Sell or rent out current home?
August 24, 2005 8:20 PM Subscribe
I expect to be relocating to a new city. I have been paying down my current home for over ten years, and have significant equity. It has appreciated in this time. My choices: sell my current home and buy one in the new city. Rent out my home (convert it to income property), and either use other funds to buy in the new city or rent in the new city.
I THINK that if do the latter I will eventually have my gain taxed, where I can avoid this with the first option. Am I right? Any other considerations?
I THINK that if do the latter I will eventually have my gain taxed, where I can avoid this with the first option. Am I right? Any other considerations?
We've been thinking along these lines, and the advice I've gotten is to be mindful of what a hassle it is to be a non-local landlord. Unless you have someone you know and trust (and who you can pay) to be the manager of your house, don't underestimate the costs (time/money/work) of being a landlord.
posted by jasper411 at 8:34 PM on August 24, 2005
posted by jasper411 at 8:34 PM on August 24, 2005
If you've lived in the house for the last 2 out of 5 years, you don't have to pay capital gains when you sell it (if the profit is under $250k if you're single, $500k if you're married). So, you could rent it for the next 5 years, if you wanted.
However, whenever the topic comes up about deciding to rent a house out, I love to tell the story of my friend who rented to a very nice young lady whose associates turned the house to the largest pot growing facility Austin police have ever seen. And when I say pot growing facility, they re-wired the electricity, re-routed the plumbing and duct work and did an amazing amount of damage.
Fortunately, insurance covered everything, but they never could quite get rid of the smell...
posted by j at 8:48 PM on August 24, 2005
However, whenever the topic comes up about deciding to rent a house out, I love to tell the story of my friend who rented to a very nice young lady whose associates turned the house to the largest pot growing facility Austin police have ever seen. And when I say pot growing facility, they re-wired the electricity, re-routed the plumbing and duct work and did an amazing amount of damage.
Fortunately, insurance covered everything, but they never could quite get rid of the smell...
posted by j at 8:48 PM on August 24, 2005
oh, sorry -- forgot to mention -- the very nice young lady had a good credit report, no police report, nothing on her at all. (My friend is very anal about these things.) Additionally, my friend drove by the place (but didn't go in) and talked to her on the phone often. Anyway, we're sure she had done this before, because she contacted my friend after the place was busted, and asked if she could break the contract by paying my friend off without adversely affecting her credit. So, she continues doing this scam probably still today.
posted by j at 8:54 PM on August 24, 2005
posted by j at 8:54 PM on August 24, 2005
Renting a property is a hassle, but less so if you hire a property manager. A real property manager, not a friend, especially if the house will rent out for a difference between the mortgage and the rent. They are worth their weight in gold, especially if you're out of town: they consistently get higher rents, they can send in their cleaners every two weeks (that can be part of the lease) to keep an eye on things, and you're not trying to get a new garage door installed from afar, deal with a broken outdoor light, choose carpet color for the living room which was covered in paint. They charge a monthly fee, but I use one and I would literally be unable to do it myself.
posted by barnone at 9:21 PM on August 24, 2005
posted by barnone at 9:21 PM on August 24, 2005
A lot of little birds (and economists) are whispering into a lot of ears that the real estate bubble is about at its bubbliest right now. Since rents in most places wont actually cover mortgage and other payments at the moment, it doesn't make economic sense to hold onto the property unless you expect it to keep going up in value quickly. So your best bet is probably to sell the house while the selling's good, settle your money into some low-risk equities, use your investment income to pay rent, and reinvest the spread. When the market cools, then buy a new house. As I understand it, the principal reason for EVERYONE not to do this is the hassle and expense of moving, + all the transaction costs. But if you're already moving, and will already have some significant costs, it seems like a gimme. Of course, prices could keep going up, everything depends on whence and whither you move, etc. But I would definitely hit the internets and look at what the Economist, WSJ, Forbes, etc. have to say about the housing bubble, and see whose line you agree with.
posted by armchairsocialist at 9:23 PM on August 24, 2005
posted by armchairsocialist at 9:23 PM on August 24, 2005
Per the URL cited by 531, above:
A 1031 exchange is possible when you sell real estate held for investment purposes. It cannot be used for the sale of your personal residen
If you rent the property you now own, after 3 years and one day you will lose the opportunity to sell it without paying capital gains tax ($250/500K, see above), since at that point you'll not have occupied it for two or more years out of five. So you'd have to move back in, for two years, to avoid paying taxes.
Capital gains tax is 20%, I believe, so if you're married, you're looking at up to $100K of additional taxes (if you have the full $500K gain in house value).
So for a variety of reasons, including others listed above, I'd vote for selling.
posted by WestCoaster at 9:38 PM on August 24, 2005
A 1031 exchange is possible when you sell real estate held for investment purposes. It cannot be used for the sale of your personal residen
If you rent the property you now own, after 3 years and one day you will lose the opportunity to sell it without paying capital gains tax ($250/500K, see above), since at that point you'll not have occupied it for two or more years out of five. So you'd have to move back in, for two years, to avoid paying taxes.
