Should you sell your house or put it up for rent?
One that many homeowners are asking themselves.
There may come a time in your life when you have to (or choose to) relocate, whether it be for professional or personal reasons, and you are faced with the decision of what to do with your family home.
It can be all too easy to become caught up in the idea of selling your home so that you can buy a larger property, to then repeat this process over the years to gradually accrue wealth. The reason this method is popular is that it generally works! According to the 2016 Census, 30 percent of households owned their home without a mortgage, indicating just how powerful the Australian dream is of owning property. But there are other ways to build wealth in property, and one that not many consider is that of turning their home into an investment property.
The Advantages of Selling Your Home
The most significant advantage of selling your home is the potential to access the capital gains accrued in the property's worth during the time you owned it.
The release of capital gains when selling your property is often how homeowners are able to afford to upsize their Melbourne homes or relocate to locations with more prospects for financial growth and lifestyle. This is in addition to an assumed pay increase throughout the course of a person's career and any other accumulations of wealth, such as through various kinds of compound interest investments. In addition, homeowners are able to afford to move into areas with greater prospects for financial growth and lifestyle when they sell their homes.
Sounds great, doesn’t it?
However, keep in mind that any release of capital gains is subject to taxation, which is particularly felt by individuals selling their primary residence (PPOR). When taxation is taken into account, correctly pricing your house for sale can make a considerable difference in your eventual earnings.
The vulnerability to market changes is where selling your property to purchase a more costly home might go wrong. There may be times in a person's life when they must sell their property within a specified time frame, which puts them at a disadvantage if the market is not in their favour. As a result, the option is to keep your home as a key asset and ride out market downturns by converting it into an investment property.
Let’s take the following financial scenario for selling your home.
Assume you have enough money to cover general purchasing costs such as stamp duty. If you decide to sell, you'll have $400,000 to put as a down payment on your next property, which means you'll only need to borrow another $200,000 to do so. Advantage: It's a safer alternative because you'll just have one new $200,000 mortgage.
The benefits of turning your home into an investment property
By far the most significant advantage of converting your home into an investment property is the potential savings available through various tax breaks for property investors.
The six-year rule is a relatively unknown tax incentive. This allows property investors who have resided in their investment property for at least 12 months to claim tax discounts on capital gains earned in the six years following the initial 12 months. More information on the six-year rule can be found here.
The second advantage of keeping your property is the chance to pay it off in full and become one of the 30% of Australian households that no longer worry about mortgage fees.
Of course, there are some things to think about before turning your house into an investment property.
While you will be able to borrow against the equity in your home, you must be able to afford the daily costs of your new home and a business (the investment property). When an investment's costs exceed its earnings, many people prefer to negatively gear their properties to take advantage of the tax breaks available in such situations. However, with the annual expenditures of running a property amounting to about 5% of the purchase price, you must ensure that you are not stretching your resources too thin (especially with any changes to interest rates or your own employment). Tax breaks are policies, and policies change with new governments, so don't rely primarily on them as a long-term investment strategy.
The decision of whether to sell or rent your home must take into account a variety of factors that are unique to each homeowner, which is why it is critical to first consult with an accredited financial adviser to determine whether your finances can support the transition of your home into a business and source of income. Remember that converting your home into an investment property will almost certainly necessitate a compromise in your lifestyle, as your new PPOR must be reasonable enough to account for the higher costs of running an investment property.
Consider the following financial scenario: you rent out your home.
If you opt to rent out your existing house, you will keep your $100,000 mortgage and will need to borrow an additional $600,000. This means that your mortgage payments will be increased. However, if your rental return rate is 5%, your rental income will be $25,000 per year. This additional income will go a long way toward covering the increased mortgage payments. As the rent rises, your cash flow will improve. Advantage: You'll own two residences worth $1,100,000 combined, and your net worth will grow over time. Disadvantage: You will have two mortgages totalling $600,000 in debt.
Top 10 Things to Think About Before Buying or Renting
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Which course of action would be the most cost-effective choice?
