Analyzing Market Trends
This is a crucial financial decision that a homeowner will ever have to take-the decision whether to rent or sell the property. This analysis will be all-inclusive, guiding you through your complicated decision by examining the main market factors and personal considerations that should influence your choice.
Understanding Market Conditions
The current state of the real estate market is essential in determining whether you should rent or sell it. If there is a seller’s market and the demand exceeds supply, then you would fetch a premium value for your property. Conversely, if you are in a buyer’s market, you might consider holding onto the property and renting it until market conditions improve.
Key metrics to measure are local property values, average days on market for comparable properties, and the list price to sale price ratio in your area. Increasing local property values may indicate selling while stable or decreasing values may make renting more appealing.
Rental Market Analysis
Evaluate the local rental market before deciding to be a landlord. Research comparable rentals to estimate possible monthly income. Calculate your expected yield using this formula:
Annual Rental Income ÷ Property Value × 100 = Rental Yield Percentage
A good yield for a rental will usually be between 6-8%. However, this depends on the location. Assess whether local rental demand is sufficiently strong to keep vacancy periods at a minimum and if rental prices are heading upwards.
Considering Your Options Before You Rent or Sell
Consider whether you have sufficient equity in your home to sell profitably-after costs for selling, such as selling commission, closing fees which apply to transfers like selling a house-in order to achieve cash on top of that. If selling leaves, you with little cash or makes you more debt-prone, then renting may be the better option.
Think also about how long you plan to stay. If you will probably return to the neighborhood or prefer to retain the possibility of using the property in the future, renting is the better choice. Research local real estate trends. If rentals are in high demand in your region and property values are projected to rise, keeping the house as a rental is a good decision. On the other hand, selling could stop losses if the market is flat or sinking.
Finacial Calculations to be Made Before You Rent or Sell
In reaching this critical decision, it is going to be necessary to perform comprehensive mathematical calculations of the situation to see the big picture. To sell your property, you must first determine your net proceeds, take the current market value and subtract out the remaining mortgage balance. Remember that you would also need to account for capital gains taxes, determined both on the duration of time in the property and tax bracket.
Do not forget realtor commissions, usually 5-6% of the sale, and closing costs, including title insurance, transfer taxes, etc. Compare that against what you could earn by reinvesting those dollars when you invest them in stocks or bonds, or consider buying another property. However, do rely on historical market returns to make some kind of estimate of what those profits might be.
If you tend to go with renting, first calculate the potential monthly income that you can expect by researching the current comparable rental rates in your area. Then subtract all monthly expenses. Prepare a comprehensive cash flow projection, taking into consideration possible vacancy periods, usually calculated at an 8-10% vacancy rate, and major repairs, such as replacement of a roof or of HVAC systems, at regular time intervals.
There are also major tax implications for prospective landlords; mortgage interest, depreciation, repairs, maintenance, and property management fees are all fully deductible, but rental income will be taxed. Consider going to a tax professional to get an idea of how this may impact your overall tax situation.
Personal Factors to Consider Before you Rent or Sell
Beyond the relative market conditions and financial calculations, personal factor play a crucial role in the decision. Being a landlord requires time investment and emotional energy. Consider whether you have the capacity to handle tenant relations, maintenance issues, or property management responsibilities. The challenges of renting include problematic tenants, property damage, or extended vacancies. Evaluate your tolerance for these types of risks.
Making the Decision to Rent or Sell
The best decision to take between rent or sell would depend on careful consideration of all these factors. It would be advisable to consult with real estate professionals, financial advisors, and tax experts for added guidance on your given circumstances.
Remember, there is no “right” answer-there are always options that work best for your given financial goals, personal needs, and long-term plans. Take the time to thoroughly elevate your choices, run the numbers, and consider the practical as well as the personal implications of each choice before making your decision.