Capital gains tax is 20%, I believe, so if you're married, you're looking at up to $100K of additional taxes (if you have the full $500K gain in house value).
So for a variety of reasons, including others listed above, I'd vote for selling.
posted by WestCoaster at 9:38 PM on August 24, 2005
If it were me, I'd sell in the old city and rent in the new city for at least six months. That way, you can figure out if you actually plan on staying there and can also scope out neighborhoods over time, rather than in the rush of "I have to buy a house today."
posted by SashaPT at 2:30 AM on August 25, 2005
posted by SashaPT at 2:30 AM on August 25, 2005
Sell it and walk away. All the stories about absent landlords are true. My favorite is the guy who came back to discover that his previously normal, 2-cat-owning tenants had become crazy, 95-cat-owning tenants. I can assure you that the only thing he was thinking was, "Why didn't I just sell it?"
Also, I agree with the suggestion above about the "bubble." If you have significant appreciation, take advantage of it now, because it might disappear soon. (Also, the tax advice above was quite sage).
posted by MrZero at 6:52 AM on August 25, 2005
Also, I agree with the suggestion above about the "bubble." If you have significant appreciation, take advantage of it now, because it might disappear soon. (Also, the tax advice above was quite sage).
posted by MrZero at 6:52 AM on August 25, 2005
Response by poster: Thanks all! Very helpful. You gave me a lot to think about.
posted by bobduckles at 7:56 AM on August 25, 2005
posted by bobduckles at 7:56 AM on August 25, 2005
Addressing some of armchaircapitalist's points:
1. The housing bubble isn't a uniform phenomenon in the US. Some areas, primarily on the coasts, have seen housing prices double in the past 5-10 years. Other's, have seen minimal increaces.
2. "rents in most places wont actually cover mortgage and other payments at the moment" While this may a good yardstick for assessing the sustainability of home prices in a given market, it could mean a few things to BobDuckles.
If he's moving to an area with an bubble housing market, it means that he might be able to get more house by renting rather than buying.
Also, if his existing home is in a bubble housing market, it may still be financially viable for him to rent it out because he bought it 10 years ago, so his costs are likely much less than they would be for a new buyer.
3. Even if there is a bubble, predicting when and how it will deflate isn't a slam dunk. We are in uncharted territory here, financewise. One of the big factors fueling the housing market has been the availability of cheap capital (ie low mortgage rates). The fed has been unable to move mortgage interest rates up, despite multiple hikes because there are bigger forces at work than the once mighty fed. Forces like China, which is buying lots and lots of US debt.
If my existing house had appreciated dramatically, I'd look at the historical rents for the area and see if I could still cover my costs (including property management) if rents retreated to something near their 10 low. Then I'd find a reputable property manager and rent the house out. Then I'd rent in my new hometown and start shopping for houses without being in any particular hurry. Once I had a good feel for the market in my new hometown, I'd be ready to buy when I came across a good deal. At that point, I'd consider selling the old house.
My thinking is that by keeping a house in the market gives a hedge against further run-up. You might not make out like a bandit by timing the bubble properly, but you won't find yourself priced out of the market either.
posted by Good Brain at 10:40 AM on August 25, 2005
1. The housing bubble isn't a uniform phenomenon in the US. Some areas, primarily on the coasts, have seen housing prices double in the past 5-10 years. Other's, have seen minimal increaces.
2. "rents in most places wont actually cover mortgage and other payments at the moment" While this may a good yardstick for assessing the sustainability of home prices in a given market, it could mean a few things to BobDuckles.
If he's moving to an area with an bubble housing market, it means that he might be able to get more house by renting rather than buying.
Also, if his existing home is in a bubble housing market, it may still be financially viable for him to rent it out because he bought it 10 years ago, so his costs are likely much less than they would be for a new buyer.
3. Even if there is a bubble, predicting when and how it will deflate isn't a slam dunk. We are in uncharted territory here, financewise. One of the big factors fueling the housing market has been the availability of cheap capital (ie low mortgage rates). The fed has been unable to move mortgage interest rates up, despite multiple hikes because there are bigger forces at work than the once mighty fed. Forces like China, which is buying lots and lots of US debt.
If my existing house had appreciated dramatically, I'd look at the historical rents for the area and see if I could still cover my costs (including property management) if rents retreated to something near their 10 low. Then I'd find a reputable property manager and rent the house out. Then I'd rent in my new hometown and start shopping for houses without being in any particular hurry. Once I had a good feel for the market in my new hometown, I'd be ready to buy when I came across a good deal. At that point, I'd consider selling the old house.
My thinking is that by keeping a house in the market gives a hedge against further run-up. You might not make out like a bandit by timing the bubble properly, but you won't find yourself priced out of the market either.
posted by Good Brain at 10:40 AM on August 25, 2005
This thread is closed to new comments.
1031 exchange.
posted by 517 at 8:34 PM on August 24, 2005