You fall in love, and it's great. Until it's not.
This happens with homes as well as significant others. When circumstances change, what do you do? Going solo is always an option, and dating or living with multiple people can become complicated. Being homeless isn't a comfortable choice, but owning multiple homes might actually work in certain circumstances.
As we ponder what New York City will be like post-COVID, friends and clients ask whether they should leave The City, and if so, permanently or temporarily. If they plan to leave town, they routinely ask whether they should sell their home and move on, or keep it and rent it out? My response to these questions is typically the same, and is always right: "It depends." What does it depend upon? Consider the following:
1. Will the property produce positive cash flow?
If the property is rented out at fair market value, will there be a profit or loss after you deduct the expenses (mortgage, taxes, repairs, insurance, maintenance, utilities, etc)? You should also factor in - depreciation, and wear and tear. Speak with your accountant for a more detailed analysis.
2. What are your "opportunity costs"?
As a college economics major, this is one of my favorite topics. An opportunity cost represents the loss of potential gain from other alternatives when one alternative is chosen.
Would you realize a profit if you sold the property today at fair market value? What are the costs of sale (loan payoff, transfer taxes, title costs, fees, staging, repairs, i.e.)? Speak to your real estate lawyer about this.
If there is a profit, awesome! However, regardless of whether or not there's a profit, where will the proceeds of sale be invested? Will your return exceed what you would earn if you kept the property and rented it? Speak with your wealth advisor about investment opportunities.
3. What about the taxes?
Again, your CPA will provide more personalized information. Know that there is a potential exclusion from capital gains tax on the sale of a primary residence. If you convert your residence to a rental property, you might defer capital gains by making a like-kind, 1031 exchange. Trust me: this is complicated. Leave the calculations to the experts.
4. Gaze into your crystal ball ...
What does the future look like;
- for the property's location? Is the neighborhood gentrifying or deteriorating? What are the projected changes in the area's demographics? Are improvements planned for the area? What businesses are moving in or out? A few years ago, it was a good sign when Starbucks was arriving... Discuss trends with your real estate advisor.
- for the property itself? Will it appreciate or depreciate? Will it age well? Is it likely to be in greater demand tomorrow? What repairs or improvements will likely be required in either the short term or long term?
- for you, personally? Do you plan to return to this home either as a primary residence or a vacation property? What are the implications for income taxes and estate taxes? Consider having a conversation with your employer, your accountant and your T&E attorney.
5. Can you deal with tenants?
Speaking from personal experience, some tenants are low maintenance dreamboats, easy to manage and a pleasure to work with. They will care for your property as well or better than you. Others may be nightmares: imagine a hoarder, or a deadbeat who refuses to pay rent, or a pest who constantly nags you. Unfortunately, the dreamboats and nightmares look the same. Do your research carefully.
What paperwork will you be required to complete and maintain, if any?
You can either spend your time and effort being a landlord yourself, or hire a property manager to assume this responsibility. Be sure to factor this cost into the calculations referred to in earlier paragraphs. Or you can sell now and avoid the headaches.
Falling in love, and falling out of love, offer opportunities. Recognize them, analyze them and seize them. Ask the right questions, consult with the right professionals and carpe diem!