#430 in a series of true experiences in real estate
June 2003, Hills Newspapers
To sell or to hold? is a question we are often asked. Occasionally the query comes from someone so sure the housing market is about to go bust that he’s thinking of selling and renting instead.
More frequently, people who own the house they live in, plus another that they rent, are the ones asking if this is the time to sell. Just this week I talked to two people who moved from houses in this area to others further away. They weren’t sure when they moved if they would want to stay in their new locations, so they found tenants for their houses and they became landlords.
For one of these owners, land lording has gone rather well for a number of years. When “Bill” moved out of state, he hired a friend to watch over his house, to arrange repairs when needed, and to handle tenant turnovers. There have been few problems, no unpaid rent or property damage, no lawyer needed to sue or evict.
Depreciating his house has lessened the income taxes he’s had to pay on the rent he’s received. And the value of the house has gone up. Nevertheless, because his current tenant is moving, Bill is wondering if this might be the right time to sell.
The second absentee owner I talked to this week, “Mary”, has already made her decision. Her tenant is also moving, and Mary, having thought about it for the year since she left, knows that she will never go back. While she loved her old house and garden, she enjoys her new place even more.
She’d like to get out of the landlord business now, she explained, while she can still get a homeowner’s tax break on the sale. Such a tax advantage, available to those who have lived in their homes 2 out of the last 5 years, is no longer available to Bill, and he is concerned about how much he will owe in capital gains taxes.
Bill is also worried about other issues. What if there is an earthquake and his investment turns to rubble? What if his friend who manages his building leaves the area, who would he hire to replace her? Plus, he’s heard, rents are going down, not up. Can he rent out the house for the same rent he’s been getting?
Both Bill and Mary asked me questions: What is my house worth? What will it cost me to sell? How much fix up will I have to do?
By coincidence, this week, too, I am discussing these same questions with my brother Greg. My mother left to Greg and me a house in Napa in which, at one time, Greg and his wife lived. He has a happy life in Ohio now and no emotional ties to the Napa house. For him, it is strictly an investment.
Greg would like to retire in the next 5 years and hopes to use proceeds from the Napa house to pay off his Ohio mortgage. He has a specific dollar figure in mind, the amount it will take, after paying taxes, to pursue his retirement plans.
He tells me that he is nervous about the general economy. Do I think that housing prices will keep going up? What if the bubble bursts? On the other hand, he wants to know, what if prices do increase dramatically in the next year or so? Wouldn’t it be better to hold onto the house? Because if that occurs, he tells me, he would much rather wait.
Surely, it should go without saying, none of us can see into the future. My crystal ball doesn’t tell me if the economy will strengthen or collapse, or if, or when an earthquake may hit.
I do know that most real estate in this country has been rising for a number of years. In our own market area, I haven’t seen indications of that ending. There are still many people who want to live here, and there is not enough housing to accommodate them all.
I also know that managing a rental property, especially from a distance, can be trying and expensive – in time, money and spirit. Every time a tenant moves, or the roof leaks, or the basement floods, action must be taken, resources must be tapped.
And, experience has shown me, rarely is it possible to rent to a tenant who cares for your house the way you did. Mary mentioned that her tenants are “wonderful people” but they are not gardeners, and during the year that she has been away, her carefully kept garden has become a “shambles.”
When she turned over her house to her renters, the windows were clean and the paint fresh because she kept them that way. No major damage has been done to her house but it doesn’t look now like it did, and before she sells, she will be wise to make some improvements.
Taxes on gains can be large, so large that sometimes owners choose not to sell simply to avoid having to pay them. However, as a palliative, it is good to keep in mind that only the seller who makes money owes taxes.
If he’d earn that money in another way, through a salary, for example, he’d have paid taxes on it. What is different with a sale — or with lottery winnings — is having to pay a large chunk all at once.
There can’t be any hard and fast answers, can there? Bill, Mary, Greg and I all have different situations. Each of us must decide which factors to consider and how to weight them.
For the moment at least, I want to hold, not sell. I’ve decided this for these reasons: There is a good tenant in the Napa house now. Managing it isn’t, at present, a problem. I don’t have a better place for the money if I sold. It wouldn’t be enough money for me to retire on. I don’t want to retire anyway.
Most of all, I do believe that the housing market will continue to be good.
