When a person owns a home and decides that it’s time to upgrade or relocate to another area, they have a big decision to make. Should they sell their old home or turn it into a rental property? To answer that question, it’s important to analyze all of the factors that are involved. Here are five of them to consider:
What Does The Cash Flow Look Like?
The first factor that should be examined is if a property will produce a positive cash flow when it’s rented out. If the rental income is more than expenses like taxes, monthly mortgage, insurance, vacancy, utilities, repairs, etc., it will be profitable and may be a good candidate for creating rental income.
The Internal Revenue Service allows homeowners to avoid paying taxes on the sale of their home if it has been their primary residence and they have lived in it for a minimum of two of the last five years. This is based on sales that are at least $500,000 when married and $250,000 for individuals who are single. On most capital gains, an individual has to pay taxes that are equal to as much as 20 percent of the sales price.
By renting out a home, it leaves a back-up plan during times when it would be difficult to sell. For example, if a person gets a job offer in a new city and the value of their house is currently below what they paid, they’d have to bring cash to the table. By renting, it would give them time to see if the market can recover.
Another consideration that should be analyzed is if a person wants to actually become a landlord. While there are a number of good tenants, some individuals require patience and time to deal with. There is always the option of using a professional property management company to handle everything, but that would cut into your bottom line.
How Does The Future Look?
If the future for appreciation looks bright, a person may want to keep their home, rent it out, and see if its value escalates in the next three, five or ten years. While no one has a crystal ball and can accurately forecast this, a person can gauge if growth is possible. Are current homes being renovated? Are retail buildings being constructed in the same location? These type of indicators are positive signs that the value of a home could appreciate in the future.
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