Should You Keep Your Old Home? The Financial Case for Selling vs. Renting

Summary

NerdWallet's Smart Money Podcast: "Should You Keep Your Old Home? The Financial Case for Selling vs. Renting"

In this insightful episode of NerdWallet's Smart Money Podcast, hosts Sean Pyles and Lisa Green delve into the financial and logistical considerations of selling versus renting out a current home when planning a significant cross-country move. The episode features a listener, David, who is contemplating relocating his family and seeks expert advice on managing his existing property from afar.

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Introduction to David’s Situation

David and his wife are preparing for a major move from a western state to a Midwestern one, primarily to be closer to family and provide a stable environment for their children. They currently own a home with about ten years left on the mortgage and are evaluating whether to sell it or rent it out.

• Motivation for Moving:
  • Closer proximity to family.
  • Desire for a community-oriented environment with four seasons.
  • Ensuring children grow up and graduate high school in the Midwest.

Sean Pyles remarks at [03:45]:
"You have family out there which can make things easier."

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Managing Household Finances

David and his wife manage their finances separately, with David handling the mortgage and his wife covering utilities. This arrangement has worked well for them but raises concerns about complicating the logistics of an interstate move.

• Financial Management:
  • Separate accounts for different expenses.
  • Both partners earn roughly the same income, with David earning slightly more.

David states at [01:58]:
"We both kind of have our own separate accounts, which I do feel like might complicate the cross country move logistics."

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Financial Implications of Moving

David anticipates a 5-10% decrease in the cost of living in the new state but is wary of the substantial moving costs associated with relocating a family across 2,000 miles. He expresses confidence in maintaining similar income levels through his profession as a high school teacher and his wife’s potential job transfer.

• Cost of Living:
  • Expected reduction in living expenses by 5-10%.
  • Concern about moving expenses and securing new employment without significant income loss.

David shares at [04:26]:
"The cost of living in the state we're looking at is about 5 to 10% less than the state we're currently living in."

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Selling vs. Renting the Current Home

The crux of David’s dilemma revolves around whether to sell his current home or rent it out. With a current mortgage of approximately $2,200 per month and potential rental income estimated at $3,000, the decision holds significant financial implications.

• Advantages of Renting:
  • Continued appreciation in property value.
  • Potential for increasing rental income over time.
  • Tax benefits through property depreciation and travel write-offs.
  • Creation of a long-term income stream once the mortgage is paid off.

Lisa Green advises at [07:24]:
"Keeping your home as a rental property has been a really strong investment... when your house is paid off, that turns into an income stream for you."

• Challenges of Renting:
  • Risk of tenant-related property damage.
  • Potential vacancies leading to loss of rental income.
  • Necessity of a reliable property manager, especially when managing remotely.

Lisa Green cautions at [09:03]:
"Tenants don't take care of a property typically the way you would... you need a property manager, a good property manager."

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Managing Rental Properties from Afar

Given the distance, David and his wife have limited experience in property management, raising concerns about maintaining the property and ensuring consistent rental income.

• Recommendations:
  • Hiring a Property Manager: Essential for handling tenant issues, maintenance, and rent collection.
  • Financial Buffer: Maintain a cash reserve to cover vacancies and unexpected repairs.
  • Home Equity Line of Credit (HELOC): Consider setting up a HELOC on the current home to access funds if needed.

Lisa Green suggests at [11:58]:
"Setting up a home equity line of credit on the house you live in... then you can just continue to keep it even after you move out."

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Planning the Physical Move

David is evaluating the logistical aspects of moving, including transporting belongings versus starting fresh in the new location. He has received quotes from moving services like PODS and is considering the most cost-effective and efficient method for his family's move.

• Options Considered:
  • Professional Movers vs. Self-Service Options: Assessing costs and convenience.
  • Decluttering: Selling or donating items to reduce moving load and costs.
  • Furnishing New Home: Avoiding the expense and hassle of transporting large furniture pieces.

David reflects at [16:42]:
"Having to deal with the middle of the night phone call 2,000 miles away... I was strongly considering the property management option."

