Should you sell or rent your home?

Should you sell or rent your home –  that is the big question many homeowners are asking themselves.

Whether it's for work or personal reasons, there may come a moment in your life when you have to (or choose to) move and must make a choice about what to do with your family home.

It can be all too simple to get carried away with the idea of selling your house in order to acquire a bigger one, then repeating this process over the years in order to progressively amass riches. This approach is well-liked since it typically works! The 2016 Census found that 30% of households owned their homes outright, demonstrating the strength of the Australian dream of home ownership. There are additional ways to accumulate money through real estate, albeit few people think to convert their own home into an investment property.

Would you like to speak to a specialist? Book a complimentary discovery session by calling: (03)999 81940 or emailing team@klearpicture.com.au.

The benefits of selling your home

The option to access the capital gains earned in the property's worth throughout the time you have owned it is the biggest advantage of selling your house.

The release of capital gains when selling your home is typically how homeowners are able to afford to upsize their homes or move into areas with greater prospects for financial growth and lifestyle, along with any other wealth accumulations, such as through other types of compound interest investments.

Doesn't that sound great?

But keep in mind that any distribution of capital gains is subject to taxation, which is felt most keenly by those who sell their primary residence (PPOR). Pricing your home to sell correctly can have a big impact on how much money you ultimately make after taxes.

Your sensitivity to market changes is where selling your house to pay for a more expensive one can go wrong. There may be times in a person's life when they must sell their house quickly, and if the market is not on their side, this puts them at a disadvantage. Therefore, the option is to keep your home as a significant asset and use it as an investment property to ride out market downturns till the conclusion of their cycle.

Consider the financial scenario below for selling your house.

Assume you have enough cash on hand to cover general purchasing expenses like stamp duty. If you decide to sell, you will have $400,000 to put down as a deposit on your next home, necessitating only a $200,000 loan for the purchase of the new home. Benefit: Since you'll only have one new mortgage of $200,000, it's a safer choice.

The benefits of turning your home into an investment property

The potential savings you might realise through various tax incentives for property investors are by far the biggest advantage of using your house as an investment property.

The six-year rule is one tax advantage that is not widely understood. This enables property investors who have resided in their investment property for at least 12 consecutive months to claim tax discounts on any capital gains accumulated over the subsequent six years. Here is further information about the six-year rule.

The second benefit of keeping your home is the opportunity to pay it off completely and join the 30% of Australian households that no longer worry about mortgage payments.

Of course, things should be considered before using your house as an investment.

Despite the possibility of borrowing against the home's current equity, you must be able to cover the daily costs of both a business and a new home (the investment property). Many people decide to negatively gear their assets in order to take advantage of the tax benefits available when costs outweigh profits from an investment. But you must be careful not to strain your finances to the breaking point because annual home operating expenses can reach approximately 5% of the home's purchase price (especially with any changes to interest rates or your own employment). Avoid relying primarily on tax incentives as a long-term investment strategy because they are laws that might change with new governments.

It is important to first speak with an accredited financial adviser to determine whether your finances can support the transformation of your home into a business and source of income. This is because the decision of whether to sell or rent your home must consider a variety of unique factors for each homeowner. You should keep in mind that if you decide to convert your house into an investment property, you will probably have to give up some of your lifestyle because your new PPOR will need to be reasonable enough to cover the higher expenses associated with maintaining an investment property.

Consider the next financial scenario where you rent out your house.

If you want to rent out your current home, you will still owe the $100,000 mortgage on it and will also need to borrow an additional $600,000. Your mortgage payments will now be more expensive as a result. However, if your rental return rate is 5%, you'll be earning $25,000 in rental income. These increased mortgage payments will be easily covered by this income. As the rent rises, your cash flow will become more favourable. Advantage: Your nett worth will increase over time and you'll own two residences worth a total of $1,100,000. You'll be saddled with two mortgages totalling $600,000 in debt.

Top 10 Considerations

Which decision makes the most financial sense?

Because of the nature of these conditions, financial constraints place a premium on determining what you can and cannot purchase.

