Renting or selling your vacant home. Do you have a vacant home that is just sitting there? Have you thought about renting it out or selling it? Which option should you do? Should you rent or sell that vacant house?
As with anything in real estate, this is a very important question that should not be rushed into. You should give each option due consideration and determine which path is the right one for you to take. Note, you may want to consult with accountants and tax professionals in order to help make your decision, as there will be tax implications for both options.
The First Thing to Consider
Before getting into details with the pros and cons of each option, lets look at one of the main reasons you may want to just sell the home outright.
The Neighborhood Has Gone Downhill
If your home is located in an area that has been hit hard by an economic disaster, such as the main factories closing down, or even a civic collapse like the water supply in Flint, Michigan, it may be time to sell and do it sooner rather than later. These types of incidents can have a severe negative impact on a house's value, even to the point where a home might become unsalable. Out here in Ventura County, California we saw this back in the 80s when the Aerospace industry giants (Boeing, Lockheed Martin) left the state. All of a sudden the market was flooded with homes for sale and there were few buyers. Prices dropped for several years and it was a long time before they recovered.
Once a neighborhood, city, county or state gets impacted by something that causes prices to drop, it is hard to know when or if it will stop. That's why it is important to work with a knowledgeable real estate professional to help you figure out what to do.
If the agent thinks that the housing values may not recover in the near-term, or at all, it may be best to sell your house ASAP. By using a real estate professional, they can help you price and market the home so that it will sell quicker and for more money.
Your agent can also be a wealth of knowledge and connections, connecting you with trades people to spruce up the house prior to selling and can even help with deciding if you need staging and connecting you with a home stager.
If your home's neighborhood is doing well or only has a short term drop in values, the below list of pros and cons can help you decide whether you should rent or sell your home.
The Pros and Cons of Renting Your Vacant Home
If you are considering renting your vacant home out, then the following pros and cons will help you in your decision making process.
The Pros of Renting Your Home Out
The biggest pro for renting is that it will give you a stream of passive income.
Depending on what you owe on the property, the rent you get minus your expenses (mortgage, property taxes, and insurance) can provide you with a decent income.
There is an old saying: "If you work for your money, you will become rich. If your money works hard for you, you will become wealthy." Real estate is a time honored investment vehicle, especially in times of stock market volatility.
Another nice pro about renting your house, is that the tenants are paying your mortgage for you. You are basically using other people's money to increase your net worth!
Another pro is when you upgrade or make improvements to your rental property. These improvements can have a multi-pronged effect.
For example, if you add air conditioning to your house or upgrade to a more modern kitchen, or remove some walls to open up the floorplan. Changes like this may be considered capital improvements (check with your accountant) and could be tax write-offs. In addition, they may increase what you can rent the house for. A house without air conditioning, in an area that reaches into the 90s and above, may be a necessity to get your house rented. A nicer kitchen and floorplan, may attract a better class of tenant, who is capable of paying more for the home.
Working with a real estate professional who is knowledgeable in your area and (like us) has experience with remodeling homes, is crucial to maximize your return on investment and not make changes that will not give you a good return.
Another pro is that an occupied house is a deterrent to squatters and thieves. If a house is known to be vacant, or vacant for long periods of time (such as a vacation home) it could attract squatters, drug manufacturers and thieves who will steal the copper wiring out of the house.
Typically, tenants are responsible for maintenance of the property, but you could always include a gardener as part of the monthly rent. It is advisable to make the tenants pay for their utilities directly. The only caveat to that would be in a multi family unit where there are not individual meters.
In my experience, there is also the possibility of the tenant wanting to buy the house. While it does not happen frequently, it does happen. In my experience, families that are just starting out and people who have previously owned homes, are the most likely candidates to want to buy.
If your tenants do wish to buy the house they're renting, you could leverage the sales proceeds via a Starker Exchange (more commonly known as a 1031 Exchange) into multiple rental properties. This is a time honored approach to growing one's rental portfolio.
The Cons of Renting Out
Unfortunately, there are cons when it comes to renting out your vacant home.
There are many laws that vary by state and even from city to city with regards to tenant protections, rent controls, tenant screening and selection. Some of which are harmful to the landlord. It is best to fully review your area's laws prior to deciding to rent to someone.
In addition, you could rent to tenants who seem nice at first but once they get into the home, start not paying their rent or damaging the property. This risk can be mitigated by doing a thorough background investigation, including criminal and civil court histories as part of the selection process.
If you have to evict the tenant, the process for doing so can be lengthy. Depending on your state's laws, it might take several months. This is where a good lawyer who specializes in real estate law come in handy.
Another potential negative is if you go to sell the home while it's tenant occupied. The tenants may make it difficult to get people in to see the property, especially if they don't have anywhere to go after the house sells. This is why I always get permission to show the property and put a keysafe and sign on the property when they sign the rental agreement. People are always in a good mood then. Plus, if they refuse to sign it might be an indication of future problems.
The Pros and Cons of Selling Your Vacant Home
Now lets talk about selling your vacant home. This process can take longer to accomplish and the pros and cons are considerably different.
The Pros of Selling
Depending on how much you owe on your house, one of the biggest benefits to selling is the instant cash from the proceeds of the sale. The downside to this is it can have some serious tax implications, so always consult with your accountant or tax person.
When you sell your home you can use those proceeds (aka "equity") to purchase another home, pay down your existing home or fill up your piggy bank. Should your vacant home be in neighborhood that experiences a drop in value, selling quickly can prevent you from losing your hard earned equity.
Depending on how long it's been vacant, how long you lived there, and other factors, you may qualify for a tax exemption for some or all of your proceeds.
Like with renting a home, if you sell the home you will not have to worry about any squatters or illegal activities. Additionally, if you've already bought your new home and are making mortgage payments on both properties, selling the vacant house could alleviate that pressure.
The Cons of Selling
One con to selling your home is if you have many memories tied to the house. That may make it harder to sell, even if you've already physically moved on to another house.
While the process of selling a home can be a long and difficult road, working with an experienced agent can greatly lessen the burden.
If your home is outdated, the agent may also be able to provide you with recommendations to modernize the house so that you can get top dollar.
One thing that I've mentioned several times in this article which you should seriously consider is what will be the implications for your taxes when you sell.
Say you bought your house for $30,000 60 years ago and it's now worth $1.2 million and you own the house "free and clear" (aka no mortgage). Or say you bought your house 6 years ago for $700,000 and now it's worth $900,000 and you owe $500,000 on the home. In either of these REAL LIFE situations I've encountered, you have a significant taxable event that will occur when you sell your home.
What will you do with that money and how will you ensure you keep as much of it as possible? Work with your agent to figure out the estimated sellers proceeds ("net sheet") and then star working with your accountant, tax advisor, and/or wealth manager to create a strategy to maximize your gains.
Making the Best Decision For YOU
Deciding between renting and selling is never an easy one. I hope you've gotten some benefit from this article and that it opened your eyes to some new possibilities.
Regardless of what you choose to do, make sure you don't do it alone. Get a team of professionals to assist you.
If you live in or near Ventura County and would like a free in-home consultation to discuss your particular scenario, please reach out to me. My contact information is at the bottom of the screen. I have experience with home renovations, cash investors and home stagers on staff and in my network that can provide a wide array of options for your consideration.
As always, feel free to leave a comment in the box below.