There may come a time in your life when you have to (or choose to) relocate, whether it be for professional or personal reasons, and you are faced with the decision on what to do with your family home.
Should you sell?
Or should you retain it and rent it out?
People are most often left with this decision if they need to relocate for a job opportunity, or because they've decided to take an extended vacation.
Whatever the reason may be, they are left with a tough choice on what to do with their current home, with some big financial and emotional ramifications.
Many years ago, my wife and I decided to travel overseas for a couple of years and we faced this very scenario – rent or sell.
We decided to sell because we had built up good equity in our property, we needed some capital to fund our adventure and we weren't really sure when we would be back or if we wanted to return to the same property.
In the end, we spent 12 years in the UK and when we returned we found a bigger home (because our family had grown while we were away) in a different suburb.
Plus, we used the proceeds from selling our Australian home to fund our new home overseas.
For us, this worked out really well.
However, because everyone’s circumstances are different, there is no one-size-fits-all answer to this question.
With this in mind here, I’ve put together my top 10 key considerations to help you make the best decision for you, when it comes to choosing between renting and selling your family home.
Top 10 Considerations
1. Which option makes the most sense financially?
Cash is king in these situations and you need to work out what you can and can’t afford.
Start by preparing a detailed budget, covering the period you will be away.
Your budget should account for all income and expenses associated with renting out your home, together with the costs associated to renting or buying your ‘new’ home.
Once this has been done, prepare a similar budget that assumes your property was sold.
This will quickly show you which option is the more financially feasible one for your circumstances, which may reveal the best course of action.
2. What can you handle emotionally?
Selling your family home can be quite an emotional experience.
You’ve built a life in this home and with this you have some wonderful memories.
On the flip side, it can be equally tough renting your home out to a total stranger.
Property investors are usually objective and detach emotion from the property they’re renting out, otherwise mistakes can be made and financial returns adversely affected.
Of course, if you’re planning to come back to this home in the future, then the strategy of renting out your home might focus on maintaining your asset and earning some cash to cover the holding costs while you’re away, rather than maximising investment returns.
Tip: If you think you’ll have major emotional problems with renting your home out to a stranger, selling the property might be the best option.
3. Is there is the rental demand for your property?
Before putting your home on the rental market, you need to do some research and find out what the rental demand is in your area and see what the average rent level is.
This is an important part of your budgeting process.
If rental demand is low and/or vacancy rates are high in your area, that’s not good from a financial or a security perspective – you don’t want your property sitting vacant for extended periods of time as it could be the target of vandalism and theft.
Tip: Talk to a couple of local estate agents to get some rental advice, and visit Onthehouse.com.au to check rental yields in your street and suburb.
4. Is there good potential capital growth for your property?
Again, conduct research on your suburb to get a feel of where property prices are heading in your area.
While there are no guarantees when it comes to predicting price movements, there is enough information out there that can give you a good indication of what to expect.
If the market is expected to remain buoyant with strong demand, and if it is likely to be maintained while you’re away, then this indicates that it might be in your best financial interest to hold onto your home so you don’t forgo any future capital gains.
On the other hand, if the market has reached its peak, or is nearing its peak, it might be a good time to sell, especially if there’s some uncertainty over how long you’ll be away and whether you want to return to the same property.
In other words, bank your tax free profits now rather than risk them when you return.
5. Is being a landlord for you?
Renting out your property is essentially turning it into a business and you have responsibilities as the business owner to make sure it is adequately resourced, funded and fit for purpose.
You have to be prepared to take on or manage all relevant aspects of being a landlord, and more, while you’re away.
You must to ensure you have the right people in place (e.g. rental agents, accountants, tax advisors, legal advisor, tradespeople etc.), adequate cash flow to meet all outgoings (it is likely your home will be negatively geared, meaning the rent earned will not cover all property holding and operating costs) and be prepared to discharge your legal and commercial responsibilities.
6. Is the property suitable for renting?
Your home must be habitable, safe and free of any defects that may adversely affect the enjoyment and use of the property by your tenants.
You may need to do some repairs and maintenance work on your property to bring it up to marketable standards, not to mention to meet your legal responsibilities.
This will cost money, so you will need to decide on whether it’s best to invest or sell based on affordability and commercial considerations.
7. Are your tax affairs in order?
There are a plethora of tax considerations to take into account when renting out your family home, so you should seek independent financial and tax advice before doing so.
For instance, while you want to maximise your allowable deductions (including depreciation), you also want to minimise your tax liability and protect your home’s capital gains tax exemption.
Therefore, tax planning and understanding your tax situation is vital when deciding whether to rent or sell.
8. Do you have your ownership structure right?
The family home is usually held in joint names (e.g. husband and wife, life partners, defacto partners and so on).
While this is quite normal to help ensure succession in case of death and helps protect everyone’s interests in case of separation, it might not be optimal when it comes to property investment.
Adequate tax planning is required and it is very important to obtain legal advice around things such as the rights, obligations and impact of transferring the home into one name if that course of action was chosen for tax purposes.
9. Is your home loan the best available?
There’s not much difference between a home and investment loan these days as the features and benefits are pretty similar.
The key question revolves around the appropriateness of the product to help you achieve your financial, investment and personal objectives.
A loan taken out to buy a family home may not be appropriate for an investment property.
It might pay to do an investment loan health check that takes your cash flow, tax position and how long you are likely to be away into consideration.
10. Trust your gut!
A final consideration is to trust your gut.
Reflect on what feels right as well as what makes financial sense.
If you can get to a position where you’re on the same page emotionally and financially, you’re well on your way to choosing the best option for you and your family.