Stay Put? or Sell and Rent?
There was an interesting article in Saturday’s paper in the Home & Garden section titled “Flying the Coop—to Become Renters,” by Susan Fornoff. I read this with interest, as I have toyed with the idea of doing just the same thing, selling our home and renting. So I thought I would investigate to see what options we had and how this would translate financially. Obviously there are a lot of variables, Ms. Fornoff actually downsized after selling her home, which helped them save money on rent, whereas I would need a comparable house at this point. The type of investment you would put your equity into can yield varying amounts, which is another variable. And tax consequences would vary based on your income and other factors. But I did a quick down and dirty to see what I could come up with.
First, we own in a very desirable neighborhood of our town in an 1800 square foot home with 3 bedrooms, 2 baths. In addition to the living room and kitchen there is a room off the kitchen, which may have been intended as a dining room, but which was used as a family room by the previous owners and which now houses my home office (I can cook and work at the same time). We currently have one child at home and the spare bedroom is furnished for guests, which we have several times per month. So at present I would need to have a 3-bedroom home plus office space. There were no homes in our area at all to rent on Craig’s List, going back to Sept 7. There were only two homes that were nearby or in a similar neighborhood that had 3-4 bedrooms. One for $2800 and one for $2850. Nearby is a town with neighborhoods comparable and I found an older 3/1 with separate studio (for my office) that was going for $2900, a 4BR for $3250, and another 3BR for $3500. So I took an average of about $3000 for rent per month, plus the cost of renters insurance of $400/year.
Our mortgage at the moment hovers around $357,000, and our payment including taxes and insurance is just shy of $2100 per month. The home is worth in the neighborhood of $1,000,000, given recent sales in the area. If we sold we would have about $575,000 to invest. Investing at 5% interest would garner about $28,750 per year, which would be taxable. We could put some in IRAs, which would help offset some of the taxes. On the flip side, we have owned the home for 12 years, through good times and bad, and our increase in the value of our home translates to $685,000, or roughly $57,000 per year. Granted, there is upkeep on a home. We have had to replace our heater, hot water heater, refrigerator. We have painted the whole exterior and interior, recarpeted, new windows and gutters. Average $5-10,000/year.
I assume that the tax break that homeowners get would offset any IRA investments, so I did not consider that (not to mention it would have taken me several more hours of calculations). This is what I came up with:
Current home costs: $25200 (mtg/ins/tax) + $10,000 (upkeep) – $57,000 (increase in equity) = +$21,800
Rental home costs: $36,000 (rent) + $400 (ins) – $28,700 (investment) = -$7700
Using my simplistic method, I come out $21,800 ahead staying where I am and am in the red $7,700 by renting. And that does not even take into consideration the capital gains consequences of selling our home, which could be substantial. I certainly may have left something out (if so, please feel free to comment below), but it doesn’t sound like renting would be in my best interests at this point. What about you?
