Traveling long term? Rent or Sell?

Rent or Sell? The Optimal Decision for Homeowners Turned Vagabonds

This post was written for the homeowner faced with the prospect of long-term travel who is struggling with the decision to rent or to sell. We’re considering the options. And while we haven’t reached a decision, it’s certainly raised a lot of questions. That being said, we’re unlikely, at this time, to sell.

We believe that the short-term cost of renting out our primary residence, or even leaving it unrented for six months or a year, might pay off in the end. What we mean is that the cost of selling or renting a house may not be simply monetary.  But there will be a costs.

The home we bought just a few years ago has appreciated (we’ve been lucky through this downturn as we live in a desirable area). Selling now will lock in some good gains and free us for travel; however, upon our return, and ready to buy again, we could be priced out of the market.

Here are some important factors that are worthy of consideration:

  • Do you have adequate funds? Are all options open to you? Can your cash flow sustain renting, selling or leaving your home vacant?
  • How will your choice affect your cash position?
  • How willing and able you are to manage a rental property? [especially from a distance-SA]

Balancing the pros and cons of renting, selling or leaving your home vacant, one guiding principle remains. You can rarely realize both cost savings and a high level of security—without paying for it.

Whatever your motivation, it’s important to have a healthy grasp of the financial issues [and implications-SA] when weighing this decision. Though not a comprehensive list, here are some things to consider.

Costs associated with selling

Selling your home can be an expensive proposition.  If you list your home with a realtor, expect to pay around 6% of the home’s sale price. Transfer taxes, property taxes and legal fees associated with the closing of the sale will comprise ~2–4% of the sale price. Further, the remaining principal balance on your current mortgage will have to be paid upon closing. If there’s a prepayment penalty, you’ll need to deduct that from your sale price. Even with these simple back-of-the envelope calculations, you can see how the costs of selling a home can quickly mount.

Costs associated with renting

Consider the total cost of maintaining your place while you are abroad. This includes mortgage payments, utilities, maintenance, yard work, repairs and any professional services which might be required—these could potentially include property management, accounting help and lawyer fees. If, like us, you’re considering renting out your primary residence, you’ll also have to decide whether to rent it furnished or unfurnished. If you leave furniture, be prepared for it to be damaged or, at the minimum, show some wear. If you are planning to rent it unfurnished, you’ll have to consider the costs of a paid storage facility.

Cost of leaving a home vacant

While we had initially dismissed the idea as unfeasible, we’re quickly warming up to the idea of neither selling nor renting. While the costs of leaving a home vacant aren’t negligible, there are many benefits to consider. You can avoid the expenses related to selling and the complications arising from renting.

Furthermore, a low interest-rate mortgage makes holding onto a house a decent way to build wealth.  Low mortgage rates mean that paying off your mortgage is a guaranteed, risk-free return on your investment. Of course, you can invest in safer investments like bonds and dividend paying stocks, but rarely will you earn a higher return on these types of investments than the interest rate you pay on your mortgage.

Of course, there is some downside.  For instance, an unattended home is a prime target for burglars or vandals and most household insurance policies offer only limited coverage if your home is not checked regularly while you are away. Luckily, there are a number of property management services that can help.

Consider hiring a management company

Regardless of whether you decide to rent or to sell, when you add up the responsibilities, there’s much to be said for hiring a professional. This will cost about 8–10% of the rent you collect (or the mortgage you pay). Depending on your agreement with your property manager, they could take care of everything related to the property—from putting it on the market and screening your tenants to collecting rent, maintaining the property and even taking care of your mortgage.

Conclusion

Weighing the choices:  We are concerned with the prospect of selling our house outright. If we were to sell the house, we would be unable to refinance or borrow against the equity in it for the purchase of a new one [sometimes done when a buyer finds the next house before the existing one has sold, i.e., a “bridge” loan-SA]. Moreover, securing a mortgage might prove difficult based on unemployment (or underemployment) caused by travelling. We intend to return to the same area in the future, when we face the risk of being priced out of the market if we were to sell at that time.

It would therefore make sense to rent our home. However, we’re concerned with the upkeep of the property, the screening of prospective tenants and moving our belongings into storage.

Weighing the total expected costs against the total expected benefits of each of these decisions, we’re warming up to the idea of finding somebody to stay at our house and to take care of everything while we’re gone. The challenge now is finding someone to trust. Friends?  We feel uncomfortable asking our friends to shoulder such a burden. Relatives? That option might not be available to us. We’re also considering trying to locate a reliable housesitter.

At issue of course, is how our choice will affect our cash position while travelling. We’ll consider the cost of carrying our residence as an incremental loss while we are away.

RESPONSE  Posted on August 27, 2012 by pppm

Before you decide to rent out your home instead of continuing to try to sell, you must consider a few things:

  1. Run the numbers.  Is renting feasible?   Research the current market to see what your house could rent for. Look at all the monthly bills, current repairs needed, and possible vacancy times to see if it is worth your time and effort.
  2. Contact a tax expert.   The laws vary depending on how long you lived in your home before renting and how long you rent it before selling.  [There could be large tax implications = find out!-SA]
  3. Know the laws.   Know the laws of renting real estate. Learn the legal rights and responsibilities for landlords and tenants, i.e., what you can do if the rent is not paid, what you can ask during interviews, how to handle security deposits.  Check HUD.gov to see links for tenant rights, laws, and protection.

Are you ready to take on that risk and responsibility of being a landlord? Managing your own property is like having a part-time job. You must take care of repairs, interview tenants, collect rent, do bookkeeping, etc.  Being a landlord can be tiring and costly.

Hiring a property manager is a huge relief for owners. A management company will take care of everything for you including screening and finding a tenant, collecting rent, taking care of maintenance issues, and much more. As an absentee owner, hiring a property management company is a must.

Thanks to:  Two Go Round The World Blog

Look for additional posts on Homeowners: To Sell or Rent?

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