In Orange County today, as well as many other places, there are home owners who are going through the difficult decision process of whether to sell their current home, or lease it and wait for a better time to sell. Some of these people have taken a job out of the area and will not be able to commute from their current home. Others have reasons to move such as not being able to go up and down stairs any more, or not having the energy or strength to clean and maintain the house anymore.
While nobody knows exactly what will happen in the future, it is generally expected right now that the current real estate downturn will continue for another year or two at least. When trying to make this decision, it is a well worth your time to dig in to all the details and possibly consult with a tax expert to fully consider all of your choices.
These are the steps that I recommend to my “maybe sell, maybe lease” clients:
- Look at what it really costs to own the house. Add all of your costs, such as monthly mortgage interest, property taxes, HOA dues, insurance, gardener, pool service, etc.
- Find out what amount of rent can reasonably be expected for a house like yours. Ask a Realtor to run the lease comps for you, call around to apartment leasing offices, check on Craig’s List to see what others are offering at what monthly rate. (If you are in Orange County, call me and I’ll help!)
- Check with your favorite tax expert about depreciation or any capital gains tax issues. If moving out of a primary residence, you usually have up to 3 years to close a sale and still have the capital gains exclusion of $250K for single, or $500K for married home sellers. (Who knows if this will stay in place with a new Congress and President?)
- Consider the hassle or cost of selling later, either with a tenant in place, or the cost of carrying it with no tenant income while marketing it for a few months until it closes. There may also be costs to paint or replace carpet prior to being able to market the property after a tenant vacates.
- Take a look at your current loan for both rate and terms. If it was set up as a short term fixed rate that will reset to a higher rate later, find out exactly what that rate and payment could be in a “worst case” scenario. If you are planning to refinance it prior to it resetting, it would be wise to try to do it while still occupying it yourself. Non-owner occupant rates are always higher than for owner occupied!
- Consider offering a lease-option. There are many pros and cons to doing this, but sometimes it can work well for all parties.