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Should I sell or lease my current home turning it into an investment property?
Breaking into the property market and buying your first home is a milestone in everyone’s life. But what happens to your old place when it comes time for you to buy your next house? Do you sell or rent out your old place? Are you financially able to hold onto the property?
Weighing up these questions in conjunction with your financial goals will allow you to make the best decision.
To sell or not to sell
Letting go of your first home can be tough. But when it comes down to choosing whether to sell or lease it out as an investment property, sometimes it may be in your best interest to sell. Writing a pros and cons list can assist you with your decision. Some things to take into consideration include:
Market conditions
When choosing whether to sell your property, consider the current market conditions. Research the houses that have sold recently in your area which are similar in size and style to yours. Based on the sold price, you can get a pretty good indication as to whether the market is hot. It’s also beneficial to see what’s listed in your area and note down the asking price. Once the property is sold, you’ll be able to see if it went over the asking price or was within range. Multiple properties going largely over their asking price can be a sign of a hot property market.
Repayments left on your home
Another thing to consider is how much you have left to repay on your mortgage. If your property has a lot owing, you need to create a budget to see whether managing two mortgages (until your property sells) is realistic. You’ll also need to contemplate what would happen if you had periods in between tenants where the property is vacant and you’re required to pick up mortgage repayments again. Having money set aside in an emergency fund is also a good idea, in case there are any issues with either of your properties that you need to fix.
Rental return
It’s important to look at the property market when it comes to selling but looking at the rental market is also crucial when making this decision. Look into similar properties in your area to see what they’re asking for to get an idea. Certain circumstances will affect whether you get the price you’re after. For example, thanks to lower rental demand amid COVID-19, the median rental price is noticeably less now than earlier this year, and it’s harder to attract new tenants.
Potential for capital growth
How well have house prices performed over the past 5-10 years in your area? Researching the capital growth in your area as well as the forecasted growth will allow you to decide whether it’s worth holding onto your property. It’s important that you also weigh up any capital gains tax considerations should you intend to eventually sell – make sure you seek out the appropriate professional tax advice for your circumstances.
Cash flow
Chances are, you’re not in the same financial position as you were when you first bought the house. When was the last time you updated your budget? If it’s been a while, create a new budget to see what your current cash flow situation is. Talking to a financial planner or finance expert will allow you to make the best decision.
Long-term goals
Regardless of whether your financial goals are long, medium and short-term, all your financial decisions should lead back to them. If it’s your goal to own an investment property, selling your house may not be the best option for you – especially if you can afford to hold onto it. Chat to an expert who can help guide you on this decision
Holding onto your home
While selling your home may allow you to purchase an upgraded home, holding onto your property as an investment has the potential to generate long-term wealth. Considerations for renting out your property include:
Your home’s equity
If you’re looking to hold onto your house, you may be able to use the equity you’ve built up to buy a second home. Saving for a home deposit can take years, so leveraging the equity in your existing home will help you get into the market quicker. Depending on how much equity you have in your home, you may be able to tap into up to 80 per cent.
Read our blog on equity loans to learn more.
Tax implications
Tax implications are often forgotten when it comes to choosing whether to sell or lease. For example, if you fully own your home, any rental-related income you receive from that property would be taxable. You also wouldn’t be eligible to claim tax deductions on home loan interest as a property investor since you already paid your (non-deductible) loan off in full as an owner-occupier.
Loan repayments
As mentioned above, you need to be certain you can service two loans if required. If you’re without tenants for a period or your tenants aren’t paying enough to cover the weekly mortgage repayments, you’ll need to top up the extra money required. Creating a budget can help to manage cash flow and give an overview of whether renting out your property is realistic.
Projected rental return
Researching the market and current trends will help to determine what your projected rental return is. It’s also a good idea to see whether there are any small things you can do to your home to increase the value. This might be giving it a fresh coat of paint, polishing the floors, or installing new lighting. Factors such as how modern your home is, the proximity it is to shops and schools and backyard size will impact how much you can expect to receive from tenants.
Ongoing maintenance costs
Having a safety net to fall back on is important, as you not only have one house to service and maintain but two! Although you won’t be living there, you’re still responsible for all maintenance costs that may be required, such as leaky taps or faulty lights. Having money put aside for ongoing maintenance costs will mean there isn’t an unexpected cost coming up that’s throwing out your budget.
Insurance fees
Another annual fee to keep in mind is insurance. Having home and contents insurance will help to protect you if your home is subject to accidents like storm damage, or other things like break-ins. Depending on your home, area, and a whole host of other factors, this can potentially be a large expense to take into consideration.
Choosing to sell or lease your property can be a difficult decision. While some people are looking to upgrade their old place, others are keen to get into the investment property market. There’s no right or wrong answer if it aligns with your financial goals. If you need assistance weighing up what to do, get in touch with an Inovayt financial advisor or mortgage broker today.
