The real estate market is perhaps one of the most rewarding and at the same time tricky places to invest in. Everyone will tell you that owning a property definitely makes your life different and that it is an asset which potentially can lead you to registering a profit. Every homeowner eventually comes to a crossroads when they decide it is actually time to make money off that property. The most widespread tendencies are to either rent or sell a home. Both have advantages and drawbacks although it should be pointed out that the more complex matter is related to renting.
Selling your home can be a pretty straightforward endeavour. You simply give up ownership of a property and receive a lump sum in exchange. Of course, there are taxes and commissions to keep in mind but that goes without saying. A rent means that you receive a periodic compensation which is covered by a tenant. In this case you become a landlord and retain ownership of the property. You also receive a sum but it comes in the form of a monthly payment and basically represents a steady cash flow.
This is where we simply have to clarify that any decision is fine as long as you are perfectly familiar with your own situation. Nothing is black and white when we talk about rent or sell a home. There are global real estate market trends but at the same time there are so many variables to consider and seeking professional help will never hurt. In reality you simply cannot avoid hiring a realtor regardless of which option you choose – rent or sell your home.
Speaking of fees and taxes during a sale, these expenses come right out of your profit. You need to be perfectly well aware of the value of your home and the realistic price you can ask for it. A professional real estate agent will definitely give you some up to date information on the condition of the market. There are trends which need to be constantly monitored. Even though this market is not as flexible as the stock exchange, it does go up and down and almost once in a decade crashes. That being said, you want to sell when your equity is at its highest but unfortunately some aspects do not depend on you. Any given resident or home owner cannot control whether the neighbourhood is blooming or whether the town becomes more crowded. You can’t affect the opening and closing of local businesses or schools. These are all external factors which definitely affect the price in many areas and will likely sway you in a certain direction when it is time to rent or sell a home. What you can do to improve your home equity is invest in your property by renovating it, abolish debts by making payments against your mortgage, stay on top of your taxes etc.
Since we mentioned the movement on the real estate market, we should now specify that rents rarely go down. On the contrary, they tend to become more expensive with time due to inflation and improvement of standard of life. Of course, there are exclusions but numbers do not really dip that low even during a recession. Deciding to rent instead of sell your home can be quite a profitable choice. If you can afford a second home or simply have somewhere else to live, getting rid of your asset might not be the brightest idea.
Collecting rent is considered to be a passive form of income although in reality you will need to be pretty active. Being a landlord is basically a job. In fact, if you go online or speak with friends regarding the subject, you will be swarmed with stories that it is not worth the hassle and that you might end up not only losing money but all that tumult could be detrimental to your health. Most damages that occur at your property will need to be fixed and paid for by you. Along with that dealing with your tenants can be pretty challenging as there is no guarantee you will like their lifestyle and the way they carry themselves in your house/apartment. In short there is a lot more oversight involved in renting than you might suppose. You can hire a manager (which is pretty useful if you live in another city) but then you also have to pay them. On top of that you still need to oversee them and make sure they in turn do their job properly.
If you, however, truly want to rent and not sell your home then you also need to make some calculations. There is something called “the rule of 1%”. The goal is to collect 1% of your home value monthly in the form of a rent. So if it is valued at $100,000, then your monthly rent should come to $1,000. Unfortunately the more expensive your home, the lower the ratio. A $500,000 estate would likely be rented out for about $3,000/month. As you can see this is less than 1%/month. What many smart owners do is sell their expensive asset and buy 5 cheaper ones in order to maximise their profit from rent. You are more likely to collect 5 rents per month – each at $1,000 than actually get someone to pay you $5,000/month for your big, expensive house. Consider all of that come time to rent or sell a home.
This is also better because the tenant basically pays you to increase your equity. If you use the rent to pay back your mortgage then you definitely improve your home equity. Repairs are an essential chore for every landlord as they might force you into expenses you don’t anticipate. Don’t over improve your rental house because you never know how people will treat it. You might spend 5 years not having to change one broken knob at home but in a year you might need to repair five at the place you have for rent. Keep in mind you will also have to register the rent as an income and therefore pay taxes on it. The good thing is that rental related expenses can be written off and you pay taxes only on the difference between the two.
If rents rise and home value rises, then great – rent and don’t sell. If, however, you can’t increase your equity and rentals are cheap then you will likely spend more than you earn. In this case, unload the asset. Either way, you need to assess your position and determine if it is best to rent or sell your home.