The common scenario is this: purchase a small, starter home and then move after 5 to 10 years into another, much larger home. But is this a prudent move or are there other options?
There is one, largely overlooked option, that can have a great financial impact on your finances. The option is to move and then rent out your existing home. There are times when this makes sense, and other times when it doesn’t.
Makes sense: It makes sense to rent our your first home if the following are true:
- You have the funds for a down payment on a new home or you can access the equity of your home without getting too deep into debt. A combination of the two may be used also.
- The expected rent is greater than the expected expenses
- It will be easy to find a renter
- There is a strong possibility of continued appreciation of your first home
- You do not mind being a landlord
- You have a small cushion for times of vacancy, and are in a strong position financially
Doesn’t make sense: It doesn’t make sense to rent out your first home if the following are true:
- You do not have the funds for a down payment on a new home
- There is not much equity in your old home
- The expected rent is less than the expected expenses
- It will be difficult to find a renter
- The expected appreciation is either very low or the first home may depreciate
- You do not want to be a landlord. However, I challenge this assumption, because there are always things that you do not want to do but should do them anyway.
- Your financial situation is in turmoil
What’s interesting to note is that most people who sell their homes do not think of how much the transaction costs can be, especially as a percentage of the selling price or equity, until they are in the sales process. I do not mean that costs are hidden, but the costs are not factored into the equation when wanting to sell a house. Additionally, when you sell your first home, you most likely have to repair several items that can costs thousands of dollars that you do not realize the benefit of.
If you want to get ahead financially, you usually have to not do what everyone else is doing and take prudent chances. Part of prudence is to look at the worst case scenario. If the worst case scenario is that renting your first home has become a nightmare, then just sell it and move on.
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