Retirement Relocation: What’s the Best Option?

You’ve finally reached your destination after 40 years of sitting in traffic and clocking in and out. Your house may have been ideal for starting a family and making a living, but now that you’re retired, you’re ready for a change. Yet the question arises, should I sell my house or rent it out? There are several factors to consider besides just money while making this choice.

To what extent do you believe your home to be a sound financial investment?

To you, your house during your working years was and is a place of refuge and comfort. It would be best if you prioritized living there over investing in it. This priority changes if you are thinking of renting out your home. Customers who claim that the property should be retained because rental revenue more than covers mortgage payments or that, in the absence of a mortgage, the property’s rental income represents excellent “passive income.” The quality of the investment cannot be judged in such a manner. These are some general guidelines to follow:

One percent policy: Your monthly rent should equal one percent of the home’s market value. What, though, if there is no asking price? You are already a property owner. If you’re taking an impartial stance, you must ask yourself if you’d buy the house at its current price.

The market rent for a home with a $750,000 value would be $7,500 monthly. Perhaps you’re thinking, “No way!” And if you are a resident of a region with an exceptionally high cost of living, you are correct. Getting that much is highly improbable. Conversely, you are likelier to wager on your property’s value increasing in these markets.

With prices having risen steadily over the past few years, some would say that the 1% guideline is overly generous. Consider it similar to the “4% rule” for withdrawals during retirement. It may be too high or too low, depending on the conditions. Still, as a general rule, it helps determine if you are within striking distance of the target.

You were investing interest rates: In the real estate market, yield is expressed as a capitalization rate. You can calculate your mortgage payment by dividing your annual income after taxes by the value of your home.

Suppose you rent your $750,000 home for $6,000 monthly and have $2,000 in monthly costs. This gives you a cap rate of 6.4% ($48,000/$750,000). Investment returns can be calculated as the yield plus the anticipated appreciation.

Liquidity: Real estate is less liquid than equities and bonds; thus, this factor must be considered. Real estate is a hot commodity in the spring of 2021, but only in specific markets. In 2023, the market won’t be excellent.

Sales and Rental Income Tax Implications

The sale of a primary house might result in considerable tax savings. To qualify for the 121 exceptions, you must have owned and resided in your home for at least two prior years of the past five years. Capital gains of up to $250,000 can be excluded in this manner, and it’s $500,000 for a married pair who intends to stay put.

If you make the decision to rent out your house for more than five years, you may no longer qualify for that exception, which may discourage you from doing so.

One must consider the tax implications of turning one’s home into a rental property. Income earned from real estate is taxed as ordinary rather than the (often more favored) capital gains tax.

A home’s value can be depreciated over time, and most maintenance costs are deductible. Schedule E details your rental earnings and expenses. While the form is straightforward, the tax implications of owning a rental property may necessitate the services of a certified public accountant (CPA) or an enrolled agent (EA).

Financial: Revenue from Rental Property Isn’t Actually “Passive”

Think about the infamous trio: trash, commodes, and renters. Not having to deal with them would make property management much more accessible. There would be no material gain as a result. If you will be out of town for an extended time, hiring a property manager is a good idea so that these issues can be handled in your absence. Yet doing so will erode the profitability of the capitalization rates.

The number one gripe of landlords has nothing to do with their return on investment and everything to do with the constant need to be available to tenants. You probably don’t want to spend your retirement doing that.

And finally, what if there’s a chance you might return? There is a strong justification for staying put in your current residence. Because real estate transactions are so expensive, you should avoid making a hasty decision to move because you might later regret it and desire to return to your old neighborhood.