To get started, develop a detailed budget that accounts for the period you will be away.

Your budget should account for not only the costs associated with renting or acquiring your "new" house, but also for any and all income and costs that are directly tied to your endeavour.

After you have completed, make a new budget that is comparable to the one you just finished but this time assume that you have sold your house.

This can quickly show you which option is more economical given your circumstances, which will assist you in determining which course of action is most appropriate for your case.

Think about things logically rather than emotionally.

Although it is easier to articulate than it is to put into practise, this stage is necessary in order to arrive at prudent and well-informed choices regarding one's financial situation. First, take a step back and try to understand why you are thinking about the various options that are accessible to you.

We regularly see married couples who have been living in the same house for a significant amount of time exploring the possibility of downsizing while maintaining ownership of their current residence for investment purposes. Their family has significant roots in the area, and many members of their family were born and raised there. However, when it comes down to it, the true reasons they are contemplating about maintaining their family home have much more to do with sentimentality than they do with economics. This is a precarious situation that could lead to unwise decisions regarding one's finances.

On the other side, homeowners may be forced to make the decision to sell their homes rapidly due to a number of different circumstances. Without the direction of knowledgeable market professionals and a comprehensive understanding of their own financial situation, this may not be the greatest choice either. When it comes to making sound financial decisions, having sufficient knowledge can make the process lot less difficult. Knowledge is power.

What emotional load can you handle?

This one can be difficult when selling, but it's also a significant concern for many homeowners who wish to use their PPOR as an investment in some other way.

In most cases, you have spent a significant amount of time and effort over the course of many years keeping your home to your exact specifications, developing cherished memories with your family, and tending to your land.

Because no one else will take as good of care of your home as you will, it may be challenging to then turn that over to someone else to live in as a rental. You need to be prepared for things to break or the garden to not look as well as you would like it to appear in the future.

If you believe that the emotional aspect of owning rental property will cause you problems, you may find that selling the property is in your best interest. You won't have to worry about the cost of any upkeep or repairs, despite the fact that this will generate its own emotional upheaval.

The process of selling the home in which you were raised can be fraught with feelings of nostalgia and loss.

You've made a life for yourself here, along with all of the wonderful memories that go along with that.

On the other hand, renting out your home to an unknown individual can be a difficult endeavour.

Property investors typically try to keep their objectivity and keep themselves emotionally apart from the rental property they own. Failing to do so can lead to costly blunders and lower financial returns.

Naturally, if you have the goal of moving back into this house at some point in the future, your plan for renting it out may be less concerned with maximising investment returns and more concerned with maintaining your asset and producing money to cover holding costs while you are gone.

If you fear that renting your home to a complete stranger will put you through significant emotional strain, one piece of sound advice is to consider selling the property instead of renting it out.

Is there a demand for your house as a rental?

The demand in your area plays a significant role in determining whether you would be better off selling or renting out your home.

If there is not much of a market for a property on the outskirts of a smaller city that has five bedrooms, you could be better off selling the property.

If you have, for example, a three-bedroom apartment that is located immediately on the beach, you might find that there is a lot of demand in the market for such a property, which would make converting the home into an investment the better decision.

Before you put your house up for rent, you should do some research on the market conditions in your neighbourhood, including the demand for rentals and the typical rent price.

In the process of budgeting, this is an extremely important phase.

If there is a low demand for rental housing in your neighbourhood and/or there is a high vacancy rate, this is not an ideal situation from either a financial or a safety aspect. It's possible that burglars and vandals will target your vacant property if you leave it for a lengthy period of time without someone living there.

Advice: If you want some rental assistance, go to a few estate agents in the neighbourhood, and check the rental yields in your neighbourhood and suburb on Onthehouse.com.au.

Does your property have a strong potential for capital growth?

When purchasing an investment property, owners of said property always look for properties with potential for growth.

When selecting what to do with your current PPOR, you should consider about whether the market is currently saturated or whether there is still scope for expansion. If the market is saturated, there is no room for growth.

