Should You Sell Your Home or Keep It As a Rental?
90% of rental homes are owned by small-time landlords, perhaps like you and me, who own 1-5 rentals.
People like you and me who are crazy enough to think that taking care of multiple homes in our free time is “passive income.” Haha
If you’re considering becoming a landlord for a home you own - perhaps either mortgage-free or because you have a low interest rate, keep reading…
Five Questions to Ask (and Answer) Before Deciding to Sell or Rent
Have you lived in the home for 2 of the last 5 years? If so, you likely* qualify to receive any and all profits from the sale TAX FREE - up to $250,000 for a single person and up to $500,000 for a married couple filing jointly.
If you’ve been trying out the landlord thing for a year or two, know you might have an expensive tax-clock ticking.
*talk to your CPA. This is not tax advice.
If you keep the home as a rental, what is your Return on Investment (ROI)? I offer three main ways to calculate your ROI in articles on my website, but what’s proven helpful for many people recently is the Return on Equity calculation.
Example of Return on Equity: Just because you “make” $1,000 a month on a rental, if you have some expenses and maybe a vacant month or two, you might only “make” $6,000. Tax benefits aside, assuming you have $200,000 in equity, that’s only a 3% return on investment. In the stock market, by contrast, you could have earned about $34,000 on that same investment over the last 12 months.
(Another way of looking at it might be “How many years of rental income can I cash in all at once with a sale?” I know one guy who just sold a rental that earned him $10,000/year. When he collected $338,000 at closing, he said it felt like 33 years worth of paychecks all in one day. Not bad.)What are my life priorities? Being a landlord is NOT passive income - especially if you self-manage and don’t use a property management company.
There are ever-changing laws (Do you know what to do if a tenant has an emotional support dog? Or three?), tenant drama (“We want to kick out one of our roommates, will you let us sign a new lease without her on it?”), home maintenance emergencies (“Sorry to bother you on Christmas Eve, Kevin, but the furnace died two days ago and we didn’t want to bother you. But now the house is 50 degrees and we’re really cold.”), and more.Can you emotionally detach yourself from this home?
When converting your home into a rental, you must have a mindset shift. You are running a business now.“Do you REALLY know the market rents?”
“Bleak” is a good word to describe the current state of the rental market. Rental inventory is higher than it’s been since April of 2014. Pair that with seasonality, and you might be waiting longer than you think to find the right tenant.
Listen, I’m a real estate guy. I own rentals. I’m not telling you owning rentals is a bad investment.
I AM advising that you know your investment numbers, identify your priorities, and make an educated decision.
(Note: Questions 4 and 5 generously provided by Daniel Preshaw, owner of HisHouse Property Management in Greeley, CO. He knows a thing or two about rental properties.)
If you have a desire to buy or sell, let’s chat!
Life has a way of keeping us all moving, and I’d love to be your real estate agent.
Contact me here to set up your free and confidential consultation.
Kevin
