DO YOU HAVE THE CASH FOR THE DOWN PAYMENT ON YOUR NEW HOME WITHOUT SELLING, OR TAKING OUT A NEW LOAN ON, YOUR CURRENT PLACE?

Many existing homeowners, who are planning to buy a new home, typically use the equity in their prior property as the down payment for the next home. However, if you have been able to save up extra dollars or you can tap into other funds, to use as the down payment on the new property, then you may want to consider leasing vs selling your existing home. While some may want to use a home equity loan, or refinancing, to pull some or all of the equity out of the current property to use as the down payment on the new property, this rarely makes sense since you are just decreasing your ability for the rent on the existing property to meet or cover the existing expenses let alone exceeding expenses to generate a positive cash flow!

DO YOU NOT HAVE AN EXISTING MORTGAGE, OR HAVE YOU LIVED IN THE PROPERTY FOR AT LEAST 12 MONTHS SINCE YOU TOOK OUT YOUR EXISTING MORTGAGE?

If you bought the property as a primary residence using a mortgage loan, then In most cases, you’ll need to wait at least one year before renting out your home. Additionally, if you have an FHA mortgage on your current home and plan to obtain another FHA mortgage on the next property then FHA guidelines require a distance of at least 100 miles between the departure residence and the new residence.

You would also need to confirm that any applicable Homeowners Associations or Covenants and Restrictions do not limit in any way your ability to lease the property. Some Associations may not allow you to list till after you have owned the property for 1-3 or more years. Other HOAs may not allow any rentals whatsoever, and some associations may impose lease conditions including the term of any leases as well as limiting your ability to lease to only family members etc.

IS YOUR DEBT TO INCOME RATIO LOW ENOUGH TO SUPPORT THE LOAN FOR THE CURRENT MORTGAGE, A NEW MORTGAGE, AND ALL OF YOUR OTHER DEBT?

Lenders use your debt-to-income (DTI) ratio to compare your income versus your total debt with the mortgage to determine whether you'll qualify for a mortgage loan. The size of your down payment and your credit score and also factor into whether you will qualify for the loan, as well as the interest rate and terms you receive.

Your existing mortgage will always be included as part of your debt along with the amount of a new mortgage for the next home. As far as income, some lenders may use a fully executed lease as proof of income while many lenders will only include rental income that is included on your prior 2 years of tax returns.

If your plan is to find a tenant for your current home, before you buy the next place, and this approach is acceptable to your lender, then it's likey you will have to have interim housing before you can find and close on the next property. In markets with low inventory, this could mean you might be in interim housing for at least 2-3 months and potentially it could be longer than a year before you find and close on the next place!

In either scenario though, lenders will typically only include only 75% of the rental income when calculating your debt to income ratio. What all of this means is your income will typically need to be substantially greater, perhaps twice as much as typical, to buy a another house with two or more mortgages in place on all properties.

The Future Property Value Is Likely To Be The Same, Or Less Than What You Can Sell For Now

If it's a true sellers' market or The Property Values are likely to decrease meaning you can get the maximum selling price for your property now, then selling it would likely be the better option.

The Property's Value Has Substantially Increased Since You Purchased

If The current property value is substantially greater then when you purchased then selling the property purchasing a new primary residence means the odds are good you wil not be paying capital gains taxes on the increased value. If however you lease the the property then down the road when you eventually do sell you will likely owe capital gain tax on the apprciate that was in place when you converted the property to an investment.

Keep in mind that f you have owned and occupied the residence for at least 2 of the prior 5 years before you sell the place then you can typically avoid paying capital gains taxes on the first $250,000 for single-filers and $500,000 for married people filing jointly. This means, in theory you could rent the property for the next 2-3 years and as long as you sell before the end of the third year of having moved out, in theory you could still both lease the house for the short term and avoid the capital gains on the home. Since everyone tax liabilities vary then you should speak with your CPA and Financial Advisors to confirm if it makes sense to sell or lease the property.

The Property's Age And Condition Make It Likely Major Repairs Will Be Needed During The Time You Might Lease The Property

If there is a lot of deferred maintenance or based on the age of the property it's likely you will need to make substantial repairs like replacing a roof, the HVAC, the Water heater and other components that may help with days on market when it's time to sell but these repairs are not truly updates or improvements mean that it's likely better to sell the property now vs lease it.

Are You Relocating Out Of The Area Permanently

If your current move is being driven by a relocation out of the area, and you don't anticipate moving back to the Indy area, your current home is a single family detached house and your plan did to be a landlord did not also include hiring a property manager then you may want to sell vs lease. If your current house is a condo like property where you have no outside maintenance then leasing might still be an option, however you still will likely need a property manager which typically will charge about 10% of the monthly rent payment for their services.