It would be more beneficial to put the house up for sale rather than keep it as an investment if the prices are getting close to or have already reached the highest point possible in the market.

Again, it is important to do some research on your suburb in order to get a feel of the general trend in the direction that local real estate values are moving.

When it comes to predicting how prices will move in the future, there are no guarantees, but there is sufficient information available to provide you with a decent notion of what to expect.

If the housing market is anticipated to remain robust with robust demand and if it is anticipated that it will be maintained while you are abroad, it may be to your greatest financial advantage to hang on to your home so that you don't miss out on any potential future capital gains. This will ensure that you don't miss out on any potential opportunities to increase your wealth.

However, if the market is already at its top or is close to reaching its peak, it can be a good idea to sell your home. This is especially true if you are unsure of how long you will be gone and whether or not you would want to remain in the same location when you return.

In other words, put them in the bank now rather than putting your profits that were earned tax-free at risk when you get back.

Is owning property right for you?

When you rent out your property, you are essentially converting it into a business, and as the owner of the business, it is your obligation to make sure that it has the appropriate resources, support, and configuration for the purpose for which it was designed.

Are you moving to start a new job, embark on a new chapter in your life, or experience a shift in your lifestyle?

If so, even with a property manager's help, will you have the time to be a landlord?

Will you have the time to check emails for maintenance, keep track of maintenance and spending, and keep up with all the documentation that needs to be done before the end of the fiscal year?

You need to be prepared to assume or manage all of the necessary responsibilities associated with being a landlord and others while you are gone.

It is likely that your home will be negatively geared, which means that the rent earned will not cover all of the property holding and operating costs. You need to make sure that you have the right people in place (such as rental agents, accountants, tax advisors, legal advisors, tradespeople, and so on), adequate cash flow to meet all of your outgoings, and that you are prepared to fulfil your legal and professional obligations.

Think long and hard about whether you really want to become a landlord and whether you even have the time to commit to the role.

Even if there are many other considerations to take into account, such as the potential for capital gains and tax implications, deciding whether to rent out your current PPOR or sell it before moving on can be a difficult decision to make.

Discuss the economic implications of the issue with your accountant so that you can make an informed decision about which option is best for you in the long run.

Is the property fit for rental purposes?

Your home needs to be habitable, safe, and free of any flaws or defects that could have a negative impact on how your tenants utilise and enjoy the property you rent them.

It is possible that you will need to undertake maintenance and repair work on your property in order to fulfil your legal requirements and make it more marketable.

Because doing so will require financial outlay on your part, you will need to evaluate your finances and the needs of your company before deciding if it is better for you to make an investment or to sell.

Do you have your taxes in order?

Before you start renting out your family home, you should consult with an impartial financial and tax advisor first because there are a lot of different tax considerations to take into account.

For example, you could want to maximise your tax deductions (including depreciation), while simultaneously minimising your overall tax liability and protecting the exemption from the capital gains tax that applies to your home.

Because of this, it is necessary to get your taxes in order and have a solid understanding of your current tax situation before deciding whether to sell or rent.

Consider Your Cash Flow

Your greatest choice regarding whether to sell or rent out your current PPOR will be based on which option makes more financial sense.

You should think about whether you can afford the upkeep of two properties, the numerous taxes and payments on both properties, and what would happen if the rental property is vacant for a while.

You should sit down and create a budget for both your new house and the potential costs of an investment property, such as management fees, accounting fees, maintenance charges, advertising fees, and more.

Calculate your income in relation to these costs (including any loans) and you may determine whether it would be better for you to sell the house or keep it as an investment.

It's true that keeping an investment property could improve your financial status down the road or offer large tax benefits, but what about your cash flow now? Maintaining control over your position can sometimes be a very wise financial choice. Any number of factors could have an impact on the predicted rental income from the property, which is frequently the case if your investment depends on it. It's necessary to consider things like upkeep and maintenance fees, potential body corporate costs, and council rates depending on the property or what happens if the property is vacant for a while. All of these factors may affect how manageable and viable your investment is.

