st steps is going to be choosing the right tenant. Over the years I have seen a few occasions where the renter did not treat the home the same way an owner would. The owner was left with paying to replace carpets and do quite a bit of painting. These kind of costs can add up fast. Picking a responsible tenant becomes critical.
There are also considerations such as handling tenant complaints, maintenance issues or even legal issues such as eviction. In the end there is a lot to think about when deciding whether selling or renting your home makes the best fiscal and practical sense.