Lisa Green shares a cautionary tale at [16:58]:
"She hauled all of that furniture down there and then it didn't fit the vibe of the house... she ended up having to get rid of the furniture and get new furniture."

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Accessing Funds for a New Home

As David plans to purchase a new home, he is exploring various financial avenues to secure a substantial down payment. His options include utilizing savings from different accounts like a Roth IRA, taxable investments, a 403B, and cryptocurrencies.

• Financial Strategies:
  • Tax Implications: Withdrawing from retirement accounts may incur taxes and penalties.
  • Investment Sales: Selling long-term investments in taxable accounts might offer favorable capital gains rates.
  • Strategic Planning: Creating a detailed spreadsheet to evaluate the cost and benefits of each withdrawal option.

Sean Pyles advises at [14:25]:
"With a Roth IRA, you can take your contributions out, but you'll likely have a pretty sizable tax bill on earnings."

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Final Thoughts and Next Steps

David is currently awaiting confirmation on a job offer in the new state, which will significantly influence the timing and planning of his move. The hosts emphasize the importance of thorough preparation and having contingency plans to manage the inherent chaos of relocating a family across the country.

Sean Pyles concludes at [20:37]:
"We hope it was helpful... every move has a certain level of chaos, and there's not a lot you can do."

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Key Takeaways

1. Renting vs. Selling: Renting out your current home can provide ongoing financial benefits but requires effective management, especially from a distance. Hiring a property manager is crucial for remote landlords.

2. Financial Planning: Assess all financial accounts and understand the tax implications of accessing funds for a new home. Developing a detailed financial plan can aid in making informed decisions.

3. Logistical Planning: Evaluate the cost and practicality of moving services versus purchasing new furnishings. Decluttering before the move can reduce costs and simplify the relocation process.

4. Timing and Job Security: Securing employment in the new location is essential to ensure a smooth transition and maintain financial stability during the move.

5. Emotional Considerations: Beyond finances, personal reasons such as community ties and family proximity play a significant role in the decision to relocate.

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For listeners facing similar decisions, this episode provides a comprehensive overview of the financial and practical aspects of selling versus renting a home when planning a significant move. By weighing the benefits and challenges, and seeking expert advice, you can make informed choices that align with your long-term financial goals and personal circumstances.

Transcript

[Sean Pyles]

Hey, listeners. Shawn here and Elizabeth, we are off for the Memorial Day weekend, but we have a special episode for you in store.

[Lisa Green]

We do. So while you guys are eating barbecue, if that's your thing, and having fun with family, enjoy this episode.

[Sean Pyles]

We'll be back in a few days with another brand new episode of Smart Money. And in the meantime, make sure to send us your money questions. Maybe you're sitting back enjoying a beer, eating a burger, and thinking, what am I doing with my life and my money? We want to help you.

[Lisa Green]

And if you want to send us your question, you can send it to us on the Nerd hotline at 901-730-6373. That's 901-730-N E R D. If email is your preference, you can also pop us an email odcasterdwallet.com all right, talk soon.

[Sean Pyles]

Welcome to NerdWallet's Smart Money podcast where you send us your money questions and we answer them with the help of our genius nerds. I'm Sean Pyles. We're back and answering your money questions to help you make smarter financial decisions. This episode, we're joined by a listener, David, who's planning a big cross country move with his family and has many questions about the financial and logistical challenges of moving, including whether they should sell or rent out their current home after they move. David, welcome to Smart Money.

[David]

Hi, Sean.

[Sean Pyles]

So to help me tackle your questions, David, I AM Joined by NerdWallet writer Lisa Green, who has experience managing rental properties and moving and all sorts of things that you are wondering about. So, Lisa, hey, welcome to Smart Money too.

[Lisa Green]

Hey, Sean. Hi, David.

[Sean Pyles]

So, David, before we get into the conversation, I want to remind you that everything we're about to discuss is just for educational and entertainment purposes. We are not here to give you specific financial or investing advice, but instead provide you with information so that you can make your own smarter financial decisions. Sound good?