The Investment Itself

Why did you initially purchase your home, you could ask yourself? The majority of people don't just buy a family home for economical reasons. The majority of people consider the neighbourhood, the location of their family, friends, schools, jobs, and other places. While these factors could affect your home's financial potential, they typically don't. This implies that you might hypothetically invest your proceeds in a home with a much higher return on investment than your current residence by selling.

On the other hand, the advantages of turning your property into investment may exceed the dangers involved if you have solid, trustworthy evidence (rather than simply a gut feeling) that the location is poised for great market growth.

Do you feel more perplexed than ever? The following factors should be taken into account when considering whether to rent or sell your current property:

• Never, ever, ever let feelings influence your decision.
• Have a thorough understanding of your own financial status.
• Recognize your market
• Consider all choices before excluding any.
• Could you envision relocating to the home in the future?

Is your ownership arrangement correct?

The family home is typically held in both of the family members' names (e.g. husband and wife, life partners, defacto partners and so on).

Although it is completely normal to do so in order to help ensure a smooth transition of ownership in the case of a decedent's passing and to protect everyone's interests in the event of a divorce, doing so in order to invest in real estate might not be the best course of action.

It is necessary to carry out sufficient tax planning, and it is of the utmost importance to consult with legal counsel regarding issues such as the rights, responsibilities, and effects of transferring the residence under one name, if this course of action was selected for the purposes of tax planning.

Is your mortgage the greatest one out there?

The qualities and advantages that come with a mortgage and those that come with an investment loan are becoming increasingly similar in modern times.

The primary question that needs to be answered is whether or not the product is appropriate for supporting you in accomplishing your personal, investment, and financial objectives.

It is possible that a loan intended for the purchase of a family home might not be appropriate for the acquisition of an investment property.

Consider performing an investment loan health check that takes into account your cash flow, tax situation, and the anticipated length of your absence.

Trust your gut!

Last but not least, trust on your own wisdom.

Take into consideration not just what is appropriate but also what is financially prudent.

If you and your spouse can reach a place where you are both emotionally and financially on the same page, you will be well on your way to picking the best course of action for you and your family.

Would you like to speak to a specialist? Book a complimentary discovery session by calling: (03)999 81940 or emailing team@klearpicture.com.au.

Summary

The 2016 Census found that 30% of households owned their homes outright. The release of capital gains when selling your home is typically how homeowners are able to afford to upsize their homes or move into areas with greater prospects for financial growth and lifestyle, along with other wealth accumulations. The six-year rule is one tax advantage that is not widely understood. This enables property investors to claim tax discounts on any capital gains accumulated over the subsequent six years. The second benefit of keeping your home is the opportunity to pay it off completely and join the 30% of Australian households that no longer worry about mortgage payments.

It is important to first speak with an accredited financial adviser to determine whether your finances can support the transformation of your home into a business. The decision of whether to sell or rent your home must consider a variety of unique factors for each homeowner. Top 10 Considerations:. Which option makes the most sense financially? Selling the house you grew up in can be a very emotional process.

In this house, you've established a life, and lovely memories that come with it. On the other hand, renting your house to a stranger can be challenging for many homeowners who want to use their PPOR as an investment. Whether you would be better off selling or renting out your house depends greatly on market demand. From a financial and security standpoint, it's not ideal if your neighbourhood's rental demand is weak. If your property is left empty for an extended length of time, it may become the target of theft and vandalism.

Whether to rent or sell your house before moving on can be a challenging choice. Think carefully about whether you want or have the time to become a landlord. Your house must be liveable, secure, and free from any flaws that can adversely affect how your tenants utilise and enjoy it. Tax preparation and understanding your tax situation are essential while determining whether to rent or sell. You should sit down and create a budget for both your new house and potential costs of an investment property.

Any number of factors could have an impact on the predicted rental income from the property. The advantages of turning your property into investment may exceed the dangers involved if you have solid, trustworthy evidence (rather than simply a gut feeling) that the location is poised for great market growth. An investment property may not be a good candidate for a loan taken out to purchase a family home.