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Should I rent or sell my home?

Hi everyone, my name is Ryan Vertucci. I am the owner of Real Property Management Gold, locally serving clients throughout Calvert County, operating from our office in Lexington Park.

Today I want to discuss the question we have been getting asked quite a bit from some of our current homeowner clients and people inquiring from property management– that question is “Is now the right time for me to rent or sell my home?”

That’s kind of a complicated question that is specific to each individual person and what your goals are and something you need to discuss with an accountant, tax professional, or financial advisor. (NOT A REAL ESTATE AGENT) I am not an accountant or a tax professional, but I can at least give you some tools and some insight as to things to think about before you have that conversation with your accountant or CPA.

The thing I want to talk about is on the sales side. On the sales side, you need to figure out what you owe on the property. (This includes the mortgage liens, taxes, etc.) These items are then subtracted from the sales price and transaction costs. This can include closing costs, agent commission, taxes, early payment penalty, capital gains, state taxes, etc.

Typically you take what you can sell the house for, subtract your mortgage balance and subtract the closing costs and other expenses. The closing costs expenses are (safe to say) going to be somewhere between 8-10% on average. Say you’re going to sell your house for $400,000; you should expect to pay about $40,000 in those kinds of expenses. You would have to have at least $40,000 of your mortgage paid down (or have equity of that much in the property) to break even.

On the rental side, it is a little bit different. You need to figure out your yearly rental rate and subtract that from the annual fixed expenses such as the mortgage, PMI, taxes, and insurance. Then estimate your variable costs such as repairs, vacancy, property management, and turnover costs.

What you want to do is find out what you’re going to rent it for, what your fixed payments will be, and then try to estimate your repairs and other expenses for the rental property. The older the rental property is (or the last time it was renovated), the higher it will cost for you to maintain that property over time. However, if you have an older property, your monthly payment may be lower, giving you more time to be proactive. Remember, the longer you hold onto a rental property, the longer your fixed expenses stay the same while rental rates go up and the home continues to appreciate in overall value, allowing you to build wealth over time. (That’s what Robert Kiyosaki’s book Rich Dad Poor Dad is all about.)

It is very important to discuss your sale or rental of your home with a tax professional. It could be subject to penalties and increased taxes from income and capital gains if you sell them home and take a bunch of equity out at one time. Or you could keep the rental and gain tax benefits or interest, depending on how you have it structured. Taxes can make a huge difference in this decision. In fact, it’s probably one of the most important things that will sway your decision on whether you want to rent or sell the property.

We’re currently seeing mortgage brokers persuade homeowners to keep the house as an investment property while pulling equity out to purchase another home. This allows you to continue building equity in the old house while renting it out after moving to a new home. We’ve seen people continue this pattern throughout several homes over the years, building additional wealth over time. If you know a trusted mortgage broker, they may be able to help you with that.

We know the sales market is up substantially, but the rental market is outpacing the sales market in terms of gains.  In Southern Maryland, we see a 20% increase in rental rates over 2019, so we have houses that were renting in Waldorf for $2150 in 2019 now renting for nearly $2700. In Lexington Park, we’ve got single-family homes that rented for $1850 in 2019 now running for $2400. There is a big fight over single-family homes on the rental side right now because the supply is so low, and the demand is still there due to all the military people moving into town.

One cool tool I recommend is the “Rent or Sale” Calculator on the NARPM website. You put all your numbers into this calculator and map out your returns if you rented the property vs. the payouts if you sold. We’re projecting a 10% increase in rent over the next several years, which is quite substantial. If you have any further questions, please feel free to reach out to us, Real Property Management Gold, on our website.

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