sell

Should You Sell Your Home Or Turn It Into A Rental Property?

should you sell your home or should you

turn it into a rental property

what's the best financial decision

[Music]

all right welcome back to real life at

level 10. my name is matt farnham this

is a show where we discuss

insights on real estate leadership and

personal growth

so a question that we seem to get more

and more now or a conversation we're

having more often

is with homeowners and sellers that are

trying to decide should i sell

my home or should i turn it into a

rental property

and that's a great conversation and i

will start with this and say that a good

home doesn't necessarily mean a good

rental

there's some things that you should

consider for example how much equity is

in the home

what is the return on that equity if you

were to rent your property out

and what are your other options that you

could use that equity for

so let's dive into this all right first

let's discuss what it looks like if you

have

little to no equity in your home so if

you sell your home after all the costs

that are involved

do you actually have positive net

proceeds

and if that's no or you're right around

break even then what you really need to

consider

is your risk tolerance now i know what

it's surfaced it seems like it could be

a great option i could

rent my home out if it covers your

mortgage great

you know it'll start to pay down my

mortgage i can get appreciation in the

market and there could be a great

outcome and that's absolutely true

however things to consider are your risk

tolerance for example

the markets are cyclical you know real

estate's always going to go up over time

but in seasons it definitely can go down

so are you in a position where with your

cash flow and cash reserves

where if the market were to soften if

the market were to disappoint you

uh are you able to handle that value

going down

if rents were to go down which typically

would go hand in hand

are you in a position to be in a

negative cash flow situation

uh and if so how much for how long

before you're really in a difficult

place

so you need to plan for that type of

stuff especially vacancies

you could have a season where you have a

vacancy for a month or two or three

if you're carrying the mortgage are you

in a position to do that so

yes there could be some great upside

with paying down the mortgage somebody

else paying that for you

the appreciation upside potential of

course but you have to manage the risk

tolerance

god forbid we ever see the 2008 to 2000

you know 10 11 years again in real

estate

and that's a dramatic example but that's

what i'm referring to

where a lot of folks made the decision

to to rent their properties

because of those types of assumptions

but the market disappointed a lot of

people

therefore short sales and foreclosures

and bankruptcies so

again um you know just things to

consider when you're trying to decide if

it makes sense to rent your home

in a no equity situation so now let's

say if you do have equity in your home

and i'm just gonna use

a hundred thousand dollar equity example

now you could have thirty forty thousand

two hundred thousand

uh but just for an example sake let's

say you have a hundred thousand dollars

in equity because you'd put a

a big down payment when you bought the

home and the market's gone up since then

uh but a thing to consider when i'm when

i'm explaining what

is your return on your equity is let's

say that you could get a tenant into

your property

and let's say you actually after

management fees and operations and

vacancies and you determine that you can

make about a hundred dollars a month

positive cash flow

that sounds great that's twelve hundred

dollars a year well if you make twelve

hundred dollars a year

and you keep your hundred thousand

dollars tied up into your home

you're essentially making twelve hundred

dollars on your hundred thousand equity

that's a one point two percent return

on your money that's when you need to

really look at that carefully and say

is this a great rental property for me

to keep my equity tied up

into versus let's say that you sold that

home and you took that hundred thousand

dollars in equity

and let's say that you went and paid

cash for let's say a condominium

or a small home or maybe you use that

better example might be as a large down

payment

for a 300 000 home uh and by the time

you look at the mortgage on that

and the the cash flow you could get from

renting it you're very likely going to

conservatively be probably about a five

percent return

on that same hundred thousand dollars if

not maybe reasonably a six to seven

percent return

if you find the right property in the

right neighborhood and keep in mind you

still have the

same appreciation potential whether you

keep your same property

or put that equity into another

investment property

so another example of this is a

conversation i've seem to have recently

a few times

and that is maybe some nicer primary

residences

that have been turned into rental

property or the homeowners considering

renting their home out

in some examples where maybe they had

purchased a new construction where maybe

they paid a bit of a premium when they

bought it

or maybe they've taken out a second

mortgage over time

for whatever reason for what they have

into the property

they're almost holding out waiting to

get a number to where they don't feel

like

they're selling it for less than they

