While it’s true that Real Estate can be one of the most safest ways to accumulating or maintaining wealth, the reality is that most become a Real Estate investor by accident.
You have a home that you might have acquired from an inheritance or due to reluctance to sell when you purchased another home. Whatever the reason, you’re stuck with a piece of Real Estate and you don’t know if it’s a curse or a blessing.
Keep in mind that ideally, you should never sell Real Estate. There are tons of reasons why hanging on to a property indefinitely would be in your best interests.
However, we don’t live in an ideal world. Here are a few questions that can assess your situation:
1. Do you need the money from the sale now? There are other options to selling: A Cash-out refi or Home Equity Line of Credit (HELOC). Keep in mind that this is a loan and will directly affect question #3 below. If you don’t need the money now, how long can your lifestyle and bills continue to be paid until you do need a lump sum of cash?
2. If you determined a time period from answering #1, what do you think is the market outlook X years/months from now? National Association of Realtors and your local Real Estate association provide both national and local forecasts. Obviously, if you think prices are going down, it might be a good idea to sell. If you think your value will appreciate, keep in mind that a negative cash-flow situation might negate any gain.
3. How does your investment look from a cashflow standpoint? Before you make the common error of simply subtracting the mortgage payment from the market rent, keep in mind that there are other significant costs: property management fees, vacancy periods, maintenance, taxes, HOA dues, etc. You can create your own spreadsheet or use a software tool such as REAP. If your property generates income after subtracting everything, you likely have tax liability. If you have negative cashflow, can you refinance your home? Is it time to raise rent on a long term tenant?
4. What tax advantage(s) would you be walking away from? Since one of the advantages to owning Real Estate is lowering your tax liability, do you know how much additional dollars you’d have to pay in tax? Speaking of tax, you’ll want to familiarize yourself with the new Obamacare tax and how it applies to Real Estate.
5. Are you looking to obtain a loan to purchase another property? If so, your “debt ratio” is even more important than your credit score when obtaining a loan. Your cash-flow determined from #3 above would directly affect this. In most cases, the lender will only use 70% of gross rental income.
6. Do you want to be a landlord? Collecting monthly rent, maintenance, advertising to new tenants, evictions, bookkeeping, and tenant disputes all go with the territory of being a landlord. Even if you’re letting relatives or friends live in the home for free, you’re still a landlord.
If this evaluation has you leaning toward selling, it would be a good idea to meet with a Realtor to get some additional input. Although agents always love to sell homes, the good ones always look to keep relationships intact by advising clients and the public what’s in their best interests for the long term.
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