In these instances, cash is king, and you must choose what you can and cannot afford.
Begin by creating a precise budget for the time you will be gone.
Your budget should include all revenue and expenses related to renting out your property, as well as the price of renting or purchasing your 'new' home.
After that, create a budget that assumes your property has been sold.
This will rapidly show you which choice is the most financially feasible for your situation, revealing the optimal path of action.
Think with your head rather than your heart.
This stage is easier said than done, yet it is essential for making sound financial decisions. To begin, take a step back and try to understand why you are contemplating the possibilities available to you.
We frequently find couples who have lived in the same home for many years wishing to downsize while keeping their current home as an investment. Their family grew raised in the house, and they have close ties to the community. But when it comes down to why they are considering keeping their family home in the first place, the reasons are considerably more emotional than economical. This is a risky region that can result in poor financial judgments.
On the other hand, a variety of factors can cause homeowners to make a hasty choice to sell. This may not be the best decision without adequate market counsel and a complete grasp of their specific financial condition. Essentially, knowledge is power, and being well-informed can help you make better financial decisions. Ray White has over 1,000 offices in 11 countries and a property professional in your area who can assist you make the best option for your situation.
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Where do your emotional limits lie?
This one is often a significant obstacle for many homeowners who are interested in turning their PPOR into an investment; however, it may also be a barrier when it comes time to sell the home.
In most cases, you've spent years caring for your property, creating memories with your loved ones, and perfecting the appearance of your home to meet all of your needs and preferences.
To then turn that over to someone else to live in as a rental can be challenging. No one will take care of your property in the same manner that you would, so you need to be prepared for the possibility that things will get broken or the garden will not look as well as you would like it to.
If you have any reason to believe that dealing with the sentimental aspects of an investment property could be a challenge for you, it might be in your best interest to consider selling the property. Even while this will cause its own set of emotional challenges for you, at least you'll know that you won't have to pay for any repairs or upkeep as a result of it.
The process of selling your childhood home can be pretty taxing on your emotions.
You've established a life for yourself in this house, and as a result, you have a lot of good memories here.
The challenges of renting to a stranger can be just as great.
The majority of the time, investors in real estate are unbiased and emotionally detached from the properties they own and rent out. In that case, mistakes could be made, which would have a negative impact on financial returns.
Naturally, if you have plans to return to this house at some point in the future, the goal of your approach for renting it out should not be to maximize investment returns but rather to preserve your asset and bring in enough money to cover the costs of retaining it while you're gone.
Advice: If you believe that sharing your home with a complete stranger will cause you significant mental anguish, selling the property might be the best option.
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Are you getting interested inquiries about your property as a rental?
If you are trying to decide whether it would be more beneficial for you to sell your property or turn it into an investment, one very important sign to look at is the degree of demand currently present in the market.
It is possible that you would be better off selling the property if there is no demand for a house with five bedrooms that is situated on the outskirts of a smaller city for rental purposes.
On the other hand, you might discover that there is a lot of market demand for something similar if you have, say, a three-bedroom apartment that is right on the seaside, in which case it would be preferable to turn the property into an investment.
Before you put your property up for rent on the market, you need to do some research and find out what the normal rent level is as well as what the demand is like in the neighbourhood where you live in terms of rental properties. After that, you should think about renting out your property to tenants.
The importance of this stage in the process of developing your budget cannot be overstated.
The fact that there is a low demand for rental properties and/or a high vacancy rate in your neighbourhood is not good news from either a financial or a security point of view. It is in your best interest to avoid leaving your property unoccupied for extended periods of time since during that time it runs the risk of being subject to acts of vandalism and theft.
Advice: If you want some rental advice, talk to a couple of local estate agents, and visit Onthehouse.com.au to check rental yields in your street and suburb.
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Do you think your home has a chance to grow in value?
When adding a new piece of real estate to their portfolio, owners of investments will at all times be on the lookout for new chances for expansion.
