Should I sell my house or should I turn it into an investment property? This question was sent to me by Jennifer L out of Utah. First of all, I want to congratulate you for having the option. There really is no right or wrong answer since everyone has a different plan and situation.
But let me discuss 5 factors you should consider when making this decision.
1. Cash Flow- What is cash flowing property? It is when your rent payment received can cover all your housing expenses: mortgage payment, property tax, management, HOA, and vacancy. Having cash flowing property is crucial. You are buying an investment to “build” your financial portfolio and not to “put more stress” on your financial portfolio. If your rental property cannot produce a net income for you, consider selling.
2. Return on investment – In investing, you always want to find the highest and best use of your funds. Let’s say if you are able to get $100,000 after the sell of your home, and you can only get $10,000 net cash flow by renting it, you are looking at a 1% return on your equity. Can you take that $100,000 and invest in something else that gives you a higher return?
3. Capital Gain Tax – When you make a profit from the sale of your home, you have to pay capital gain tax. It can be up to 20% depending on your tax bracket. If this is your primary residence, then you can receive up to $500,000 between two spouses on tax-free gain. Do some math now on how much you will save if sold it now tax-free vs being taxed up to 20% in the future. By the way, I am not a CPA so do check with your tax advisor.
4. What’s the future outlook? Depending on how long you are planning to hold on to the property if you do decide to keep it as a rental, do some research on where the housing market may be at for the time you are planning to sell. If you are planning to keep it rented for 3 years and sell then, and all indication that the market is going down in the next 3 years, maybe it is a better idea to sell it now than 3 years later.
5. Can you handle the tenant? Being a landlord comes with a lot of responsibility and risks. That’s why you are getting paid for being a landlord. It really is not for everyone. A few months back, one of my clients had to evict a garbage hoarder…..that That definitely wasn’t fun. The good news is that these landlord skills can be learned. It is a matter of being patient and willing to learn. If that’s you, then you can be a good landlord.
There are definitely more things to look at but I just want to give you the top 5 things to think about. If you ever want an opinion, I am always here to help. Share this with anyone that thinks may need it.
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