Should I List My Property For Sale or For Rent?

When it comes time to move for whatever reason; a new baby on the way, a job transfer or you simply want a change of pace, the initial instinct for many is to list their property for sale. The basic logic makes sense. You want to cash out and use that cash for your downpayment on a new home. However, we’re finding that many would be sellers are now considering holding onto their property and renting it out for the added cash-flow and to have a tenant help pay down their mortgage. This blog will be dedicated to asking you some basic questions so you can help decide if you should list your property for sale or list it for rent.

How much can you get in rent for your property?

The first thing you need to do is determine how much you can rent your property out for. If you cannot achieve a high enough rent amount to pay for your holding costs (your mortgage, your property taxes, association dues and insurance) then you need to consider if it is worth it for the difference to come out of your pocket.

Make sure you work with a Realtor who understands the rental market well. The rental market is starting to change and will continue to do so over the coming years (and not in the landlords favor). Make sure you also consider what time of year you are renting out your property in. For instance rents are typically much higher in May than they are in November.

Does your association have any rental restrictions?

Well, maybe this should be the FIRST thing you look into instead of rental price. Some associations prohibit rentals. Make sure yours does not! Other associations may have a rental cap and if they have met this cap (number of units they allow to be rented at any given time) then you may need to be added to a wait list before you can rent out your unit. Check with your association management to confirm any and all rental policies and restrictions. For instance, did you know that some associations may be pet friendly but do not allow renters to have pets?

Do you NEED cash from your current property to buy a new one?

If you’re buying your next property the question is can you afford to buy it without selling your current home. Look at your finances and talk with your mortgage broker regarding this. Do you need to sell in order to have 20% down payment? Or are you OK with just putting down 5% on your new property? Balance out the costs of this as putting less than 20% down typically means you’re responsible for PMI (Private Mortgage Insurance) which will increase your monthly costs on your new home.

What is the interest rate on your mortgage?

I was speaking to one of my clients recently who was deciding whether to rent or sell. She said her interest rate on her 30yr fixed mortgage was 3.35%. That is VERY cheap money! That played a role in her decision process of whether or not to rent or sell. She ended up renting out her place. If you have an incredibly low interest rate it might be a good idea to hang onto that property and rent it out.

Will it be difficult for you to manage the property?

Some condos are very easy to manage because the building maintenance staff can help with any issues that arise inside your unit. Other buildings may be self-managed and this may mean anytime there is an issue you will need to hire someone to come in and fix the problem. This should be taken into account. For instance, if you’re living in the same city as your rental property then management can be very easy even if you’re in a building that does not have maintenance staff. Conversely, if you are moving to Hong Kong for work then it might be difficult to manage your property especially given the time difference.

Can you hire local property managers? Sure, but there is a cost to that so you’d need to factor that cost into your decision.

What will be the financial state of your condo association in the future?

I have some clients who own properties in buildings that are on the downward spiral. There might not be any special assessments planned but my clients are seeing the quality of the building deteriorate and they’re worried that the building may have financial issues in the future. This is definitely something you need to take into account when considering whether your should rent or sell. Sometimes it might be better to sell, take your profits, and run!

Are you cash strapped?

There is no way other way to ask this but, are you living paycheck to paycheck? If you are then being a landlord might not be for you. It is important to have some cash saved in case you have any tenant issues or any property issues. Landlords need to understand that when tenants move out they’ll likely have to paint the property and make some minor repairs in order to get it ready for a new tenant. Do you have the cash to do that? If your dishwasher breaks can you replace it for the tenant ASAP? If your Washer / Dryer goes out can you replace it ASAP?

Paul Blackburn is a licensed Real Estate Broker and Realtor with @properties in Chicago. Paul has been selling real estate since 2007 and is a broker and trainer forĀ the Skowron Group which has sold in excess of $100 million in 2016 alone. ForĀ further information or questions please feel free to contact Paul directly at Paul@pkblackburn.com

WHEN SHOULD BUYERS OF TODAY SELL IN THE FUTURE?

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.