Step up Purchase... Rent or Sell former property?

In Southwest Florida, we have many home owners who make a property purchase that is smaller in square footage and may be a condo as their first purchase here. Then, years later, when they start spending more and more time here, they realize they may be outgrowing their original Florida property and start looking for their "step-up" purchase to more square feet or a single family home. ​

At that point, the million dollar question is what to do with the original purchase. After all, properties here may make a great annual or seasonal rental as a nice way to have income while building equity in a home. 
To help you think through the best scenario for you, here are some questions you should ask yourself:

• Are two homes in your budget? Given that rental income is never a guarantee, you need to make sure that you have the financial stability to handle carrying costs when push comes to shove. 

• Will keeping the first property impact your chances of qualifying for a mortgage on the new home if one is needed? If you need to borrow money for the new purchase you may want to consult with your mortgage adviser to make sure that you understand the impact of keeping the original purchase as a rental property.

• Is the ROI attractive enough to keep the property? You should check on the competition to understand occupancy rates and rental fees to get a grasp of how often properties like yours rent and what they rent for in order to do your computations. If you are depending on rental income in order to pay your carrying costs of mortgage payments, taxes, insurance, HOA/Condo fees, rental management fees and other miscellaneous maintenance costs, you want to make sure that there is a compelling record of rentals to give you confidence you can make that happen.

• Is there a tax benefit to keeping the property? Check with your account on how owning both properties would affect your tax situation. In most states there are expenses with rental property that can serve as write-offs such as mortgage interest, property tax, operating expenses, depreciation, repairs, etc. You may even be able to deduct any fees that are associated with renting your property such as attorney fees or property management fees.

• Is your property likely to appreciate? If you have been realizing an increase in your properties value since you owned it and all indications are that value continues to hold firm, holding onto to the property could bring you future value in addition to the rental income. As you do this, also consider other investment options if you used the cash from a sale. How do the potential returns on those options compare to the year-over-year growth you expect in the property values?

• Can you handle the responsibility of being a landlord? This is a big one to consider. Are you prepared to pay for a management company to oversee your rental or will you be doing it? How will you deal with repairs and replacements of items in/on the property? You should also do the upfront due diligence on what laws or licenses dictate being a rental home owner for your city, county and state. 

Selling your property can often be the easiest route, however, there are times when keeping that property and using it for income generation may be an attractive option for homeowners. Be sure to talk to professionals (real estate, attorney, accountant) to determine if that is a viable option for you.