[David]

Sounds great.

[Sean Pyles]

Perfect. Let's start by digging into your financial life generally. Like, how do you and your wife manage your household finances? How are you feeling about things financially?

[David]

Yeah, we manage a lot of things in a unique way. I do feel like that's something different about us is that we've never merged our finances. I take care of the mortgage, she takes care of utilities, and we both kind of have our own separate accounts, which I do feel like might complicate the cross country move logistics.

[Sean Pyles]

Do you end up venmoing each other or finding some way to send cash back and forth when you're Covering expenses.

[David]

I'm proud that we do not Venmo or Zell each other. I know there are some couples that do, but no, we're not at that level. But we've kind of just always had the. You take care of this, I take care of that. We both, in general, feel that that's a fair way to do it.

[Sean Pyles]

And what about your income levels? Because I know with some couples, if one person is earning more than another, they might cover certain things and the person who's earning less might cover less. How does that break down for you guys?

[David]

I think we're both making about the same amount. I might make maybe 10 or 20% more, but again, we've always done it the way that we do it and I've not felt the need to bring up or cause a major change as we prepare for what could be a cross country move.

[Sean Pyles]

Right.

[David]

Yeah.

[Sean Pyles]

And we'll get into that in just a second here. But I'm wondering also, how do you feel like you're doing financially? Do you think things are going well? Do you think there are areas where things could be better?

[David]

We're doing very well. I feel very fortunate to have the means to plan for a move like this and just feel like I have options. I feel like I should start this conversation by just acknowledging that I'm coming at this from a point of privilege, even being able to have this conversation and access funds from different accounts. And also family is available to help us out if needed.

[Sean Pyles]

Well, it seems like you also worked hard to get to where you are too, so you should be proud of that.

[David]

Thank you.

[Sean Pyles]

Let's get into your move. You and your wife are thinking of moving with your kids. Where do you want to move and what's motivating this?

[David]

Yeah, we live in a western state and I grew up in a Midwestern state, so we're highly considering moving back that way to be closer to family. The state that we currently live in is just one that I never thought would be the best to raise children. Growing up in the Midwest and just seeing how people interact with their neighbors, the weather and the climate is something that I also feel like is better. I live in a desert state and I want to move back to one with four seasons is nice. And again, just the biggest reason was just to be closer to family and a place for my children to know that this is where they're growing up and going to graduate from high school.

[Sean Pyles]

Yeah. And I assume you have some family out there too.

[David]

Correct.

[Sean Pyles]

That can make things easier. So how do you expect moving to change your finances. Do you think it'll make things easier? Might it actually make things more difficult?

[David]

I do think the cost of living in the state we're looking at is about 5 to 10% less than the state we're currently living in. To me, the biggest things with finances is hoping to get a similar salary in the new state, but also just not taking a huge hit in terms of moving costs. When I start to do the basic research about what it will cost to physically move a house of our size with all of our items and two small children, the numbers can be alarming. But I remind myself that millions of people have done this. But it's just something that's a little scary to start.

[Sean Pyles]

But you haven't done it, so it's new to you and your wife.

[David]

Correct.

[Sean Pyles]

I want to talk a little bit about your jobs because that's a big thing to line up when you're moving to a new place. Make sure you have an income coming in. Have you looked into two jobs in your potential new home? How has that gone so far?

[David]

I think I'm comfortable sharing that I am a high school teacher. I have spoken to a couple schools in the area we're considering moving to. I have had an interview that I'm still waiting to hear back about if that will be a possibility. My wife is a journalist and she has a potential job lined up that she could transfer within the same company. So we're both optimistic that a somewhat easy transition could happen with similar income levels, maybe adjusted for cost of living.

[Sean Pyles]

David, can you think of any financial reasons to not move just to stay where you are, or are you really set on this lifestyle change?

[David]

The biggest one that comes to mind is just that I feel very fortunate to be well respected at my current school. Just the other day an administrator approached me already asking about plans for next year. I kind of had to delay and stall what I even said to that question. So I do think that my current school would notice and acknowledge my loss if I were to decide to leave.

