'Buy, Rent, Sell'

Should You Rent or Sell Your Home?

Many people find themselves in the position of having an additional property, but how do you decide whether to rent or sell up?

Whether you are a couple who have just moved into together after owning separate properties, or have just gained a property through inheritance, there are many reasons why people end up having more than just one property. Some people are also in the enviable position of being able to upsize to a new house prior to selling their old property. With rising house prices and demand for housing, it can seem a no-brainer to sell up and benefit from the cash injection, which you can put into reducing your own mortgage, paying off debts, putting down a deposit on a home for your child or perhaps even buying a holiday home abroad. But is selling up always the best option, or would it be more lucrative to retain the property and rent it out instead?

When renting your property, a tenant will live in your home and pay you rent, which will go towards paying the mortgage on the property if you still have one. If not, then the rent will simply be additional income. As an additional investment stream, it can work well to reduce your overall financial risk, as it provides you with added income in the event that you are unwell or lose your job. It can also act as a savings pot for you and allow you to build up a pot of money for vacations, renovations or simply to act as a safety net. As house prices continue to rise, you’ll continue to retain an asset which will be worth even more in the future should you decide to sell.

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Determining your rent will in part be influenced by comparable properties in your area, as they will always be led by the market. If you are too pricey you are unlikely to successfully let your property. The rental price should take into account your current mortgage payments, any taxes you pay on the property, any mortgage insurance premiums, any landlord insurance premiums, any association fees if your property belongs to an association and an allowance for repairs, replacements and maintenance. You will also need to factor in direct costs associated with sourcing a tenant including advertising and tenant checks alongside accounting and property management fees. Also bear in mind that your rental fee may become more attractive over time, particularly if your mortgage is fairly high to begin with. As you pay off more of your mortgage, the fee will become more palatable.

Renting can be a good option if you are still intending to sell, but the current market value isn’t what you’d want to get for the property. Perhaps you had the property on the market for a while but it didn’t sell, or the offers you were getting were too low. Renting would give you the opportunity to bide your time until the market improves and you can obtain the right price.
That said, this approach can only work if you are looking to sell within three years as any longer and it won’t be considered your primary residence. The impact of this is that you would have to pay capital gains tax on the sale, which can be as much as 20% depending on your personal circumstance. This means that if you rent for too long, you could end up paying much more in capital gains tax than you made through rental income.

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Another consideration is that you will be taxed on the rental income you receive from your property. It is treated just the same as wages or dividends from stock. Although the costs associated with renting the house are fully deductible, you do still need to work out the tax implications associated with the additional rental income you will receive.

A final point to consider is whether retaining the property will prevent you from buying your next dream home. Usually you will need to find a downpayment for your new home and this could be as much as 20% of the property value. If the only way you can do this is via selling your existing property, then renting may hold you back from acting quickly when the right property does come up. Even if you are renting on a short-term lease, you will need to give your tenants notice and then there will be several weeks or months before the property sells. If you want flexibility to act quickly, selling may be a better option.

Whether you decide to continue renting or selling your home, consider all of the options and weigh up the pros and cons. There are clear benefits to both approaches, but often this is influenced by your own personal set of circumstances, rather than a one size fits all approach.

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