Moving out of your condo? Wondering if holding onto it and renting it out could be a better move than selling it?
You’ll find pros and cons to both options. Let’s explore a few of them.
Threshold Question: What Does the Condo Policy Say?
Your first move? Speak with the board and management before getting your heart set on keeping your condo as an investment property. Whether you can actually rent out your condo after moving out depends on your condo property’s rules and its current policy.
“Current policy” is a key term. What your property allows this year might differ from last year. Limits on the number of rental units on the property can change.
Why? Condo properties sometimes reach their allowed limits for non-occupant owners — meaning letting someone rent out even one more unit would be a problem. A blanket approval for FHA financing, for example, limits the percentage of a condo property’s units that may be rented.
So…ask where you stand, and whether your ideas fit in with the plans of your property managers.
Money Matters: How Much Can You Gain From an Immediate Sale?
Selling your home could pay off very well after the recent surge in real estate values. Those who sell now will most likely have ample opportunities to buy investment properties later.
Could later buying opportunities get a little cheaper? Possibly. That’s especially possible in markets that soared in 2020-21. But overall, who can say how real estate will do in the next few years?
Consider talking with a local agent. Go over any advantages and drawbacks of selling quickly or slowly in your area.
What if you learn of exceptionally strong reasons to think your condo property’s values will appreciate substantially over the next few years? If that’s the case, you could hold it as an investment property now, then sell when values rise.
On the other hand, those who can make a good profit now might feel entirely happy selling their condos. And of course, liquidating a property’s value is helpful to anyone looking to buy their next home.
In any case, those who do sell for a profit can also benefit from the federal capital gains exclusion. (Note that state taxes and exclusions might be less generous.) To benefit from the standard IRS capital gains exclusion, the condo has to have served as the taxpayer’s main home for two of the past five years, or more.
Next, you’ll want to compare the benefit of gains you’ll get from a sale to the benefit of income you’ll get if you rent the place out. So let’s take a look…
Adding It Up: The Right Condo, in the Right Spot, Can Be a Sustainable Income Source
So much hinges on location. If…
- Renter interest in your area is high (because of things like available jobs, a good transit system, trendy stores, great recreational opportunities, or a highly rated school district), and…
- The condo is the right size and style to attract those who want its particular blend of advantages…
Then the rental demand could be very good!
If so, calculate just how much you can reasonably expect to earn by being a landlord. Examine the nearby condo properties and check out what they charge renters monthly for units like yours. Subtract the monthly expenses of condo ownership and upkeep. This includes making mortgage loan payments and property taxes as well as keeping everything in working order. By this calculation, you’ll know roughly how much regular income you can get.
☛ A real estate agent can market the condo for you, and let you know what range of income you can reasonably expect. Learn more about a real estate agent’s fiduciary duties to you as you market your condo to potential renters.
So, ask yourself if you can realistically answer “yes” to these burning questions:
- Will my condo property attract renters?
- Will I be able to keep the condo unit occupied continually?
- Will the amount that local renters are willing to pay cover this condo’s expenses? They include the mortgage, necessary furnishings and appliances, HVAC and other routine upkeep, insurance policies (condo owner’s and landlord’s), and association fees.
Note that insurance for landlords can be pricey. On the other side of the coin, condo owners do have special advantages when they decide to rent out their units. This is because condo properties have networks of reliable, local contractors who know the property. For many things, an on-site maintenance pro might already be there for you, to help keep your unit functioning safely. And your homeowner’s association has the outdoor maintenance routine down pat.
Renting out your condo could also be a good idea if you’d like to return to live in it again in the future. You could manage the rental arrangement personally; or you could hire someone to handle the task for you.
Meanwhile, if you want to buy another property, your rental income can help you finance that next purchase. Lenders do look at the value of rental income when establishing someone’s mortgage approval ceiling.
Up to 75% of rental income can count in a mortgage applicant’s total income. (The lender will ignore the rest, creating a margin to cover any vacant periods and regular upkeep needs.)
Because your rental property isn’t generating income yet, the amount you expect to earn is projected, not real. Speak with a mortgage consultant to find out the specific amount that will count in your situation.
Family Matters: A Revocable Trust Can Meet Some Families’ Goals
If you wish, you can keep the condo in a trust for someone who might need it later on. For example, you might have family members potentially in need of a place to call home.
☛ Find out how an owner might use a quitclaim deed to transfer a condo into a living trust in order to hold real estate for loved ones.
Putting a house into a trust for family members will help your beneficiaries bypass the county probate court after your death. (Reminder: Even with a trust, you still need a last will.)
Then again, after you transfer the condo deed into a trust, what if you decide you’d really like to sell the property at some point later on? No worries. A revocable trust may transfer a property. Meanwhile, the trust can treat the condo unit as an income-generating investment.
Before deciding to put a condo or any other mortgaged property into a revocable trust, speak with the mortgage servicer. Find out what the company needs you to do to keep the financing intact.
Consulting with a local estates and trusts lawyer is also important when forming a family trust.
A Word to the Wise in 2023: Don’t Ignore Possible Turbulence
It’s a strange economy out there. The U.S. central bank’s pattern of interest rate hikes could be too heavy-handed, some analysts say. It so, we might face a recession instead of a “soft landing” for the U.S. economy.
So, think about how your condo decision sets you up. Imagine a recession does occur. It could impact your renters as well as yourself. You might find it hard to charge as much rent as you’d originally planned. Will you be in the position to handle mortgages, taxes, insurance, and upkeep on your next home and on a rental property?
If you’re unsure, then selling your condo could be the least risky way to make your move into a financially sound future.
Supporting References
Bankrate.com: Should I Sell or Rent My House? (Dec. 22, 2022).
Kenny Zhu for Lending Tree, via ValuePenguin.com: Claiming Rental Income to Qualify for a Mortgage: How Do Lenders View It? (updated Dec. 29, 2022).
And as linked.
Photo credits (both): Max Vakhtbovych, via Pexels.