[Sean Pyles]

So it's more the personal reasons that might be hard. Saying bye to your colleagues and to your current community.

[David]

Yeah. And just again, just uprooting the place that I've lived for nearly 20 years to move back to the place where I grew up. But again, it's really just thinking about being close to family. I have two small children, both in elementary school, and I just think to myself, where do I want them to graduate? High school. Right.

[Sean Pyles]

And that kind of move only get harder as they get older.

[David]

Correct. I was in the same school district from when I was second grade till I graduated. And I feel like that's powerful to just know that this is where I'm growing up, this is where I'm going to graduate from high school.

[Sean Pyles]

Well, I think I have grilled you enough, David. Let's get to some of your questions for Lisa and me around the move. What concerns do you have? Where do you want a little bit more information?

[David]

The biggest one is just what should we do with our current home? We are homeowners. We've got about 10 years until the house will be paid off. The biggest question again is just renting versus selling. Our current mortgage is about $2,200 per month. A website like Zillow estimates that we could rent it out for $3,000. What are the key factors we should consider specifically related to being cross country landlords with little to no property management experience?

[Sean Pyles]

Well, Lisa, I'll let you take that.

[Lisa Green]

Yeah, David, I think that's a great question. I have several rental homes myself, including a couple that I used to live in. And in my experience keeping a home, a previous residence as a rental property has been a really strong investment. You continue benefiting from house values, appreciating, and your rents will also typically go up over time while your mortgage payment stays the same. So meanwhile, while you're enjoying this nice cash flow from your property, tax laws let you depreciate the property. Which means that even while you've got positive cash flow money coming in, you may show a loss on paper that can save money on your taxes. And if you ever want to go back to your previous area to visit, check on your property while you're there. And now you have a tax write off for the travel because you had to travel back to check on your property. Ten years from now, when your house is paid off, most or all of that $2,200 monthly mortgage payment will go away and that turns into an income stream for you. So I would definitely look at trying to hang onto the house and try renting it.

[Sean Pyles]

So that all sounds pretty cushy and nice, but I imagine it's not all easy money coming in as you are managing a rental, especially when you're living in a different state. What do you think David should keep in mind to ensure that if they do go this route that everything is properly maintained and they're getting their rent on time and they're not on the hook for a mortgage several states away? Perhaps while having a new mortgage, there.

[Lisa Green]

Are Some caveats to renting out your house. Tenants don't take care of a property typically the way you would take care of your own property. And being halfway across the country, it's a little bit hard to keep an eye on it. And vacancies are expensive because you'll lose your rental income at the same time that you have to shoulder expenses for maintenance and repairs between tenants. So you need a cash cushion. And most of all, I think that you need a property manager, a good property manager. When we were first getting started with rental properties, we managed them ourselves, screened the tenants ourselves, dealt with the phone calls ourselves about something being broken, and then we finally hired a property manager and we have not really had to deal with those kinds of issues at all. The property manager will typically charge about 10% of their rental income and for that they will find and screen your tenants. They will collect your rents, they'll handle the maintenance, keep records and send you money every month. I think that this is especially important for a long distance rental because you don't want to get a call in the middle of the night about a clogged toilet 2,000 miles away. Property manager will be equipped to handle things like that. We're back in a moment with more questions and answers. Stay with us.

[Elizabeth]

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[Sean Pyles]

Lisa, one thing I'M thinking about is savings. It strikes me that you or anyone you know, David, anyone who's looking to have a rental property in another state or even in the state that they are in, would probably want to have more in savings to cover a month where maybe they don't have a tenant or there is some sort of maintenance that needs to be done to the property. How have you thought about this with your own rental properties?

[Lisa Green]

Absolutely. It's good to have a cash cushion. Another option is to kind of tap into the equity in the property that you already own. When we were first getting started, one of the first things that we did was set up a home equity line of credit on the house that we lived in. That gave us a way to get money if we needed it when something broke or we had a vacancy. If you want to go that route, I would suggest you may want to get that home equity line of credit set up on the house that you're currently in while you're still living in it. It's going to be easier and you'll get better terms as an owner occupant to get that home equity line of credit set up. And then typically you can just continue to keep it even after you move out of the house. That's what we did.

