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There has been a lot of discussion of Golden Handcuffs for a lot of owners given where interest rates are currently. We’ve also had a significant jump in pricing over the course of the last few years. If your home no longer suits your needs, the new interest rate marketplace and change in pricing can make the question of how to proceed very challenging.
Pro Rent
Here are the side effects of choosing to sell. First, capital gains tax. Depending on how long you’ve owned your home, the value of your home and whether or not you’re married, you could have a hefty capital gains tax bill. I’ll take myself as an example. Between price growth and the remodel I did at my home, my property has increased in value significantly. As a result, my tax bill would be pretty hefty. As a result, I decided to rent my property. The rental income I’m collecting is enough to cover my expenses and even have positive cash flow. I can still sell my property down the road and defer my capital gains tax by completing a 1031 exchange.
Second, new interest rate market. In order to upgrade, the interest rate would be nearly twice as high and would increase my monthly payment even to take on the same mortgage let alone taking on a larger mortgage. Now, by no means do I expect to have a similar payment, but in order to upgrade to what I’d like next, the payment would be more than I’d like it to be. The new mortgage rate market has really presented challenges for those of us looking to upgrade/expand.
These all sound like reasons to not sell. However, there might be a reason to sell after all. One, you might not want to be a landlord. If you’ve never been a landlord and it’s intimidating, you might not have the appetite. That’s ok.
Pro Sell
There are solutions to the mortgage market these days. They range from paying down your rate, temporary buy downs, and more. I’m very pro temporary buy downs in order to remove some burden for some time with the expectation/hope that rates come down. It’s not guaranteed, but we can hope. Either way, when you look at property value changes over the course of the last decade versus rent growth, rent growth can’t touch property value growth. If that’s the case, and you’re planning on “upgrading”, aka purchasing a more expensive property, you’re likely to increase your equity because growth is typically on a percentage basis instead of nominal growth.
My favorite example of this was a woman who purchased property in the 1970’s. She decided that she couldn’t afford the oceanfront property that was 25-30% more than non-oceanfront. Not only is that oceanfront probably worth more than double the non-oceanfront, considering the percentage growth, those properties have probably increased by more than 300%. Forgive me as the numbers are from memory, but I think the oceanfront was about $300,000 and the non-oceanfront was about $225,000. If this is the case, the non-oceanfront is $6,750,000 and the oceanfront is $9,000,000. That difference of $2,250,000 was only a difference of $75,000 many years prior. Percentage growth makes a great case for selling your home and purchasing a new one despite the change in interest rates.
Conclusion
The good news is that there are no wrong answers. The only concern is what the side effects are for each decision.
