I just read an article about girlfriends although this could
apply to boyfriends as well. You've got one but then you spot another one
that's better and you want to move on. Well owning a home is like that. You're
fine living in one and then you see a new one in your neighborhood, or spot an
open house and fall in love with the location, the house, the neighborhood and
more. So now what do you do? You've made an offer on the new one and it's been
accepted so now you need to decide what to do with the one you're currently
living in. Well there are five things that you should consider when you're
making your decision.
1. Will this property generate positive cash flow? When
it's rented out and you deduct all the expenses such as mortgage, taxes,
insurance, utilities, vacancy, repairs etc. will the property produce a monthly
profit or will there be a loss?
2. What about ROI or return on investment? How
much profit would you make if you sold this home today. If it's not much it
might be better to hold on to it for a period of time. Especially if there is a
positive cash flow. If you would make a profit by selling and could make
$100,000 in profit and your making only $1000.00 per year in cash flow that's a
1% return on your investment. Could you take that $100,000 and invest it some
place else for a higher return?
3. And then lets talk about taxes.
Usually when you sell a home for a profit you will need to pay capital
gains tax on the sale of potentially up to 20% depending on your tax
bracket. However, the IRS allows homeowners to exclude the sale of up to
$250,000 (or $500,000 if married filing jointly) of a primary residence if you
lived in the home for at least two of the last five years. So when you sell the
home in the future you may have to pay capital gains taxes but if you sell now,
you will be able to save the profit. There are no guarantees however as to
what the home will be worth in five or ten years. You will want to check with
your CPA for financial advice.
4. What does the future look like? What will your
neighborhood look like in the future. Is there potential growth? Are
there services coming into the area and is the current trend leaning
toward growth?
5. Don't forget the tenants. Can you handle tenants? Some
tenants are easy to work with but don't forget the party animals, the hoarders
and more. You can manage the property yourself or you can hire a management
firm but there will be a fee involved.
So should you buy or sell? This is your own personal decision
after weighing all the options. You will have t0 decide if renting or owning is
in your financial future.
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