[Sean Pyles]

So, David, how is this sounding to you? Feasible? Difficult, Stressful.

[David]

Yeah, I'm glad she mentioned that. Recommending a property manager. I will admit that I'm not the most handy homeowner myself, so having to deal with the middle of the night phone call 2,000 miles away, that obviously is something that would be a challenge in itself. So I was strongly considering the property management option. And again, Lisa, I think if we do go that route, that may be a strong consideration.

[Lisa Green]

Our properties, our rental properties are not out of state, but they are probably over an hour from where we live. And since we've had a property manager in place, we really essentially have not had to drive that hour and go up there at all. It's been a life changer.

[Sean Pyles]

And David, you're planning on buying a new home when you move, is that correct?

[David]

I think that is the long term goal, yes. We did consider possibly renting or we're fortunate to have family who would take us in for the first weeks or probably even month or two if needed. But yeah, one of my other biggest questions was just how to access funds for a down payment for a new home. I do feel fortunate that I do have a good amount of money saved across different account types. A Roth IRA, taxable investments, a 403B and cryptocurrencies. But if 50 to, let's just say 50,000 to 100, 150,000 or more down payment was needed. I was just curious, what should we consider in terms of tax implications, withdrawing strategies, or just selecting which of those accounts to draw from? I currently don't have a large liquid down payment available, but with a couple months notice, I'm just curious Lisa, your advice for where I could access a large down payment if needed, I can.

[Sean Pyles]

Touch on the tax part quickly. One thing to Note around Roth IRAs is that you can take your contributions out, but you'll likely have a pretty sizable tax bill on earnings. And in general, withdrawing funds from a retirement account is likely to leave you with a tax bill and potentially penalties too. If you need to sell investments, look into your taxable brokerage account because that is probably going to be the most tax advantaged way to do it. If you've held the investments for longer than a year, you'll be taxed at a favorable long term capital gains rate, which is lower than your income tax rate most likely. So that might be the best way to go potentially if you need to sell investments. I'm wondering how you personally have thought out which option might be best for you. Have you maybe put together some sort of nerdy spreadsheet where you're listing each option and what it might cost you in terms of taxes or interest rate, any of those things?

[David]

I do have the nerdy spreadsheet, but no, I have not taken the next step to really see the tax implications or exactly where I want to draw this money from. I just want to minimize the tax bill from potentially tapping into these accounts that in theory are for long term growth. But this is obviously a major life change and I know that having access to this is is definitely a time.

[Sean Pyles]

To use it and I think running those numbers will provide you a lot of clarity. So I would say add some meat to that spreadsheet, see what the bottom line is for each option. And David, how are you thinking about timing here too? Are you planning to move in the next few months? Are you planning to put your house maybe up for Ren? How are you considering that as a.

[David]

Teacher the goal is to obviously finish out the school year, which for me here would be the end of May. I wouldn't need to for, for my job. I would have a nice about two months, June and July to get out there. But I just think the logistics of the move are also the most daunting. It's just should we hire professional movers, use a service like PODS or U Haul, or we also consider just selling a lot of our belongings and starting fresh. I did get a quote from a few of these options, but I'm just curious if anyone else on the call has an idea. Where should we start in terms of physically getting a. It's a four or five bedroom house with two small children 2,000 miles away.

[Sean Pyles]

Think about what you do and don't need at your current home and also whether it would just be more expensive to haul it to a new place versus getting rid of it and maybe buying something in your new location. Lisa, how have you handled that with your various moves?

[Lisa Green]

I can share a story from my sister's situation. She lived in one state and had just bought a new house and furnished the new house in that state when she got a grandchild in another state and decided to move to be near that baby. So since she had just purchased all of this new furniture, of course she thought the thing to do would be to take it with her. And that turned out to be not perhaps exactly her best move. She hauled all of that furniture down there and then it didn't fit the vibe of the house. It didn't fit the vibe of the new state, which was coastal rather than inland. It just didn't work. She ended up having to get rid of the furniture down there and get new furniture.

