To Sell or Not to Sell Your Old Home?

Within five years of buying your first home, the chances are you will begin shopping for another one. You may think you should keep your current house because it is a “good investment.”

There are usually better options, though. The financial impacts, alone, of retaining a current home when trying to buy another primary residence would lead most people to sell it.

At first thought, this may sound counterintuitive, but this logic comes from the wisdom after being involved in hundreds of real estate transactions.

That being said, here are aspects to consider:

1. Keeping a larger, higher-priced home often does not generate the same cash flow as a lower-priced one. 

Why? Because your nice home probably has an existing mortgage with a higher monthly payment than a true investment/rental home. Because of this, it may only break even in cash flow. Since the cheaper replacement rental house has a lower monthly payment, it typically generates more income, making it a better long-term investment without the financial burden of the higher-priced home.

If you really want a rental home as an investment, then sell your nicer house and replace it with a less expensive rental home. I still don’t think this is the best option, though. You’ll see, just continue reading.

2. Consider the income-tax ramifications of selling a property that has a homestead exemption versus selling it after it has become a rental home. *always consult a tax professional about this

A homestead exemption prevents property taxes from skyrocketing. However, it applies only to primary residences. If you keep your current home after buying another one to live in, you risk an increase in property taxes. The amount can be substantial if the home has significantly appreciated since you purchased it.

This is important when it comes to selling the current primary residence. If you sell a valuable home while it has a homestead exemption on it, income taxes on the proceeds from the sale will likely not apply. They will apply if the house is sold after being converted into a rental home for a period of time.

This is something you could have avoided by selling it while it was your PRIMARY residence.

Not only do you have to consider the increase in PROPERTY taxes from retaining a rental home, you have to consider the EVENTUAL INCOME tax responsibility from selling what has become a rental home.

3. Consider the down payment on the new home.

If selling an existing home can generate a larger down payment on a new home, the amount of money it can save down the road may make more financial sense. For instance, it may help qualify you for a larger loan amount, or it may lower your payment.

For example, if you were NOT planning on putting a 20% down payment on your new home, you would have to pay mortgage insurance (MI). But if the proceeds from selling your current home would add up to at least a 20% down payment and you paid that much, then MI is not required. This can be more than a $100 a month in savings, sometimes more than $200. It’s important to note that MI payments do not protect you personally, nor do they pay down your mortgage amount.

Monthly mortgage insurance can be considered a tax on those who are eager to buy but have not saved up the standard 20% down.

4. Are you truly cut out to be a landlord?

Tenants come in all forms — some are slobs, some are neat, some crazy and some normal. Despite your best efforts to screen them, are you prepared to see a home you love not being kept in the same fashion in which you kept it? Are you a stickler about keeping the flower beds perfect? The lawn edged? The pool screens clean?

Your tenant may not have the same drive as you to keep the house in tip-top shape. This does not mean they are a slob. It just means they are not a home owner.

5. Can you hang?

Sometimes landlords have vacancies in their properties. If you’re thinking about renting a home, then ask yourself this:

  • Would a vacancy and possible repairs (even if just carpet and paint) financially burden you?
  • Can you float the existing mortgage payment and any rehab necessary should a tenant move out?

In other words, can you emotionally and financially handle a random call that your tenant is moving out at the end of the month, and now you will need to cover the $1,500 mortgage payment?

6. Is your time worth the return?

This question must be asked by anyone considering having a rental property. Many higher earners are better suited increasing revenue through their profession versus attempting rental management.

Sure, on paper you can say you will clear $200-$300 per month in revenue from a rental home, but does that analysis consider the eventual repairs you will have to make? Vacancies? Extra tax forms for filing? The list goes on.

From a cash-flow perspective, once these items are considered, a mortgaged rental home is usually a break-even financial proposition — at best.

7. Question the quality of life.

Will issues with tenants and repair costs impact your quality of life? Will the additional liabilities affect or worry you? Do you have adequate liability insurance?  Do you have the time to deal with potential issues? Even with a property manager in charge, there are still time and financial requirements to consider.

Don’t let it be misunderstood, rental homes are a great investment. This is coming from an active real estate investor with rental homes, however, this is an investment for which most are not cut out. Even if you can hack it, most people cannot maximize the returns while not allowing an “investment” to affect their peace of mind.

If you are thinking about retaining your existing home, please heed the above and make a choice for the right reasons — not because of the idea that “it is a good investment.” Weigh the pros and cons.

If you are in this predicament, feel free to call The Florida Mortgage Firm for an honest evaluation on your personal scenario.

As always, no sales pitches. Just honest, ethical advice from the professionals.

Call us today at 813.707.6200

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