Demand For Rentals, Similar To Your Property, In The Area Is Weak

If there is not data within the last six to 12 months, showing both an acceptable days on market and final lease amounts for very comparable properties, in the same area, that would support ideally covering all of your mortgage payments, real estate taxes, HOA fees and foreseeable required repair costs meaning it's not likely you will have a positive cash flow then it likely makes more sense to sell vs lease your property. While appreciation can offset some of the need for positive cashflow, the need to sell vs lease only becomes more critically important if the property is not expected to appreciate much or at all during the time you will have it leased. For some folks, having an investment that's actually loosing money could add some value. So, part of your evaluation should include conversations with your CPA and financial advisors.

It Is Not The Best Time Of Year To Find The Most Ideal Tenants For The Property

The best time of year to lease your property typically is the spring since more people move in the spring vs the fall, winter and summer. That desired timeline can become even more limited and specific if your property is desirable to college students including med and or law school students. The ability to sign these tenants for 2 or even 3 years vs for one year means lower rental costs and typically less re-leasing costs for painting etc. So if the timeline for selling your property is outside of this desired window it may take longer to lease the property and more price concessions. It's also likely you will need/want to find tenants willing to lease for longer than 12 months to get the property on the desired lease cycle. Because of this it may make more sense to sell vs lease your current place.

The Monthly Rental Income would be Less Than All Expenses Including Real Estate Taxes, HOA Fees, Etc.,

If there is not lot of deferred maintenance, or based on the age of the property it's NOT likely you will need to make substantial repairs like replacing a roof, the HVAC, the Water heater and other components during the time the property will be leased then it's may make sense to lease vs sell.

The Thought Of Being A Landlord Does Not Excite You

Even with great tenants, a perfect rental still can still generate a lot of stress and hassles. Frozen pipes, clogged drains, broken garage door springs, pets, and roommates are just some of the frustrations and challenges that surface. Even ideal tenants want your full and immediate attention when something goes wrong with the property.

Challenging and difficult tenants multiple and exaggerate that stress and frustration. Daily calls from the tenants and late or unpaid rent just add more fuel to the fire! The move-out process can be another challenging time. Damage to walls, floors, carpets, and other components of the property can lead to disputes over the security deposit and to costly and time consuming repairs. Since every moment wasted arguing is a moment the house could be sitting vacant, you are often better off just paying for the repairs yourself to be able to lease the property sooner vs later.

If you don't plan to have a property manager to field these calls and to deal with all of these hassles then give serious thought to disruptions on holidays and vacation time especially if you typically travel out of the city or the country.

The bottom line if this all sounds like more grief then what you want to deal with then you should likely sell vs lease your property!

Future Property Value Is Likely To Be Greater Than What You Can Sell For Now

If it's a true Buyers' market or The Property Values are likely to increase meaning you can get the maximum selling price for your property later vs now, then leasing it would likely be the better option.

The Property's Value Has Not Substantially Changed Since You Purchased

If The current property value is the same, or even less then then when you purchased, then the odds are good you will not be paying capital gains taxes and now may be a good time to lease. Since everyone's tax liabilities vary, you should speak with your CPA and Financial Advisors to confirm if it makes sense to lease or sell the property.

The Property's Age And Condition Make It Likely Major Repairs Will NOT Be Needed During The Time You Might Lease The Property

Are You Relocating Out Of The Area Temporarily

If your current move is being driven by a relocation out of the area, and you anticipate moving back to the Indy area and you can see yourself moving back in to this same property, then leasing vs selling may make more sense. Keep in mind that if you have owned and occupied the residence for at least 2 of the prior 5 years, before you sell the place, then you can typically avoid paying capital gains taxes on the first $250,000 for single-filers and $500,000 for married people filing jointly. This means, that even if you are not sure you will want to move back in to the property you could in theory still rent the property for the next 2-3 years, and as long as you sell before the end of the third year of having moved out, in you would likely still both be able to lease the house for the short term and avoid the capital gains on the home.

If your your current home is a single family detached house then consideration of your leasing options should likely include hiring a property manager. However, if your current house is a condo like property where you have no exterior repairs or maintenance then while you might not require a property manager, Mitch would still usually encourage you to hire a property manager just because you will be out of town.

Even though managers will typically charge about 10% of the monthly rent payment for their services, this will make your life less stressful and if the long term plans are to move back into the property, without having the costs to sell it now, this might make the numbers even with a property manager more viable.

Mitch would also encourage you to keep a HSA home warranty in place during the time you have the property leased.

