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RENTING VS. SELLING: MAKING THE RIGHT CHOICE FOR YOUR PROPERTY

Increased remote working and a global pandemic have caused a shift in where
people are moving and retiring. For many in dense urban communities, the
possibility of moving to a vacation community or a more isolated area is
appealing. They may be considering selling their home, or keeping it as a rental
property. In order to make an informed decision, we’ve come up with several
considerations to ponder in making this decision. This article is strictly meant
to be thought provoking, and should in no way be construed as tax or legal
advice.




Can you afford to keep the home? This is often the foremost question to
consider. If you’ve built equity, do you need to cash in on the equity by
selling your home for a down payment on a new home? Also, if you are buying
another home, can you qualify for a mortgage without selling the home you
currently own? Even if you are not buying another home you should ask yourself
if the rental income will cover the mortgage, maintenance, and management costs
of the home as a rental. 

 

Will you self-manage the property? One important decision you will need to make
is whether or not you will hire a management company. A management company may
greatly reduce the time, energy, and liability you incur as opposed to managing
the property yourself. The management company will prepare the legal documents
between you and the renter, collect the rents and deposits, coordinate
maintenance, run background checks, and may even assist in the unfortunate need
for eviction proceedings. In return for these and other services, you will need
to pay the management company a fee. Commonly it is a percentage of the rental
income and this should be factored into your operating expenses.

 

Are you ready for the risk? Every investment includes the element of risk and
reward; real estate is no different. Thoughtful research of the rental rates,
vacancy rates, and property appreciation rates should be taken into
consideration.

 

On one hand, a well-performing rental property will have positive cash flow each
month, ideally the value of the property will appreciate over time, and the
principal balance of the mortgage (if one exists) will decrease, thusly
increasing the overall value of the investment. This is a great scenario. On the
other hand, decreasing rental rates, declining property values, and vacancy can
quickly become a financial burden. Ask yourself if you are prepared for such an
event.

 

What is your tax situation? There may be tax benefits to consider such as
capital gains taxes when renting. Generally speaking, if you’ve lived in your
home and it’s been your primary residence for 2 of the last 5 years, you can
take up to $250,000 if you are single (or $500,000 for a married couple filing
jointly) of gain tax free when you sell the home. If you have more gain and are
using the property as an investment property at the time that you sell it, you
may be able to use a 1031 exchange and defer the tax on the gain over and above
the $250,000 (or $500,000). This can be important in appreciating real estate
markets where you speculate the property will continue to go up in value. There
are many other tax factors to consider, so for best practice always consult with
a professional.

 

The overall mindset of anyone who considers becoming a landlord should be: take
care and caution. Consult your real estate, tax, and legal advisors. Your
initial due diligence will pay big dividends for years to come and the next time
you’re faced with the same big decision you’ll be armed with knowledge.

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 3. Renting vs. Selling: Making the Right Choice for Your Property

   
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First American Exchange Company, LLC a Qualified Intermediary, is not a
financial or real estate broker, agent or salesperson, and is precluded from
giving financial, real estate, tax or legal advice. Consult with your financial,
real estate, tax or legal advisor about your specific circumstances. First
American Exchange Company, LLC makes no express or implied warranty respecting
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