Suppose you’re moving to another state because you were accepted into graduate school in another state and own property. The obvious question arises in that case: should you rent or sell it to buy new real estate in a different state? This question feels complex, almost challenging to imagine executing in a real-life situation. This article aims to provide insights, weighing the pros and cons of each available course of action with your property. It may assist you in resolving this pressing question as swiftly as possible.
You already have property
You already own some real estate in one state, which is an excellent starting point for contemplation. Firstly, you need to determine the moral value your property holds for you. While we usually lean towards practical approaches, moral values could be a significant motivator for renting out the property rather than selling it. For instance, if the property was inherited from your relatives, and you’ve spent considerable time there, you might prefer renting it out, especially if the area is favorable. You have been accepted into graduate school in another state but may return after completing your education. However, in contrast, should it be a bought asset devoid of strong emotional ties, one could lean towards selling, particularly when contemplating a prolonged relocation to a different state with the prospect of establishing roots. Let’s delve more profoundly into this and scrutinize the advantages and disadvantages of such actions.
Sell/Rent Real Estate
Let’s start with the clear advantages and disadvantages of selling property to subsequently buy a new one in another state where you plan to reside in the long term.
Pros of Sell/Rent Real Estate
Among the advantages of selling or renting, the following stand out:
- Financial Freedom: You gain a substantial influx of financial resources. Virtually any property promises significant returns from the sale, which you can use for another real estate investment or set aside for long-term renting, with the remainder allocated to, for example, unforeseen educational expenses.
- Tax Benefits: You may even legally avoid paying taxes if you’ve inhabited a property valued at up to $250,000 for over two years. If you’re married, this threshold increases to $500,000. Sometimes, waiting a bit is an excellent option if time is a constraint for a favorable sale.
- Liberation from Property Burdens: You become unencumbered and free from any property-related burdens on your soul. This opens up the possibility of purchasing another home or leasing a place for an extended period until you figure out a preferable arrangement.
These advantages seem subtle, but the primary benefit lies in having a substantial amount of money, which can be even more significant if you qualify for favorable tax conditions.
Cons of Sell and Rent Real Estate
Now, let’s delve into the significant downsides of selling or renting financial transactions that you might encounter.
- Risk of Undervaluation: There’s always a risk of underselling, especially when you rush to sell quickly for a specific amount, maybe to leave the state promptly for a fresh start or professional reasons. This haste might result in selling your property for much less than its potential value, mainly if it’s in a desirable neighborhood.
- Financial Disparity Between States: If you’re selling an apartment in one state and planning to buy in another, the latter might have a much higher real estate cost than your initial one. This could lead to an uncomfortable situation where you need more funds for a new property that meets your comfort standards.
- Lump Sum Payment vs. Security: While you receive a substantial one-time payment from selling your property, you exchange it for your security. A property is a reliable way to ensure personal safety – a place to return to and live peacefully. Selling your sole property puts you in a vulnerable position, especially if you suffer a significant health setback, making it challenging to generate income for a certain period. This vulnerability is magnified if you’ve already spent the proceeds from the sale.
- Absence of Passive Income: By taking this action, you ensure the absence of passive income. You lose the opportunity to receive a fixed sum each month that could have come from renting out your property. Instead, you’re using your financial resources for rent, which are finite.
As you can see, the sell/rent drawbacks after you have been accepted into graduate school in another state are substantial. Now, let’s transition to renting, a promising long-term planning avenue.
Rent/Buy Real Estate
Now, let’s explore another option. This approach involves accumulating real estate through various financial instruments accessible to practically every citizen. We’re talking about the Rent/Buy scheme. This means you rent out your current property but acquire another one in a different state using various mortgages and loans. Let’s delve into the pros and cons of this course of action.
Pros of Rent/Buy Real Estate
Right from the start, let’s dive into the perks you can boast about after making this decision.
- Steady Income: You secure a stable income, a magnificent advantage ensuring your safety and potential mortgage expenses you might incur. Essentially, you’re opting for a hefty pile of enduring funds, unlike the one-time influx you’d get from selling, providing substantial gains in the long run.
- More manageable Mortgage for Property Owners: If you’re already a property owner, obtaining a mortgage for a second property becomes much simpler under favorable conditions. This leads to intriguing possibilities for passive income, entirely dedicated to covering your mortgage. If you’ve taken a long-term mortgage, you’ll still have funds for living expenses without a job.
- Flexibility to Return Home: You can always return to your native state if you decide to move back. Even if you purchase property in another state, you can rent it out instead of your initial property, ensuring you still have passive income to cover the mortgage on the second property.
All these advantages are splendid for long-term apartment investments in your future.
Cons of Rent and Buy Real Estate
Let’s look at some drawbacks you might encounter after being accepted into graduate school in another state and if you chose the Rent/Buy option. They are significant but more manageable than in the case of selling property.
- Property Market Fluctuations: There’s always a chance of an unfavorable real estate scenario. Despite the increasing popularity of renting every year, you might own property that doesn’t enjoy particular favor. To maintain a competitive edge, you need to lower the average rent, which could negatively impact your second property under mortgage.
- Risk of Losing Properties: If you fail to meet payments on the second mortgage, you could lose your first property if you used it as collateral. This could happen in certain situations, such as health problems preventing you from generating extra income to cover the mortgage.
- Potential Repair Expenses: You are still subject to potential expenses for the upkeep of your property. In the case of a second property, you’ll also need to keep it in order, potentially increasing your expenses.
So, it’s more complex. While this might seem like an ideal option, you might also need significant funds to cover various repairs for your properties. An additional income source will be necessary, no matter how much you’d like to avoid it.
Consider the sell/rent or rent/buy strategies exclusively from the standpoint of your financial capabilities. The first option provides you with tremendous freedom and burning bridges, and it suits you well if you no longer wish to return to your previous apartment. The second option offers long-term scalability and potentially more significant returns with initial substantial expenses. Even these expenses may not be obligatory, as we’ve already described. Choose wisely and trust your instincts. We recommend seeking guidance from a financial analyst. It’s a complex decision that requires a conversation with a professional to gain all the necessary insights.