[Sean Pyles]

You gotta match the furniture to the vibe of where your house is. Otherwise the feng shui is off exactly.

[Lisa Green]

The table just won't fit in that.

[Sean Pyles]

Corner here, you know, David, how have you thought about that with your wife? Have you had discussions of like, okay, like we really don't want to have to move this sectional 2,000 miles. Have you even gotten that far yet?

[David]

No, not gotten that far. I don't know if it comes across on the call, but feng shui is not in my vocabulary. That is not something that I think about my wife. Definitely I could see her, once we find a place to live, realizing that, yeah, the couch or yeah, a large piece of furniture just doesn't fit. So this is helpful feedback. I do think there's maybe an argument to sell and start fresh once we see what we need. Really just bringing the basics I feel like would really make this a lot easier.

[Sean Pyles]

That's something that I want to emphasize too is how can you make this move easier for you because you and your wife will be moving 2,000 miles. You said with two young kids, there are going to be all sorts of logistics to figure out around like snack Time and bathroom breaks and where all of your stuff is in the car and how do you load up the car that I think to the extent that you can take steps to make that process easier for you, you will appreciate it afterward and especially while you're doing it. Have you also looked into the cost of like movers or using pods or U Hauls? Have you mapped out what those expenses might be too?

[David]

I did reach out to pods. I did get a quote from them for one of their largest containers. I haven't looked into U Hauls or professional movers yet, but I feel like the pods or the U haul option is going to be the least expensive. So, yes, I have started that process, but again, just taking that next step is daunting.

[Lisa Green]

I'll toss out one more thought on your furnishings as well. You have a fully furnished home that you are thinking of renting out. There are opportunities to rent it out with the furnishings in it. I think this is a bit of a niche, but there are short term rentals for travelers, for traveling nurses, for vacationers, et cetera. It may not be suitable for your location, but it's certainly something you could think of.

[David]

I hadn't considered that. That's great advice, Lisa. Thank you. Yeah, that would obviously make it way easier if we didn't have to sell anything and can maybe just charge a little bit extra. Giving them a fully furnished house.

[Sean Pyles]

And the depreciation on the furniture in the home could potentially be a tax write off too. So, David, I know we've run through a lot of different aspects of moving and selling and renting and managing a rental property. How are you thinking about all of this right now?

[David]

Yeah, at this point it's really just waiting to see if the job offer I'm looking for ends up coming through from the state we're looking to move to. So that's, that's where we're at. The timing, as a school teacher, this is. We're entering kind of the time of the year when, when staff starts letting administrators know whether or not they plan to return. So I'm kind of just playing the waiting game right now to see if, if this works out. But I know if it does, we're going to have to be frantically planning the move. So I really appreciate this advice.

[Sean Pyles]

Well, we're happy to talk about it with you and I hope it's a little bit of solace that you know there are steps that you can take now to plan for your move and try to make it as easy as possible. But at a certain point, every move has a certain level of chaos, and there's not a lot you can do.

[David]

That I'm prepared for the chaos.

[Sean Pyles]

Well, thank you so much for coming on and chatting with us about your situation. I hope it was helpful.

[David]

Very helpful. I'm a huge fan. Thank you so much for having me.

[Sean Pyles]

And Lisa, thank you for also coming on and sharing your insights.

[Lisa Green]

Yes, thank you for having me, Sean.

[Sean Pyles]

And that's all we have for this episode. Remember, listener, that we are here to answer your money questions. So turn to the Nerds and call or text us your questions at 901-730-6373. That's 901-730-N E R D. You can also email [e-mail] you can follow Smart Money on your favorite podcast app, including Spotify, Apple Podcasts and iHeartRadio to automatically download new episodes. And here's our brief. We are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances. And with that said, until next time, turn to the Nerds.