Have you been contemplating on selling your home but wondering is now a good time to sell a house? My short answer is, it depends. If you currently own your home, you want to upsize or downsize, and you can’t ever see yourself renting because that absolutely makes no sense to you, then selling your home can be whenever you are ready, regardless of the market cycle. There are priorities in your life that outweigh trying to time the market, your options are sell now or wait. There isn’t really any additional market risk (just incremental if you are upsizing) for you because you will be always in the market anyway. If you are open to renting because you think the market is going down or maybe you want to use your equity for other things, then that’s a whole different situation and I created another blog to address that question alone. Click HERE to read it.
So, if you’re asking this question and you’re not one of the above, then you’re an investor. Maybe it’s your first home that you bought, your family outgrew it, so you moved out and started renting it out. Or maybe it’s your childhood home that was given to you. Rent covers the bills, sometimes there’s a headache from the tenant or the property manager but it doesn’t seem to be a financial burden on you. Well you may want to think again. The proof is in the numbers and the main number to consider is your return on equity, I like to look at the cash on cash return. To calculate this, you take all your rental income for the year and minus out ALL expenses related to the investment. Don’t forget expenses like insurance, real property tax, property management fees, repair costs, and mortgage payments. Take this net income number and divide it by the net equity in your property. The net equity is what you’d get in your pocket if you sold your property today. To simplify it, you can just minus any outstanding loans from the market value of the property. Now you take this rate and compare it to the potential rate of return in the investment you are considering putting your money into. If your potential investment has a higher return than what you are currently earning, then you may want to consider selling. If that was a little confusing click on the following link to download a cheat sheet (click to download).
If you are thinking about using the proceeds of the sale to
go towards things such as paying your child’s tuition, or paying down your
mortgage on your current home, then that’s a great plan and there may not be
anything to analyze because you probably have a larger goal of wanting to
reduce or minimize your debt and improve your overall balance sheet.
So… to summarize, the decision to sell your home depends less on the current real estate market conditions and more on what you plan to do with the proceeds from the sale. And this is because if you are taking your equity out of this real estate investment, you need to consider how you are going to put that equity to work for you. If you determine you have a better use of funds somewhere else, then you should consider selling. Something I ask my clients from the beginning is, what’s your end game. In other words at the end of the day, how do you see your life for you and your family. That question alone, often helps provide clarity on the situation.
If you want a simple cheat sheet to calculate your cash on cash return, click on this link and I’ll send you a copy (click to download).