One of the things that you need to consider about when you are trying to decide what to do with your current PPOR is whether or not the region has already hit the pinnacle of the market or whether or not there is opportunity for expansion. This is one of the things that you need to think about.
It is possible that it would be more lucrative to put the home up for sale than to use it as an investment at this point if property prices have already hit the peak of the market or are on their way there.
Again, it is crucial to conduct research on your neighbourhood in order to get a feel of the direction in which real estate values are trending in your location. You may get this sense by looking at the trends in local property prices.
However, there is adequate information accessible that can provide you with a good indicator of what to anticipate when it comes to price fluctuations; however, there are no guarantees that can be provided regarding price changes that can be anticipated.
If the market is expected to remain buoyant with strong demand, and if it is likely to be maintained while you're away, then this indicates that it may be in your best financial interest to hold onto your home so that you don't forego any potential future capital gains. If the market is expected to remain buoyant with strong demand, then this indicates that it may be in your best financial interest to hold onto your home. if it is anticipated that the market will continue to be robust as a result of high demand, and if it is likely that it will be sustained while you are away.
On the other hand, if the market has already reached its high point or is getting close to reaching its high point, it may be a good moment to sell if you are considering doing so. This is especially important to keep in mind in the event that you are unsure of the length of time that you will be gone or whether or not you intend to return to the same property.
To put it another way, you should put the money you will save on taxes into investments right now rather than risk losing it when you return to your home country.
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Do you see yourself operating a rental property?
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 ensure that it has appropriate resources and finance, as well as that it is suitable for the use to which it is being put.
Are you planning to begin a new job, go on an exciting new journey, or otherwise alter your current way of life after the move?
Do you believe that even with the assistance of a property manager, you will be able to find the time necessary to maintain a rental property, given the circumstances?
Will you be able to find the time to monitor emails pertaining to maintenance, keep track of expenditures and maintenance, and stay current on the essential documentation for the end of the fiscal year?
While you are away from the rental property, you need to be prepared to delegate or handle all of the essential aspects of being a landlord, in addition to the other obligations that fall under your purview.
You have to make sure that you have the right people working for you (such as rental agents, accountants, tax advisors, a legal advisor, tradespeople, and so on), and adequate cash flow to meet all of your outgoings (it is likely that your home will be negatively geared, which means that the rent earned will not cover all of the costs associated with holding and operating the property), and you have to be ready to fulfil both your legal and your commercial responsibilities. If you want to be successful in this endeavour,
Think long and hard about whether or not you have the time to be a landlord and whether or not you even want to put in the work. If you do not, then you should probably not pursue this career path.
Even if there are a lot of other aspects to think about, such as the effects of taxes and the potential returns on investment, the question of whether you should rent out your current PPOR or sell it before moving on can be a challenging one.
It is in your best interest to examine the numerous financial aspects of the issue with your accountant so that you can assess which option will be most beneficial to you in the long run. This will allow you to make the most informed decision possible.
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Is the property fit for rental purposes?
Your property must be habitable, safe, and free of any problems that could impede your tenants' ability to enjoy and make use of the space they rent from you in order to be considered suitable for occupancy.
It is possible that you will need to perform some maintenance and repairs on your property in order to bring it up to the standards that are necessary in order to make it marketable, not to mention in order to fulfil your legal responsibilities. This is because of the fact that you are the owner of the property.
This will cost you money, so you will need to decide whether it is better to invest the money or sell it based on whether or not it is within your financial means to do so and how the decision will influence your company.
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Do you have your taxes in order?
When renting out your family home, there is a multitude of tax factors to take into account; thus, you should obtain the opinion of an independent financial and tax professional before doing so.
For example, you want to get the most out of your permissible deductions (including depreciation), but you also want to lower the amount of tax that you owe and make sure that you don't lose the exemption on the sale of your primary house from the capital gains tax.
Before deciding whether to sell or rent a property, it is vital to engage in tax planning and have a thorough understanding of your present tax situation. This is the case whether you plan to sell the property or not.
