While embracing a life of travel, making the decision if you should sell or rent your house is a big one. The potential impact can be significant either way you go. There are a lot of considerations and no “right” answers. In these situations, running the pros and cons can be helpful in trying to determine what’s best in your particular situation. Last week we looked at the Pros and Cons of maintaining a rental house. This week, let’s look at the opposite scenario, selling the house.
No worries of maintenance and overhead
If you sell, you don’t have the maintenance and overhead of managing a rental, turning over the property between tenants, nonpaying tenants, repairing wear and tear or damage and other issues. This reduces a variable in your budget with possible significant and unexpected costs. It can also reduce a lot of stress and worry while you are away.
Your investment capital is liquid
You can invest the money in other assets that are more liquid – Bonds, stocks, mutual funds – and have it accessible when you want it (usually days, not months waiting for a house to sell). You have to look at the risk and return, but if you are hoping to use some of your “savings” that are currently tied up in your house to fund your travel, you are going to need them to be more liquid. You will need to refinance the house and take the money out, get a home equity line or credit, or sell the house to access those funds. All of these approaches will cost you time and money. Investments in the stock market or other liquid assets are more readily accessible and can perform as well as a rental property.
You can access a down payment for your new adventure
Selling may give you a lump sum of money to invest in your new lifestyle choice – purchasing a boat, RV, or bed and breakfast for instance. You will have a down payment on your next adventure. If you are re-investing the money into your new accommodations (boat, RV, bus), you may save significantly on your journey by not having to pay for rentals everywhere you’d like to go. If you buy a jet ski or SCUBA equipment, you won’t have your equity AND you’ll have to pay for accommodations, so it’s all in priorities.
You won’t be tied down to any particular location. You will no longer have an address, therefore if it benefits you, you can technically “move” to another location while you’re out traveling. Say you live in New York, but someone in your family wants to attend college in Florida when you return from your travels. You can begin your “move,” get a mailing address in Florida, get a driver’s license, and have your bills mailed there so that when you return from your travels, you are able to qualify for instate tuition.
Avoid capital gains of a selling a rental house
If you hold on to your house, but it’s not your primary, you may become liable for capital gains taxes. If you have not lived in your house for 2 of the last 5 years, you are liable for the capital gains taxes due on any gains. If you’re in a lower tax bracket, you still may not owe taxes. If you’re in a higher tax bracket, this can be a considerable amount.
No home base
You no longer have a home base. When you travel, you’re more committed in that you don’t have a home to go back to again. We’ve had friends on a boat who lost their boat on a reef and had no place to return, therefore ending up moving back in with their parents in their 40’s. Another family who sold their boat and went to live with parents in their 50’s while they sorted out their next plan. This is not a problem, depending on family relationships and accommodations available, but worth a consideration.
No long term investment
You no longer have an investment. This is a big one. While you are out traveling, if your home is being rented and just breaking even, it is one of a few appreciating assets. Cars, boats, RVs and other wonderful things are all depreciating assets, but a house is likely to go up in value over time. So, even if you’re not getting a positive rental income monthly, you ARE paying down equity and it’s quite likely over 10-20 years that you’ll have gained equity through the inflation of value. Even if you’re not setting aside much each month toward retirement, owning a house free and clear in 30 years is a pretty nice nest egg if needed.
Lost income potential
You don’t have a potential income source. In some markets, you can rent your house for more than your payments, especially with interest rates having been so low in recent years. Sometimes you can rent your house and live off of the rental income, which can be a very sustainable plan because it’s a continuous flow of income (don’t forget to consider vacancies, repairs, and maintenance though).
You don’t have a place to store valuables or memoirs. If you have inherited a favorite desk from your grandmother or a set of dishes, you will need a place to keep your items. Maybe you have photo albums, collectible coins, or other things. If you own a house, you can rent it furnished, or you can keep a shed in the back yard with your valuables (make sure it’s well secured from the elements). Otherwise make sure to count the cost of a storage unit into your cost of living.
If you like the location or home, sometimes it’s hard to replace when you hope to return. Some neighborhoods don’t have much turn over of properties. Also, sometimes property values increase dramatically and it’s hard to get back into the market once you leave. If you particularly love your house for it’s layout or back yard, you may not be able to find as nice of a replacement when you look next time.
Lost equity in closing costs
There are significant fees associated with every purchase and sale of real estate. You are paying commissions, usually 6%. So for a house that you sell for $300,000, you’re also paying a commission of $18,000. And you have to pay capital gains taxes if you’ve gained anything on holding the real estate (if it hasn’t been your primary for 2 of the last 5 years, depending on your tax bracket and how long you’ve held the property). So if you’re only going for a year, you could easily live on the expense of selling and re-purchasing a home, especially if you take out a loan and count the purchase commissions and lending fees!!
Hopefully these considerations give you something to think about and make the best choice in your situation. It is a six-figure decision and not to be taken lightly and without running some numbers and considering all the potential consequences, both positive and negative.