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When to Sell and When to Rent Your Real Estate Investment

keys-1317390_960_720Chances are good that you don’t live in your “forever home” right now and at some point you will decide to move to a new house. When that time comes, some people aren’t sure whether to sell their home or to rent it as an additional income source. If you are currently at this crossroads or think you may be soon, keep reading to find out how you can make the best decision for your particular property and situation.

When to Rent

The bottom line of deciding to rent your home: Can you afford it without taking on a significant risk to your financial situation?

Renting is not only a great source of extra income, but can also provide a great long-term payoff as well if real estate is appreciating in your area. (And it certainly is in Middle Tennessee!) After doing your research on rental rates in your area, determine if your monthly income will cover the cost of your mortgage, plus extra costs like insurance (remember that landlord insurance is typically more expensive than typical homeowner’s insurance because of the greater liability), HOA fees, repairs, cleaning and general maintenance. And you’ll also need to ask yourself if you can cover the mortgage yourself if you have gaps in renters for months at a time. Lastly, you’ll need to assess if you have the time and energy to put into serving as a landlord. If you don’t, you’ll have to hire a management company which typically charges 10-15% of your monthly rental income.

When to Sell

If you can’t take on the risk of keeping your current house while also purchasing a new one, you’ll have to sell. You may need the equity in the current house in order to put down a down payment on your new home or you may not be able to take on the risk of potentially needing to make two monthly mortgage payments at some point.

Selling is certainly instant gratification, especially if you have been in your home for a few years as real estate in Middle Tennessee has been quickly appreciating in our area. You can also avoid capital gains taxes if you sell your home immediately. A married couple filing jointly can exclude up to $500,000 in capital gains whereas someone who has rented their home for the past three years or longer is liable to pay capital gains when they sell their home – up to 20% of the net profit depending on their tax bracket.

Certainly there is a lot to consider when making the decision of whether to sell or rent your real estate investment. Before you make such an important decision, be sure to consult your financial and tax advisors to see how either choice could affect your financial situation in the future.

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