Only a few years ago, the real estate market was so hot that condominiums were selling in days and the asking price was just the opening bid. In many cases you could get more than your asking price due to the demand for housing and the apparently never-ending supply of buyers willing to pay top dollar for your unit.
What has happened to change this seller's market to a buyer's market — or, more accurately, a stagnant market where prices are falling and buyers are scarce? This new market situation is due in part to the tight credit we are seeing in the wake of the subprime lending market crisis. Even if the subprime market didn't directly affect you, it is affecting you in ways you may not have considered.
This scenario is being played out all over the country, and New England is no exception. We have encountered the following question more than once over the past few months: "I want to move but the market is soft, the prices are down and I can't afford to own two homes while waiting for the housing market to pick up. What can I do?"
This question, like many financially-based questions, cannot be answered with a simple yes or no response. It needs some delving into, and as your physician would do when you have a medical aliment, so, too, when you are facing a potential financial ailmentyou need to have a history taken. I'm referring to your financial history as it relates to your home. One response is to consider renting versus selling. No, not renting versus buying — that is something different. Here we have a situation in which you rent your unit and move to your new residence, in effect owning two residences and becoming a real estate landlord and investor.
Can this be done without going broke? Well, here is where the history and analysis comes in. The following key decisions will need to be made based on your analysis:
1. Do you have adequate funds?
2. What is the rental market doing?
3. How are your management skills when it comes to tenants?
4. And, of course, taxes.
"Adequate funds" include the funds needed to buy your new home and the income you can expect to receive from renting your old one. If you look at the decision and the analysis separately, you have three major decisions to make:
1. Is there enough equity in the old house to borrow against to buy the new home, or do you have sufficient savings to put the necessary down payment on the second new home without taking an equity loan?
2. Do you have adequate income and proper credit to carry two mortgages? You may have the income, but your credit score will ultimately determine whether you can carry two mortgages.
3. How does the rental income, if any, offset the mortgage payments, and does the bank use the rental income dollar for dollar against the mortgage?
Emotional Issues Arise
Answering by calculating and analyzing your financial information will lead you to a second very important question: Do you want to be a landlord? Here you are venturing out of the solely financial arena and entering into the emotional one. Do you want to have a stranger living in your house? Will that stranger treat your house the way you would? And will the stranger pay his or her rent in a timely manner?
OK. One out of three issues is financial, so let's get going and analyze this one issue specifically. Can, and will, the rents cover your costs? I say "costs" and not "mortgage," as not everyone is in the same financial position. Some owners have lived in their residences for many years and have no mortgage while others have a large mortgage payment.
Transitioning from being an owner-occupied dweller to an "investor" has financial implications that we need to look at. As an owner-occupied dweller you can deduct, if applicable, your mortgage interest and real estate taxes. As an investor you can now deduct your condo payments, insurance, utilities and repairs, and a new item, depreciation.
Crunch the Numbers
All these new deductions may make the decision to rent vs. sell more palatable, but you must really do the crunching of the figures as it is somewhat complicated and takes into consideration your specific circumstances.
Another important factor we have not addressed is the reason you might consider becoming a real estate investor. Now your real estate is an investment, not your home, and you need to determine the direction of the real estate market. If you believe that this downturn in the market is temporary and the market will again grow at 4-6% in five years, then renting out your unit while taking a small cash flow loss for four or five years might be offset by the future return of appreciated real estate values.
While selling your home and moving on may be the first choice for most, the option of renting your dwelling during this down time might be a viable alternative to selling your unit for a loss and regretting it later. As I have said before, crunch the numbers and see if you can be a real estate investor.