- Consider Your Cash Flow
The most important factor to consider when determining whether or not to sell or rent out your existing PPOR is which option will bring in the most profit for you in the long run.
You need to think about whether or not you can afford the upkeep on two properties, as well as whether or not you can handle the different taxes and expenses that go along with both properties, and you also need to think about what happens if the rental is vacant for an extended period of time.
You need to take some time to sit down and create a budget that accounts for the potential costs of an investment property (such as management fees, accountancy fees, maintenance costs, advertising fees, and more), in addition to the budget that accounts for the potential costs of your new house.
You can get a decent indication of whether you would be better off selling the home or whether you can hold on to it as an investment if you calculate your income in contrast to these expenses (including any loans) and then compare that to the property's value.
It is true that keeping an investment property could provide a boost to your financial status in the future or could bring large tax benefits; however, what about your cash flow in the meantime? Keeping your circumstances under control is typically a very sensible choice with regard to your finances. If the predicted rental income from the property is crucial to the success of your investment (which is typically the case), then the amount of revenue you receive from it could be affected by a wide variety of factors. It is essential to think about things like the costs of maintenance and upkeep, the potential costs of body corporate fees and council rates depending on the property, and what will happen if the property is empty for some period for whatever reason. All of these factors may have an effect on the profitability and the degree to which your investment may be controlled.
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The Investment Itself
Put this question to yourself: why did you purchase your home in the first place? The majority of people do not only base their decision to purchase a family home on their available finances. The majority of people take into account factors such as the area, the proximity of family and friends, schools, and places of employment, among other factors. Although the aforementioned factors might have an effect on the resale value of your house, in most circumstances they won't. Because of this, if you sold your home, you would theoretically be able to invest the proceeds in a property that has significantly more potential for return on investment than your current residence.
On the other hand, if you are in possession of solid, dependable evidence (and not just a hunch) that the local real estate market is about to experience phenomenal expansion, then you should, by all means, consider converting your home into an investment property because the potential benefits may outweigh the dangers that are involved.
Are you more perplexed than you've ever been? When selecting whether to rent or sell your existing property, the following are some of the most important factors to take into account:
Never, ever, ever let your feelings influence a choice you have to make.
Learn your own personal financial condition as you know your own hand inside and out.
Learn the ins and outs of your industry, and if you need guidance, talk to a Ray White agent.
Investigate every possibility before deciding against anything.
Do you foresee a day when you might want to move back into the property in the future?
If you are looking to purchase, sell, or rent a property, talk with a local Ray White professional as soon as possible. Our representatives are here to assist you in arriving at sound choices regarding your financial future.
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Is your ownership arrangement correct?
Joint ownership of the family home is the standard arrangement in most cases (e.g., husband and wife, life partners, defacto partners and so on).
Even while it's customary to do so to ensure success in the event of death and to ensure that everyone's rights are protected in the event of divorce, this strategy might not be the most efficient when it comes to the investment of real estate.
If a particular course of action was chosen with the intention of reducing one's tax burden, then a sufficient amount of tax planning is necessary, and it is of the utmost importance to consult a lawyer regarding issues such as the rights, obligations, and effects of transferring the home into one name. This is the case in the event that this course of action was selected.
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Is your mortgage the greatest one out there?
There is not much of a distinction between a home loan and an investment loan in this day and age due to the fact that the features and benefits are rather the same.
The most important question to ask is whether or not the product is suitable for assisting you in achieving your personal, investment, and financial goals.
It's possible that a mortgage that was intended for the purchase of a primary residence won't work for the acquisition of a rental property.
It is in your best interest to have your cash flow, tax situation, and the length of time you are likely to be gone evaluated by a professional that specializes in investment loan health checks.
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Take a gut feeling!
One last thing to keep in mind is to go with your gut instinct.
Consider not only what is appropriate but also what would be financially prudent.
If you and your family can reach a point where you are emotionally and financially on the same page, you will be well on your way to selecting the alternative that will be most beneficial to you and your loved ones.
