I own my home 100%. I am moving and would like to rent my current home. Our accountant advises my husband and I not to rent. We have no current debt other than the new home. Our current home is worth about $240,000 and rental income would be approx. $1300/mo. Taxes: $3,000/mo. Do you have any advice for us? Thanks much.

It is difficult to give feedback that might contradict your accountant since he should know your situation better. Nevertheless, I can tell you what I would do in your situation.

First, I would sit down and go over what I would gain from keeping the house. There are essentially two things that you can count on {to certain degrees}. One is the rental income, which is $15,600 a year. The other is the appreciation of the property, which is harder to pin down. For argument sake, lets assume that in five years you will be able to sell the house for $300,000 receiving a $60,000 profit. Now, you have to start thinking about the expenses. In addition to the taxes, it would be good form to allow for at least a 1 month vacancy as well as maintenance related expenses {these are all guesses as only you know the condition of your house or have an idea of the rental market in your area} that will add an additional $4,000 in expenses a year.

This means that every year you get:

$15,600 - $3,000 - $4,000 = $8,600

So on year 1 you get $8,600
Year 2 you get $8,600
Year 3 you get $8,600
Year 4 you get $8,600
Year 5 you get $68,600

But because, you have decided to keep the old house, you did not have the money available to pay down the mortgage on your new house. This can get really complicated if you assume that you could use the money for more rewarding investments, but at the very least you know that you can pay down the new mortgage and not have to pay interest on that money. Assuming a 6% rate on your new mortgage, you get the following outflows.

On year 1 you pay $14,400
Year 2 you pay $14,400
Year 3 you pay $14,400
Year 4 you pay $14,400
Year 5 you pay $14,400

To me this is looking very close, but there is still another factor to consider…… Capital gains {I am not an accountant by the way}, but once you moved out of your house and are selling a rental property, Uncle Sam is going to want to tax your gains {please double check this with your accountant}. The capital gains that you are going to have to pay if you decide to sell the house could easily wipe out any difference in favor of renting. In addition, the capital gains are going to be based on the difference between sales price and your cost basis. Depending on how much you paid for the house, this could wipe out your entire appreciation. {did I mention I am not an accountant?}

Just remember that I made a lot of assumptions including the one that you will be selling the rental house in five years as capital gains are only due when you dispose of the asset.

Good luck

while I am also not an accountant, my understanding is that you have lived in the house for 2 out of the last 5 years that you should still get the exemption when you sell it (that is, the first $500,000 or so of gain is exempt from taxes).

I believe that there are other restrictions, such as if you rent this out and move to another house and later sell that house. (i.e. a limit on how many properties you can do this with within a year or two) I don't know about that exactly.

An even bigger question is the investment return that you would be getting.

By my calculations, you would be making about a 5% annual return on the property value, assuming that you won't have any maintenance costs. Once you factor in having the lawn mowed, unclogging the toilets, fixing the heater next winter, repairing the roof in two years, etc. the return is much lower.

You could put that money in a CD and have an equivalent return without the headaches of being called in the middle of the night by your tenant saying that the toilet is overflowing.

But, as you are probably thinking, total return is made up of two components: income and capital appreciation. Income is the rent that you make every year, less all expenses. Capital appreciation is the value (hopefully an increase) that the property has each year, but does not result in cash flow until you sell it.

In this hot real estate market, a lot of people are taking 0% (or even negative) returns on the income side because of their bullish expectations on the appreciation side. That is not going to last for ever, and if you are hoping for big gains to continue, you are may want to reconsider your plans.

Finally, if you didn't own that house already, and you looked around at all possible investments to make, would you still choose to buy that particular house? Of all of the houses in all of the neighborhoods in the city, is that one poised for the most growth? Of all of the real estate investment opportunities (office, retail, industrial, apartment, single family home) is that single family home in that neighborhood really your best alternative?

so, make sure that this is the place where you think that you can get the greatest risk-adjusted return? Every day that you hold that house, that is the decision that you are making.

Hello! I have the same question regarding sell vs. rent home... the only difference is I don't own my old home right now, still paying the mortgage but I'm moving to another house and wondered whether I should rent out my old home to (less than what I'm currently paying for the mortgage) - bec. I heard that the difference is 100% tax deduction, then sell the old home after two years to avoid the capital gain tax?
Is it worth it? Need advise. Very confused since a lot of people are saying to keep it as a good investment, but I'm worried if it's going to be worth it? Thank you!

These are great questions and interesting insights. I am trying to assess the decision making process of choosing between renting a property or selling it. This is assuming that the current homeowners are still paying on the house... and also that the house is one unit of a 4 unit townhome. Several people ask if it is a traditional condo. It is a townhouse, but there is no association fee, so I hesitate to call it a condo.

If anyone has some comments or info that they would like to add for making this decision, it would be greatly appreciated.