Demand For Rentals, Similar To Your Property, In The Area Is Strong

If the data within the last six to twelve months, shows both lower days on market and final lease amounts for very comparable properties, in the same area, that would cover and ideally exceed all of your mortgage payments, real estate taxes, HOA fees and foreseeable required repair costs meaning it's likely you will have a positive cash flow, then it likely makes sense to lease vs sell your property. If the property is also likely to appreciate then this is just icing on the cake for the positive cashflow meaning that it likely makes even more sense to lease vs sell the property. For some folks, having an investment that's actually generating a positive cashflow, could increase your tax bracket causing more taxes to be paid in excess of the increase in income. So, part of your evaluation process should always include conversations with your CPA and financial advisors.

Now Is The Best Time Of Year To Find The Most Ideal Tenants For The Property

The best time of year to lease your property typically is the spring since more people move in the spring vs the fall, winter and summer. The desired timeline can become even more limited and specific if your property is desirable to college students including medical and or law school students. The ability to sign these tenants for 2 or even 3 years, vs for one year, means lower rental costs and typically less re-leasing costs for painting etc. So if the timeline for selling your property supports this desired window then it will likely take less time to lease the property and at higher price points. Because of this it may make more sense to lease vs sell your current place.

The Monthly Rental Income, After All Expenses, Would Provide Passive Income

You Have Always Wanted To Be A Landlord

Challenging and difficult tenants multiple and exaggerate that stress and frustration. Daily calls from the tenants and late or unpaid rent just add more fuel to the fire! The move-out process can be another challenging time. Damage to walls, floors, carpets, and other components of the property can lead to disputes over the security deposist and to costly and time consuming repairs. Since every moment wasted arguing is a moment the house could be sitting vacant, you are often better off just paying for the repairs yourself to be able to lease the property sooner vs later.

The bottom line is if your plans include hiring a property manager or your full time job is dealing with you rental properties then leasing may be as or more viable then selling your property!

Get One To Two Comparative Market Analyses "CMAs"

A CMA should also increase or decrease the value based on the current market conditions including, interest rates, and the supply and demand at that moment in time. Most real estate agents will perform a CMA before listing a home for sale and great Buyer’s Agents will also complete a CMA when working for a buyer who is considering submitting an offer on a property.

If you are not working with a prior agent, that has a proven track record that you have experienced first-hand, then you should start with at least two real estate agents who visit your home and give you their opinion of its likely selling price.

Don't accept or rely upon an Agent's "gut feeling" about the proper list or likely sales price. Ask for a ‘comparative market analysis’ (CMA), which shows the prices of comparable recently sold homes, as well as active comparable listings that potential buyers will also be considering when they look at your place along with comparable homes that were on the market, but did not sell because we can learn both what the market will not support pricing wise and some, if not many of these properties may also become active competitors when your place is for sale.

The on-the-market homes are the “competition” for your home. Ask the agents why each home was included in the CMA and whether any other comparable homes were eliminated from the CMA. Just realize that price recommendations are not an exact science. If this process was that black and white then Real Estate Agent's would not exist!

If the suggested list and/or sales price in the first two CMA's vary widely than you should have a 3^rd CMA completed by another agent. But keep in mind that some agents will tell you to underprice your home in hope of sparking a bidding war. Others will suggest a flatteringly high price to ‘buy’ your listing only to demand a price reduction a few weeks later. The best agent can easily justify the sales price to you using timely and relevant market data. If any agent can’t defend their price, high or low, to you then please don’t expect those same agents to be able to justify your list or sales price to a buyer’s agent or buyer who wants to buy your home for less!

Have Mitch Complete a Market Analysis of your home or condo.

An Appraisal

State-licensed appraisers will walk through a property and write an official appraisal report. While appraisals offer a little protection for buyers regarding the value of a property, the customer for the appraiser is the mortgage lender not the buyers. Banks typically require appraisals when refinancing your home, or getting a mortgage for a new home, to minimize the lender’s risk by making sure the bank is loaning no more than what the property could be resold for if the buyer was unable to repay their mortgage loan.

Instant Online Value Estimators

These are easy, convenient, and, best of all, free. There are many real estate and lending websites offering estimators out there. You can use this if you want a general estimate of your home may be worth. While these can help you decide if it’s worth considering selling or refinancing, these sites tend to dramatically undervalue or overvalue property values. So, using these when selling or purchasing a new place could create unrealistically high or unreasonably low expectations that could cost you thousands of dollars as both a seller or a buyer!

Price Per Square Foot Calculations

Price per square foot calculations are often used by sellers, buyers and unfortunately even by some real estate agents to determine the value of a property in comparison to other recent sales. This approach divides the sale or list price by the above ground square feet to arrive at a price per square foot.

If you are comparing to identical floor plans, with identical finishes and features, built at the same time, by the same builder on lots next to each other and both places have continued to have identical updates, then this approach might yield a meaningful value. However, this is rarely the case since price per square foot calculations do not reflect the many differences in properties like, bed and bathroom configurations, land value and location, garage spaces, finishes, updates and improvements, the year the place was built or any of the hundreds of differences between homes.