long term rental vs selling considerations during times of covid

Your current home may not serve your needs forever – that’s a possibility every homeowner has in mind. You may want to upgrade or downgrade, move to another city, or simply decide to opt for some other location. Whatever the reason may be, chances of you staying in your property for an indefinite period is thin.

In such a scenario, you have two choices in front of you

  • Sell your property
  • Give out your property for long term rental
  • The big question is, which of these two options would serve you better? Would you be better off selling your property altogether? Or would long term rental be more profitable to you?

    We will be looking at the pros and cons, the considerations and risks of each, the profitability, and chances of loss in each.

    Renting vs Selling – A head to head comparison

    Consider things like your financial situation, that state of the market, and the governmental ordinances that affect your rights as a landlord before committing to either decision.

    The curious case of Corona

    Coronavirus has changed the world in 2020 in ways we had never expected it to. In terms of business, there has been a rapid downward spiral. Though things seem to be recovering at this stage, the long-term effects will be felt for years from now.

    What the Covid-19 outbreak has shown us is the uncertainty of the market, the very unstable foundation upon which markets and economies are based. Given this notion of uncertainty, many homeowners have suddenly shown favor for long-term rental as opposed to selling. ‘Uncertainty’ is the keyword in this market situation. Giving up your property altogether seems to be a daunting task under the given global circumstances.

    This is where the option of long-term rental has steadily gained popularity. Let’s look briefly at some of the reasons you might consider renting if you haven’t done so already.

    1. You can use the tenant’s payment to cover your monthly mortgage. This essentially makes your tenant pay for you to earn equity in your home.

    2. Whatever you have after the mortgage has been paid off, is your profit. It is a steady source of monthly income.

    3. Renting out your property gives you extra channels for income. Given the times of uncertainty, it is one certain way to ensure a steady flow of money.

    4. If your region has a trend of increasing rental price, your rental revenue will soon be more than your expenses.

    5. Rental rates vary. Hence, if you do not right away see a profit in your rental revenue, you need not fret, since, with the rise of market rates, your profit will automatically go up.

    Capital Gains and Sales Price

    Your present home value may not satisfy you. In that case, you can rent out the property while waiting for its value to increase. If you see a trend of upward rise in property prices in your area, it may be a wiser decision to wait.

    However, there’s a consideration to keep in mind. According to the laws of your region, you can no longer claim your property to be your primary residence after a certain time. This means you’ll be liable for tax payments.

    If you make a mistake with your timing, you may end up owing thousands of dollars in capital gains after selling the rental.

    Rental income tax

    As is the case with wages from a job or dividends from a stock, you are liable to pay income tax on any income you get for your rental, at your ordinary tax rate. On the bright side, however, you can write off all the costs associated with renting the house.

    You can claim a deduction for depreciation expenses as well as deducting cash expenses. This (non-cash expense) will help you to gradually deduct the amount you paid to own the property.

    Consult a CPA for more information on deducting any deprecation or losses.

    Stress and time

    Being a landlord can be as stressful and time-consuming as a full-time job. The responsibilities of advertising, showcasing, running background checks fall on your shoulders. From calling up tenants to handling maintenance and repairs to dealing with emergencies – everything is a part of your responsibility as a landlord.

    In case you hire a property management firm to do these for you, you can expect it to charge at least 10% of your revenue.

    The issue of distance

    If you are living in the same city (or nearby) where your rental property is, it will be possible to manage. But managing a property in a remote place will be very difficult. Add in the costs of mileage, plane tickets, taxi fare, food cost, hotel rent – they’ll quickly cut into your rental profit. In a situation like this, it would make more sense to consult a property management company for day-to-day issues and odd emergencies. You will also have to hire repair and maintenance people for odd jobs, which you could have done yourself had you stayed near the rental property.

    Renting restrictions and rights of tenants

    Landlord-tenant laws vary from state to state and some cities also have local ordinances. These tell you how you can evict tenants, access the rental property, increase rent, and return deposits.

    These regulations will affect your profitability. If the laws of your state favor tenants, you are in bad luck. In case it’s the opposite, you are in luck.

    Before renting out your property, check with your homeowner’s association about any restrictions.

    Conclusion

    Renting entails risk, but so does selling. Before you commit to either decision, make sure you have a fair amount of money in case there’s some unforeseen emergency. Always consult your financial planner about these decisions.

    In times like this, any financial decision needs to be made with consideration for both the risks and scopes. COVID 19 will continue affecting us for years to come, and if we have learned anything from it, that has to be being cautious and not taking stability for granted.