Deciding Whether to Sell Your House or Rent It Out
Because it has been harder than ever to sell Jacksonville real estate lately, more and more homeowners are considering renting their home as a solution. Perhaps you are one of those people. If so, keep reading! You have much to consider…
On the surface, renting may look like a good option when you can’t sell. And for many, it is… but let’s face the facts, not everybody is cut out to be a landlord. Even if you think that you are cut out for the job, renting may seem like an easy short-term fix but it may not be your best long-term solution.
If you’re anything like me, you want to make certain that you consider all the factors before deciding whether renting is going to solve your problems … or create more in the long run. (Keep in mind that I speak with experience – Susan and I have owned numerous rental properties over the years.)
Let’s Consider Two Major Reasons Many People Decide To Rent
- Personal Urgency – many people simply have to sell and they have to sell NOW.
- Home Values – the bottom line is a major consideration today considering the fact that home values have fallen so much over the past few years. Some people just aren’t prepared to give their house away at today’s depressed prices.
Many people think that the market will recover soon and if they wait a few years, they’ll be able to sell their house for more than they can today.
For most, however, this proves to be faulty thinking because the gap between what they owe and the value of their property is just too much to make up in only a few years… even under the most optimistic scenarios.
So, will renting solve your dilemma? Maybe yes… maybe no. (By the way, we have been in this situation ourselves and have helped countless others weigh their options so don’t hesitate to contact us with any questions you might have.)
Top 10 Challenges When Renting Your House
Again, because of the current economy, more and more Jacksonville area homeowners are finding reasons to rent their house, but let’s consider the following challenges before giving up on selling.
- Buying Another House – Leaving equity behind in your house may prevent you from purchasing a new house. Check with your lender to determine how much value they will give you for any rental income you will get.
- Property Management – Managing everything associated with renting, including receipts, maintenance, repairs, emergencies, and other requirements demands more time, money, and effort than most people realize. Of course, you might decide to hire a property manager to do it for you. Fees for property management vary quite a bit so be sure to interview several different companies.
- Recovery vs Bust – As mentioned above, the time needed for real estate values to recover may be much longer than you. Currently the Jacksonville real estate market remains weak (though there are signs of stabilization in some areas). Nobody knows for sure how much longer – or steeper – values might drop before recovery. Even when we do have a recovery, most analyst predict a slow, gradual climb… nothing like the fast climb we saw early in this century.
- Depreciation – The IRS does permit you to take deprecation as an expense against rental income, but don’t think of depreciation only as a tax deduction good for improving cash flow. Plan on tenants NOT treating your home as well as you would. Physical depreciation is a very real consideration when turning your home over to tenants.
- Capital Gains – If you rent your house for only two years, you can still sell your house and be exempt from paying IRS taxes on up to $250,000 of capital gain (if single) or $500,000 (if married). However, the depreciation you take against rental income may have to be recaptured. We advise that you always consult your tax accountant and a real estate attorney.
- Re-Lease or List Again – In the current Jacksonville market, if you have a desirable property, you’ll probably find tenants quickly. After the first year’s lease is over (and each subsequent lease as well), you’ll have to decide whether to continue renting your house or giving it another try at selling. Regardless, you may have to invest in cleaning, painting, landscaping, replacing carpet, upgrading appliances, making repairs, etc. before new tenants or buyers move in.
- Damaged Goods – When you do get ready to sell again, your house may be considered damaged goods simply because it has been a rental. Unless you’ve had the good fortune to have had great tenants, home buyers will be aware of the home’s history and will take this into consideration when making offers.
- Selling as Tenant Occupied – Reality Check… tenants don’t care if you sell your house or not. They have zero stake in the outcome. All they know or care about is that selling it disrupts their lives. Do not expect them keep the house as neat and clean as you would and don’t expect them to be flexible to accommodate showing appointments. In fact, tenants often make it as difficult as possible to show the property just out of spite. Consider, also, that if the house doesn’t sell you may find yourself with disgruntled tenants because of the inconvenience they experienced. Trust me… disgruntled tenants are no fun!
- Rental Merry-Go-Round – Although the plan was to just rent your house for a year or two (just until the market improves), consider that this could turn into a long-term commitment. You might just find yourself stuck on the rental merry-go-round without any easy way to get off. The window of opportunity between leases is going to leave you with only a short time to find a buyer. Unless you have adequate resources, you may find yourself back on the rental merry-go-round, wishing and waiting for the opportunity to unload a burden you never counted on having.
- Rental Prices Could Decline – Right now rental prices in Jacksonville are increasing. But there is no guaranty that this will continue. In fact, if/when the selling market begins to improve, rental prices may decline due to reduced demand.
One more thing to consider – Mortgage rates: Mortgage rates are currently the lowest they’ve been in recent history. But that won’t last forever (in fact, as I write this, the US economy is in serious trouble as our politicians try to iron out a way to prevent a reduction in our credit rating).
There is simply no way of knowing when the Federal Reserve will start raising key interest rates. When they do, mortgage rates will climb, making homeownership more expensive.
So, while renting may seem like the ideal short-term solution, only you can decide if it is the best long-term solution for you and your family.