With much of the optimism of the past decade wrung out of the housing market, I have been fielding a lot of questions about what to do with an existing home. Should you still try and sell now? Or perhaps rent it out?
As a comprehensive financial planner, I strive to guide my clients to the best options for their financial needs. Real estate is not a particularly liquid asset, so in some cases, you may not be able to sell a home. In some markets or situations, you may be better off trying to rent out your home. The best answer will also likely depend on your cash flow, mortgage and needs for the equity in the house. Keep reading to help know if you should consider putting your home on the rental market.
The cooling housing market, paired with seemingly non-stop headlines about inflation and soaring rents, might lead you to think about turning your primary residence into a rental and cashing in. This option may not be optimal depending on your long-term plans for the home or your need to use the equity now. Keep reading as we share something you should consider before turning your home into a rental.
Rental Income Is Not Passive Income
You may be dreaming of a tenant paying your mortgage. But managing a rental takes more time and energy than just making sure the rent payment hits your bank account each month. Being the owner of a rental property comes with financial risks. This is not just limited to unexpected repairs, tenants who don’t pay their rent, or even a slowdown in the rental market.
What Is Your Mortgage Rate?
Are you on an adjustable-rate mortgage or a fixed mortgage? For those with an adjustable-rate mortgage, a property that is cash flow positive now may not be cash flow positive when the adjustable rate resets at some point in the future.
On the flip side, if you have locked in an ultra-low mortgage rate, keeping the property as a rental may be more tempting. The lower mortgage cost will make owning a property more profitable over the long term.
Will You Be Giving Up Beneficial Property Taxes Rates?
For California homeowners, you are likely paying property taxes at a below-market rate (thanks to Prop 13). In cases like this, the longer you have owned the home, the more significant this benefit could be, and the more likely you would want to consider holding onto the house.
Again, for California homeowners age 55+, you may be able to transfer your tax base three times when moving within CA. So, if you are close to turning 55, you might want to hold off a bit.
Do You Need Your Home Equity to Buy the Next Place?
In reality, many people need home equity from their current home to buy their next home. If this is you, renting your place out likely won’t be a viable option, even if it would otherwise be a good financial move.
Tax Benefits of Selling a Primary Residence
There is a fantastic tax benefit when you sell your primary residence. You can avoid paying capital gains on the first $250,000 of profit ($500,000 for married filing jointly) when you sell a home you have lived in as a primary residence for at least two out of the last five years.
If your house has gone up substantially since you purchased it, consider this tax break before putting your home on the rental market. Ignoring this could be a $100,000 tax mistake for a high-income home seller.
Can You Afford to Rent Your Home?
Do you have the time and energy to be a landlord? Will you be able to pay for repairs when (not if) they’re needed? Also, will you be able to pay for the costs of owning this real estate when it isn’t rented?
Turning your home into a rental may make sense for many of you reading this. For others, being a landlord will drain your quality of life. Work with your financial planner to find the right path forward when putting your home on the rental market or just selling it.