Renting vs. Selling: Evaluating Home Ownership Choices

Ryan faces a tough decision: rent his home for cash flow or sell for tax-free gains.

### Renting vs. Selling: Navigating Your Home Equity Dilemma
* 🏠  Ryan is considering whether to rent out his current home with **$200k equity** and a **2.6% mortgage interest rate** or to sell it and invest the equity in an **index fund**.
* 💡  Financial advisors emphasize that the decision "**depends**" on several factors, including the **desirability of the area** and the **potential for strong rental income**.
* 📈  If choosing to rent, it's crucial to ensure that the new home purchase adheres to guidelines, such as a **20% down payment** and a mortgage not exceeding **25% of gross income**.
* 💰  The inflationary period has led to **low mortgage rates** and **increased home appreciation**, presenting a **cash flow opportunity** for renting out the property.
* 🧾  Homeowners can benefit from a **tax-free gain of up to $250,000 for singles or $500,000 for married couples** when selling, provided they meet the **two-out-of-five-year rule**.
* 😟  However, becoming a landlord can be challenging, with potential issues such as **difficult tenants or management headaches**, which may not suit everyone's temperament.
* 🔍  It’s essential to create a deliberate plan that considers both **financial and emotional factors**, ensuring that the choice aligns with **personal circumstances and long-term goals**.
* 📊  Ultimately, whether to rent or sell should be a **well-thought-out decision**, avoiding any hasty actions that could lead to **missed opportunities or regrets**.

[Music] Ryan has a question. He says, Hi, is it better to rent out your home when you're ready to buy or move into a new home or sell it and then invest the equity in an index fund? I have 200k equity with a 2.6% interest on my first home. So when you're ready to upgrade, is it better to sell or rent it? Oo, this one's tough. B, well, here's the, you know, we're very good financial advisers, and so our answer obviously is going to be, It depends, it depends, it depends, it depends. CU, sometimes it's a great idea. You're going to sell your first home, and you're going to move into a new home. But maybe you got a really great deal on that home, and you've got a really good mortgage, and it's in a highly desirable area where there are really strong rents, and it's a good, you know, it's a good community where there's a lot of people coming into the community where you know you're going to not have a ton of

vacancies. That's a really compelling case to rent out the home so long as when you buy your new home, you make sure that you follow our home buying rules. You go to money.com if you want to see those home buying rules. That when it comes time to upgrade, when it comes time to move to your second house, you got to make sure that in that second house, you're going to be there for at least 5 to 7 years. You do have to put 20% down. So if you're not going to sell the primary home that you're currently in and you're going to instead make it a rental property, you have to say very diligently to make sure you have that 20% down payment on your second home. And then you have to make sure that your monthly mortgage cost does not exceed 25% of your gross income. If you can check all those boxes, that might be a compelling reason to continue to have that be a rental property. But in that same vein, there's a lot of reasons why

you might want to sell it. Yeah, let me lay out the groundwork, and then I'd love to get your thoughts. This is mean; this is mean in a good way because we have two things, and it's both good things for you, Ryan, is that we have just come through an inflationary period where you're the beneficiary of two big things from that inflationary period. First of all, low interest rate on your mortgage. Yep. Second is you probably your house is appreciated dramatically, and because it's appreciated dramatically, rents are also up dramatically from an inflation perspective. So here's the two tough choices you have, you, and this is, like I said, mean in a good way. You have probably an arbitrage on the rent. Is that because your mortgage is so low, that low interest rate, and rents have gone up? There's a cash flow opportunity. You're like, this is pretty awesome. But here's where this gets hard. The government lets you, if you're single, it's $250,000. If you're married

It's $500,000 of tax-free gain. Now, there's some gray zone in between that I want to make sure I give you on that tax-free gain of your personal residence. When you sell it, you have two out of the last five years to choose this. So, you actually might be able to try the rent for a little bit to see if this works out well for you or you and not jeopardize the tax-free gain you have. But you have to make sure you take into account two out of the last five years. So, probably, you know, 18 months into renting this thing, you better have it on the market trying to sell it because there is going to be some type of lead time to sell it to still take advantage of that tax-free gain. But what are your thoughts on that dilemma that people face? Well, here's my question for you because you just laid out it's great if you can have rent coming in and that rent is more than your mortgage and it's covering the mortgage and it's also

cash flowing for you. That's a really, really compelling case to do that. But renting is not always just like rainbows and butterflies. It's not like always a wonderful thing. I mean, we have seen firsthand some horror stories of people that go into rental properties or have rental properties, and it doesn't work out that way. So I would never say, Oh, I'm just going to continue to hold this house, and I'm going to become a landlord. I'm going to have a renter simply because I can. 'Cause a lot of folks, and I'm sure you agree with this, a lot of folks don't need to be landlords. If you're someone who, like, every time the temperature drops below 32.1 degrees, and you're nervous about every pipe bursting and every... He's describing me. Well, no, I just... I have a friend who's like that. You might not be cut out for renting, right? If you don't want to have to... If especially if this is a house, and you're moving geographies, and you're going to

have to have a management company that's going to cut into the profitability of the endeavor. You just want to make sure that you really think through it, and this is where you have to make the personal finance personal. If I continue to hold it and rent it, is that what makes the most sense for me? There's the mathematical part of the equation, but there's also the emotional part of the equation. Or if I sell the house, is that going to be more advantageous? And I would argue that both of those answers can be correct, and it very much depends on the person. Just create a plan. Don't go in this half-baked of the point of you try this rental, and then you realize, you know what, I'm just not a landlord-type person. And then in year three, you decide you're going to sell it because now you've squandered the tax-free growth opportunity, and that's the worst of the worst if you do that because you

do have some. You got some unique opportunities that you just need to be very deliberate. Create a plan, maybe even do that, you know, put on your 3D glasses to do, um, you know, a cash flow plan where you the 3DS, by the way, when you're talking about 3D glasses, is your dream plan. Make sure you plan for that, the down toe plan, and then, of course, the doooo plan. You know, you get in there and your tenant tears up the place, he doesn't pay, then you, it sits vacant for six months, you got to do repairs, do the plan so that you actually, when you, you get into this, you're deliberate, you know where you stand, and then you don't have regrets later. Love it.

Should I Rent My Current Home or Sell It When Moving?

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The Money Guy Show

Renting out your home can be a good option if you have a favorable mortgage, a desirable location, and strong rental demand.

It's important to follow home buying rules for the new property, including a 20% down payment and keeping the mortgage cost within 25% of your gross income.

However, there are also compelling reasons to sell the home, making the decision dependent on individual circumstances.

Ryan is in a favorable position due to low mortgage interest rates and a dramatic increase in his home's value during the inflationary period.

He has a cash flow opportunity from the rent increase, creating a potential arbitrage.

The government offers a tax-free gain of up to $250,000 for singles and $500,000 for married couples when selling a personal residence, with a two out of five-year window to qualify for the gain.

Renting out properties can be a compelling way to generate cash flow, but it's not always a smooth experience.

Many people are not cut out to be landlords, especially if they are anxious about property management or dealing with unexpected issues.

It's important to carefully consider the decision to rent out a property, weighing both the mathematical and emotional factors, and to create a clear plan before committing.

Deliberate Planning for Unique Opportunities

Creating a cash flow plan is essential for managing unique opportunities.

The "3D glasses" approach involves a dream plan, a down toe plan, and a do plan to address potential challenges.

Being deliberate in planning helps avoid regrets and ensures a clear understanding of one's financial position.