05/05/08: Sell or Rent: A Comment Current Dilemma
By Benny L. Kass
Q: We have lived in our house for 15 years and have decided to move. We bought a new home six months ago and tried to sell our old one “by owner.”
We had no success. We had a real estate agent give us a price that he thought the home would sell for. My husband did not like that number because it was too low. He thinks prices will come up again.
Do you think we should sell our home at the going rate or rent it out for a while until the prices come up again? I’m not sure they will, so I think we should just sell it at the best offer, but we thought we would ask for your professional advice.
A: My “professional advice” is probably as good – or as bad – as that of anyone else who is trying to predict when or even if the real estate market will bounce back. Whether to sell or rent is a personal question that only you and your husband can decide, after taking into consideration a number of important factors. Here are some things to consider:
– Tax implications: I suspect that during the 15 years you have lived there, your house has increased in value. You do not want to get hit with capital gains tax on the profit you have made. That means that you will have to live in the house for at least two out of the five years before it is sold. If you can meet this test, and assuming that you and your husband file a joint income tax return, you can exclude up to $500,000 of the gain from tax. (Single people and those married but filing separately can exclude up to $250,000.) This means that if you move out and rent the house, you want to sell it before three years have elapsed. Selling a house that has a tenant is not always easy. Some tenants do not keep the house in the same condition that you or a potential purchaser would like. Some tenants refuse to let you show your house to prospective buyers, even if your lease specifically permits you to do so. You may have to take the tenant to court to get a judge to order showings. Thus, even with the best intentions of selling the house within three years, you may find yourself thwarted and so lose the valuable tax exclusion.
Being a landlord: Not everyone is cut out to be a landlord. You have to learn the local landlord-tenant laws, and make sure that your lease conforms to those laws. For example, different jurisdictions place limits on the amount of the security deposit you can collect when you lease the house. In the District, tenants have a number of rights they don’t have elsewhere, including the opportunity to purchase the house even if you should find a buyer. If a tenant does not pay rent, eviction can be time consuming and expensive. More important, do you want to get calls in the middle of the night complaining that the toilet is overflowing or that the roof is leaking?
– Carrying costs: You have already purchased another home. Can you afford to pay for two houses? Keep in mind that to have a buffer between you and your tenant, you may want to hire a property manager. And the manager will want to get paid whether or not you have a tenant – and whether or not the tenant is paying the monthly rent. When you rent out a house, there will be months when it is vacant. But you still have to pay the mortgage and the real estate tax, and carry adequate insurance. Maintenance bills don’t stop, either. All of this costs money, and you have to make absolutely sure that you have – and will have – sufficient resources.
-Benefits of renting: Yes, there are also benefits to being a landlord. You can get tax deductions that are not available to homeowners, such as depreciation. Discuss the details with your financial advisers, because there are specific limitations on the amount that you can deduct, depending on your annual income.
– Future of the market: Here, no one can assist you. Some “experts” are predicting that the real estate market will come back by the end of this year, while others think it may take two or three years. The crystal ball on my desk is cloudy.
But here’s a suggestion. If you decide to rent out the house and you have a lot of equity, you may want to consider refinancing and pulling out some of that money. (Assuming you can find a lender in today’s economy that is willing to make a cash-out loan.) However, first calculate all the potential income and expenses involved with the rental. You do not want to pull out too much money, only to find that the new mortgage payments and other expenses will exceed the monthly rental income.
Another suggestion: Take your time and see if you can get a better offer for your house. Spring is usually a good time to try to sell. Perhaps you will get lucky and find a buyer who will come closer to your price.
In the final analysis, however, if you decide to sell, I am sure you will make a profit. It might not be as large as you would like, or as much as your neighbor got for a similar house two years, ago, but it will still be a profit. Too many people want to forget that property values were going crazy in the past few years, and are disappointed that they cannot sell at those same exorbitant prices. There’s no room for that mindset today.