Rent It Out or Sell It?
You might be one of the countless homeowners who’ve fallen out of love with your current home. Maybe it’s the general area, the neighbors or the house itself. Or maybe the “dream” of homeownership has become a nightmare for some reason. Regardless of your situation, push has come to shove, and it’s time to make a decision on where to go from here.
Your choices are to keep the house as a rental property for investment purposes or sell it and maybe buy elsewhere. Answering the questions below should help you decide which route is best for you.
Do I have the money to purchase another property if I hold this one?
When you purchase a home you need to have enough cash for a down payment and closing costs, plus funds for moving expenses and associated costs. A 20 percent down payment is ideal because you’ll avoid paying private mortgage insurance (PMI). Therefore, take a look at your savings. Do you see enough cash to be able to put down a hefty chunk of change on a new property? If you don’t, it’s probably best to sell your current property, and hopefully that will generate the cash needed to put down a large down payment on your new home.
Do I want to be a landlord?
Yes, all the TV shows make it look like owning property is fun and doesn’t take up too much of your time, energy and effort. Unfortunately reality TV isn’t reality rental property investing. You do have the good fortune that your current home is probably already in good shape, so at least there won’t be a lot of money out of pocket to make it rental-ready. But you will still have to educate yourself, obtain leasing documents, advertise and show the property and screen prospective tenants. It really can take a fair amount of time, so is that within your interest? Alternatively you could have a property management company handle it, but that would wipe out a lot of your potential wealth generation from the property.
Would this property even be a good investment?
Good real estate investments are cash-flow positive and provide a fair rate of return on the equity you hold in the property. Will the rents less all the expenses and mortgage be positive? If the answer is no — and this is often the case — that particular property probably isn’t a good investment. Talk to your financial adviser or accountant and ask for help penciling out your real estate deal based on the cash flows and current equity in the property. Once you figure out your current investment returns — free cash flow divided by your equity — you can compare those returns to other investments.
Maybe it’s better to invest elsewhere
If you could sell and generate a large chuck of change, like $100,000 or $300,000, you could invest that money elsewhere. Considering the risk factors for real estate, a well-diversified large capitalization stock mutual fund, with long-term returns of 7-9 percent per year probably is a better deal than owning real estate. Note: As an added bonus on financial assets, no mutual fund has ever had a clogged toilet that flooded the house.
Those are some items to consider just to get into the landlord game. If none of those look appetizing related to your current home, sell it! Then you can decide whether to take a step back and rent for a while or try to find a new home and not repeat the home buying mistakes of your past. Good luck!
