Dear Al,
My wife and I currently live in a townhouse in Northern Virginia near Washington, D.C. We’re about to have our second child and need to start house hunting for a larger home with a yard. We’re trying to decide whether we should sell our current house or keep it as a rental property. The real estate market is crazy in this area with our property having gone up 30% in the past two years. If we don’t sell it, we’ll have to refinance it so to get enough for a down payment on the new house. Our question: Which way should we go?
Thank you.
Frank
Dear Frank,
The question you’ve asked shows that you’re planning ahead. With that, I’ll throw a question back at you. Will you feel comfortable being obligated on both the refinanced loan as well as the new home loan? And while we’re in the question business, are you able to maintain yourself financially if the tenant should not pay rent or destroy the townhouse? You should be aware that the ownership of rental property can be an outstanding investment, but it carries with it certain requirements, one of them being that you’re financially able to withstand any problems that occur. Finally, I’ll throw one other factor into the mix. You mention that your townhouse has risen 30% in value over the past two years. As its been your principal residence for that length of time, you and your wife are eligible to exclude up to $500,000 of any capital gain you realize on the sale. Should you choose instead to convert it to rental property, you’ll forfeit this benefit. This is just one more factor that should go into your decision.
Best of luck to you.
Al Jacobs
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AL JACOBS has been a professional investor for nearly four decades. His business experience ranges from real estate, mortgage, and securities investment to appraisal, civil engineering, and the operation of a private trust company. In addition to managing his investments on a day-to-day basis, he is a featured financial columnist for both online and print publications. He is the author of Nobody’s Fool: A Skeptic’s Guide to Prosperity. You’re invited to subscribe to his financial Newsletter, "On the Money Trail," at no cost or obligation by visiting www.onthemoneytrail.com.
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