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Jul 21 2009 12:00AM

Question

I am 52 years old and will have a modest pension from my job when I retire in ten years. I will not have any employer sponsored retiree health care after I retire. I inherited the family home almost two years ago when my mother passed away. The house is paid for as is the condo in which I reside. I am restricted and can defer only 3 percent of my salary into my 401(k) plan. I'm not sure when I want to retire, some of that depends on my finances. Would it be better to rent the family home or sell it?

Answer


Financial planners say it's hard to say whether selling or renting is the best option without knowing your entire financial situation. "A specific recommendation for your situation depends on many other factors," said FPA member, Philip White, CFP®, of Ducere Capital. However, there are some general comments and observations that can be made. "The decision to sell or rent the family home is not an easy decision. It often represents the single largest asset held by an individual."

The Pros of Renting

  • "You can establish a consistent stream of income that has the potential to increase over time.
  • "You can retain the family home that probably has many memories associated with it.
  • "And, you don't have to sell the home in the current real estate market," said White.

FPA member, Gail Senay, CFP®, of UBS noted that property values have declined over the last number of months and some areas of the country have seen a greater drop than others.  "I do not know where you live or the market value of your home," Senay said. "In general, with the decline in value, I would consider renting the home for a few years to allow the prices to increase to a price you are comfortable with."

The Cons of Renting

  • "The asset you have remains illiquid. You can't spend or eat a house.
  • "You will become very familiar with the challenges of being a landlord," said White.

Senay asked the following: "If you rent a property, are you prepared for the responsibility of reviewing potential tenants, collecting rent from them and maintaining the property? Is this something that you would do, or would you consider hiring a property management company to take care of this for you?  Would this extra cost be able to be added to the rental price and still be able to allow you to have a good return on this investment? Has someone been living in the home currently? And, if not, are there repairs that would need to be completed?"

Selling the House

The decision to sell the house also has its issues. For instance, if you sold the home today, what amount of cash would you realize from the sale?  Senay asked.  There is, however, a silver lining to property values being down. "The good news is that if you inherited the house two years ago. The value of the house at that time was probably higher than it is now," said FPA member, Ronald R. Cain, CFP®, of Fairlawn Financial Services. "The value of the house on that date is your basis for tax purposes, meaning that when you sell the house your basis is deducted from the sale price to determine the taxable gain.  As a side note, if you lived in the house for two years or more prior to selling the house (if even feasible) then you could exclude it from taxable income up to $250,000 in gains if single and $500,000 if married."

Before deciding to rent or sell the house, you should examine what sort of investment return you might generate with both options. "If you sell the house, would you be able to get a better return on your money in the investment as opposed to holding onto the property and getting the monthly income," Senay asked.

Ultimately, Cain said it's hard to determine whether you would be better off renting or selling because it depends on several variables including:

  1. What are your monthly income needs (including medical) during retirement?
  2. Do you have any retirement goals, such as travel, vacation homes, and hobbies?
  3. What are your invested assets, savings, pension benefits, etc. in terms of dollars and how is the money invested?
  4. In terms of dollars, how much are you saving in your 401(k) plan monthly?
  5. What is your current salary?
  6. Are you married?
  7. Where is the house located relative to your residence?

Of course, a full analysis of your financial situation is required given its complexity.

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