When should buyers today plan to sell their condos or homes? If I buy a condo today when can I sell it to recoup my costs or make a little money?
My advice to clients is DO NOT SELL in 5 years if you are buying today. Here is the simple reason why: Money is cheap! Many buyers of today are locking in interest rates between 3.6 and 3.9%. These are the lowest interest rates we have ever seen for home purchases. While the Fed says they will keep interest rates low over the next two years, I suspect that in 5 years interest rates will be higher. Perhaps not much higher but definitely higher than 3.5%. With this being said, why would you sell your condo and lose your fixed rate of 3.6%?
First, lets discuss who I’m talking to. I’m talking to buyers who are currently obtaining fix interest rate mortgages at today’s prevailing rates. Right now for a 30yr fixed your APR is in the 3.5 to 3.8% range depending on your down payment. During the first few years of your mortgage, almost ALL of your payment goes toward interest. For those of you not familiar with how mortgages work here is a quick explanation. Interest is paid first, at the front end of the loan, while principal is paid out towards the end of the loan term. However, when you view an amortization schedule you’ll notice that around year 5, on a 30yr fixed, you will see a “decent” portion of your monthly payment going toward principal.
If you sell your home on year 5 of your mortgage you’ve barely made a dent in your principal but you have paid plenty of interest. My suggestion to my clients is if you have a rate of lets say 3.6% then keep your property. When it is time to move (lets say 5 to 7 years down the line) rent out your home and buy another. Now, the biggest issue many families may have is coming up with the down payment for their next home if they are unable to sell their current residence. But, if you are able to save enough money for a down payment on your next home then DO NOT SELL your home with that incredibly low interest rate of 3.6%!
Instead rent out your home and let your tenant pay down your mortgage for you. While I am not a CPA or a Tax Attorney, the interest on your second home is typically tax deductible along with the interest on your first (primary) residence. You still get to take advantage of the tax breaks of home ownership even on your second home.
Understand how much you are truly making on your rental:
Here is what most people do to figure out if they are making money on their home that they have decided to rent out:
They say “Ok my mortgage payment, with taxes and insurance is $3,000. I can rent my house out for $2,800/mo therefore I am losing $200/mo.” Now, if you are in Year 1 of your mortgage this may be accurate as nearly 100% of your payment is going toward interest. But if you are in year 5 or 6 of your mortgage you are seeing a great dollar amount going toward principal. Therefore, you may have a $200 cash outflow each month to keep the other mortgage current, but $400 of that payment may be going toward principal. In reality you are paying that additional 200 to yourself and your tenant is paying the rest.
This is not meant to be financial or tax advise. What I am trying to get across though is the fact that right now we are seeing interest rates dirt cheap, cheaper than we’ve ever seen them before. The natural tendency is to sell your home when you buy another one. What I am encouraging my clients to do is to think about “Building Wealth” and hanging on to that home and renting it out instead, if the numbers work for them financially. If the numbers don’t work then you have to sell. But many homeowners don’t even entertain the option of renting out their home instead of selling it. So in 5 years or even 3 years, when the time comes to sell your home sit down with an accountant or financial planner, and of course your Realtor and figure out what is going to make the most sense for you. You may see that you’ll do quite well in the future by holding on to your home.