The two-bedroom, two-bathroom townhome that looked so perfect to the couple in their newly married, pre-child years now feels really small. Someone’s going to have to give up the den for a nursery, and where are the chair, desk and filing cabinets going to go? Does the dining room now have to become the office?
Such a scenario plays out across America every day. Circumstances change. Lives change. Needs change. Moving into a new home often is the next step. Should you sell the old and then buy the new, or buy the new and then rent the old? Personal finances are going to be a key factor in that decision but maybe not the sole factor.
Here are five things to consider prior to determining whether you are in a situation to own two homes.
What is your purchasing power?
“If you were to sell your home and take out the equity, how much could you afford to spend on a purchase and what type of home would that get you?” asks Tony Coplen in a LinkedIn article titled “Looking to Convert Your Home into a Rental Property?”
Renting can be lucrative. And you might be able to use some of the equity in your old home to make a down payment on your new home. But as the old saying goes, you don’t want to rob Peter to pay Paul. Make well-though-out and wise decisions when coming up with the capital.
What are your incomes and expenses?
Run the numbers and get a beat on what is coming in and going out financially. Include your prospective rental income in the calculation, as well as your new mortgage payment. Ideally, you should be in the black, but if you’re in the red, there still might be an opportunity to hang onto both properties if you’re willing to realize a short-term loss for a long-term gain.
What is your stress level?
Renting a home comes with the title of landlord. A landlord has a lot of responsibilities, such as collecting rent, making repairs and replacing appliances. It can be a daily disturbance on your life.
“Just like buying a new home while trying to sell a home can be stressful so can renting while buying,” according to the article. “You want to keep in mind that it could be stressful, especially in the beginning.”
What is your idea of the perfect tenant?
Screening renters can be tricky. You want to have a good relationship with them but also want to set some guidelines and standards. Even though they are living in it, it still is your house. What is their employment situation? How long will they stay in the area? What is their track record with renting other properties?
What is your tax liability?
Make a point to talk with your accountant in advance of deciding whether to sell or rent your original home. There are certain tax implications that need to be considered because they will impact your bottom line.