I’ve had two clients in the last month ask me if they should sell their home now that they have to move or if they should hold on to it and rent it out. There are definite pros and cons of both options. Here are some questions to ask if you are needing to move and currently own your home.

1. What is your current interest rate and monthly payment? Over 60% of Americans currently have a mortgage interest rate below 4%. That’s a big reason why I am getting this question a lot. It’s really hard to walk away from a mortgage interest rate that low. If you have owned your home for a while you also most likely bought it when prices were less and so your monthly mortgage could be very low. The average mortgage payment in 2021 was only around $1500 and many clients I talk to have monthly payments closer to $1200 a month. Rents have gone up as home prices have increased. In Watkinsville, rent for a 3/2 is over $2000 a month. If your mortgage payment is only $1200 and you can rent your home for $2000 then that could be $800 a month in income while you are continuing to gain equity in your home.

2. Will you be managing the rental yourself or paying a property manager? If you are moving out of the area, I highly recommend paying a property manager. Their fees typically run from 10 to 20% of the monthly rent. Even if you are close enough to manage it yourself, ask yourself if you have the resources to properly screen tenants and make sure they are taking care of your property. Speaking of which…

3. Can you emotionally handle it if your home becomes damaged as a rental property? There are horror stories of renters trashing homes. This year we experienced it first hand when clients asked us to step in and help them sell their rental property of six years. The folks had paid on time and were nice people. But, when we went into the home after they moved out, it looked like they had literally never cleaned. Ever. Rats, roaches, smells - truly disgusting. We were able to help our clients get the house fixed up but at the cost of $10,000’s and countless hours. A good property manager should keep this from happening, but how would you feel if that happened to your house, your home.

4. Do you have enough money set aside to cover the cost of repairs? Inevitably things break or need to be replaced in a home. You need to budget for those costs especially if you have a property manager coordinating repairs and you not are doing the repairs yourself.

5. Are you going to be buying a home where you are moving? Unless you are moving to the middle of nowhere, most likely home prices will be high wherever you are moving to. To make your new house payment affordable, you may need the equity in your current home for a large down payment. For example, let’s say you have $200,000 in equity in your home. The home you want to buy where you are moving is $400,000. If you don’t put any money down on that home, with a 6.5% interest rate before taxes and insurance, your monthly payment would be $2695. If you put the $200,000 in equity down, your payment would only be $1264. That’s a difference of $1431 a month!

6. What are the tax implications? Owning rental property can be a great tax write off. You get to depreciate the property every year*. You also get to write off all those repairs and the property taxes and any other expenses you have for the rental property. However, you may have to pay back that deprecation when you go to sell the rental home as well as pay capital gains (typically around 20%) on the profit of the home from what you originally paid for it. If you want to continue owning rental property you can do a 1031 exchange as a way to defer those taxes. Importantly, if a home has been your primary residence 2 of the last 5 years, you can actually avoid paying taxes on your profit - up to $250,000 if you are single, or $500,000 if you are filing as a married person. So, you might be able to rent your home for a few years and then sell it without having to pay capital gains. Please make sure that you discuss any of the tax implications with your accountant as there is nuance and I am not a tax professional.

7. What is the market going to do? Are home prices going to continue to go up? That is always the million dollar question. If homes continue to increase at the rate they have then not only would you be building equity in your home through the monthly payments the renter is essentially paying, but you also would be gaining equity through the value going up in the market place. But, what if homes are stabilizing in price (which is what I think is happening now)? Or what if they actually go down in value? During the last recession the Athens and Oconee areas held their value more than any other area in the state of Georgia. However, prices still did go down. If you can afford to hold on to the house then almost always if a home is maintained in a thriving area, you will eventually gain equity.

So, should you sell your home or rent it out? If you aren’t going to be buying a home somewhere else then it might be a really good idea to hold on to your current home and let a renter build your equity. If you are buying somewhere else, there’s a good chance you will need the equity in your current home to purchase the next one. This decision is nuanced and I am more than happy to discuss your particular situation.

*Depreciation is the recovery of the cost of the property over a number of years. You deduct a part of the cost every year until you fully recover its cost.