paid for it or that they have

into the property and i'll just caution

you this is a very

dangerous way to think because in some

of these examples i've seen homeowners

with 200 300 400

000 in equity in some bigger homes and

let's just talk about 300 000

equity for example in that example um

you know a lot of these homeowners are

probably

fortunate to break even on their rental

by the time they have their costs

accounted for management fees and so

forth

you know they're about getting what

they're paying each month in mortgage

and taxes and hoa fees

well in that example they're getting

zero percent

on their money so let's say it's three

hundred thousand dollars tied up in that

home

and you're getting break even results

that's a zero percent return on your

three hundred thousand dollars in equity

and that decision is made solely on the

hope and waiting

for the home value to come up so you're

hoping for that appreciation

again same example you take that three

hundred thousand dollars and pay cash

for a property

and again conservatively you're going to

be a five percent return on a property

probably higher six seven plus percent

return

and you're not paying any interest on a

mortgage if you paid cash for it

uh and still getting the same percentage

potential and appreciation

so again it's not always so simple as as

just looking at my home saying it's a

beautiful home that i've enjoyed living

in

it makes a great rental property there

are plenty of things that you should be

considering

just a few final thoughts that are

important to note now first of all

capital gains now i'm not a tax advisor

so you would want to always seek

professional tax

you know counsel from your cpa or

whoever financial advisor

but keep in mind too there's a lot of

folks that have primary residences that

they want to turn them into a rental

home

and again might be a great option but

you have to be aware of how long you've

lived in the property

in the last five years and remember if

you or don't live in your home for two

of the last five years

you could put yourself in a position

where it could be subject to capital

gains tax

on any gain you realize in that property

and let's say you're at the home with a

with a game plan of renting it for a

year or two

so you don't have to worry about that

well again if the market were to adjust

or disappoint you

and you end up renewing at least beyond

that you know after two years you start

to

play with fire getting close to that

three year mark where you've no longer

lived in it for two the last five years

again i'm not a tax adviser i just

encourage you to get educated on these

things

before you make these decisions the next

thing to mention would be

the option of paying down your new

mortgage if you have uh

you know since moved into a new home

with a new mortgage and let's go back to

that hundred thousand dollar

example where you have that equity in

the home well if you were to pull that

equity out

and an idea that gets overlooked so many

times

would be to get that equity and just

throw it at your new mortgage

did you know that if you had a four

hundred thousand dollar mortgage and

let's say you just purchased this home

it's a new 30-year mortgage

and you were to take a hundred thousand

dollars from the equity of that other

home sale

and just throw it at that new mortgage

you would actually eliminate

fifty percent of the interest that you

would pay over the life of that loan

and save a hundred and thirty thousand

dollars in interest payments

so another really good option to think

about using the equity versus renting it

out

and the last thing i'd leave you with

this is you know if you're going to be

a an investor if you're going to be a

landlord you know

do you want to own one property or do

you truly have a commitment

and goal to work towards owning five six

ten properties

you know when you own a rental property

it definitely takes time and attention

and mental bandwidth

away from other things that you're doing

or working on so are you truly committed

to becoming an investor

in which case maybe it's a great way to

start with your current home

that you're considering but use it as a

a goal of

working your way towards more properties

owning one investment property is not

usually

recommended by financial advisors or or

myself for that matter

so i guess in summary you know make sure

you're not trying to to fit a round peg

in a square hole

a good home doesn't always mean a good

rental it may it may be great

but the most important thing i could

leave you with is get the professional

guidance that you need

get all the cards on the table look at

the other options look at the return on

equity

look at the neighborhood and the

potential appreciation that you could

realize

in all these things to make a wise

decision for you and your family

i hope you found this valuable if so

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know somebody

that's probably you know weighing these

decisions right now that could find

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so again thank you for tuning in to real

life at level 10.

whatever it is you're doing whatever is

you're walking through do it at a level

10

and live with the results

[Music]

this episode was filmed at our team

farnam listing at 3119 dalmasia avenue

in henderson nevada for more information

on this home or any of our team farnam

listings

visit teamfarnum.com