JANUARY 2015:
Should I Rent or Sell My House?
Are you going overseas for a while and wondering whether or not to Rent or Sell your house?
Here is an actual, practical review of the Rent vs Sell option…
How Do I Feel About It?
My instinct tells me to SELL.
If I come back to New Zealand, I won’t be coming back to live in this same house… that means that I am either going to sell it now or sell it later. That makes it easy for me because it is, now, just a timing issue based on a financial analysis of the two options…
My normal advise to anyone else would be to hang on to real estate property as long as possible. This is because you (1) get rental income and (2) also get capital gain.
There is no Capital Gains Tax in NZ – yet – but if Labour have their way, Capital Gains will be introduced the next time that they get into office.
But, to be honest, I don’t want my house “hanging over me” whilst I’m overseas. I want the freedom and flexibility to do what I want to do as and when I find it.
So, I did a financial analysis of Rent vs Sell just to make sure that my “sell preference” wasn’t overly “financially stupid”. I was surprised by what I found. You might be surprised too… so, read on…
Obviously, the numbers are private and personal… so you’ll just have to trust me on the actual figures. I will, however, explain my approach…
What Do The Numbers Say?
I had 5 different real estate agents come around to give me estimates. The consensus was that I can sell for about $s or rent at $r / month.
RENT
If I rent, I will need to put the property under Property Management; they will charge me 10% of rent and 10% on all 3rd party bills that they handle. Standard guidelines are that I should only budget to rent for an average of 11 months each year. From the resulting rental income figure I need to deduct:
- 10% Management Fees
- Everyday R&M (plus an extra 10% in property management fees)
- Rates / Local Taxes
- House Insurance
- NZ Income Tax
I am mortgage free, so there is no mortgage interest to pay.
The nett annual rental income (let’s call this $R) came in LESS than the amount that I needed for my overseas trip. I will need to draw ALL of $R and top up from my other savings / income sources.
I have owned this property since 1999. In the early years it appreciated at about 5-8% per year. The 2008 financial crisis put an end to that for a year or two. Houses have started to appreciate again, but at a slower rate than in those halcyon older days.
On average, my house has appreciated year on year by 3.5% since 1999. There is no reason to believe that this average is going to change over the next few years.
In 3 years time my house should be worth about 11% more than its current $s figure; let’s call this 3 year figure $S.
However, after being rented for 3 years it is likely to need money spent on it to realise that value:
- The carpet is 15 years old now. It will (most probably) need to be replaced after having a tenant family in it for 3 years; Re-carpeting an executive 230 sqm house with a suitable carpet is not going to be cheap…
- I can, also, assume that some internal painting will need to be done at the end of the rental term.
- I can, also, assume that there will be some things to fix that are not covered by the bond…
I reckon that, in order to fully realise $S, I will need to put NZ$30,000 aside to prepare My House for sale after rental. I also need to set aside about 3% of $S (the sale price) in Realtor Fees etc to cover the cost of sale.
SELL
If I sell now, I will get $s less 3% in Realtor Fees (let’s say that I will nett $C – C for Cash).
I can put $C in a Term Deposit account in a safe bank and get 4.50% over 1 year or 5.25% over the 3 years. I can get up to 3% more than that if I drop to a “B” S&P Rated financial institution.
The Reserve Bank Of New Zealand has indicated that it plans to raise the Official Cash Rate (OCR) by 1.5-2.0% by 2016; they have already raised the OCR by 0.5% in the first half of 2014. I calculate that I am better off renewing my Term Deposit every 12 months to get the increasing 12-month interest rates (rather than to put it all in a 3 year Term Deposit now).
Let’s say that I put all of $C in a safe Bank Term Deposit at 4.5% and get interest paid out monthly (after the bank deducts Resident Withholding Tax). The annual nett interest earned will be higher than $R – the annual nett rental earned (above).
To compare apples with apples vs renting, I will only draw $R to live off and re-invest the remainder (call it $z) into year 2. I should get ($C+$z) at 5.25% in year 2. Obviously, annual nett interest in year 2 will be higher than that received in year 1.
Again, I will draw $R and re-invest the remainder into year 3. In year 3, I should get a 6% Term Interest rate. Obviously, annual nett interest in year 3 will be higher than that received in year 2. Again, I will only take $R during the year to finance my overseas trip.
I calculate that, by the end of year 3, there is no significant difference between the profit made from Selling vs the profit made from Renting.
These are my figures. You will need to do your own. Your figures may end up different.
What If?
I have been conservative with my parameters for both Selling and Renting. I checked the sensitivity of my model to changes in key parameters. I was not concerned by any of the What If results.
I know what I need to know. I have confirmed that Selling is not “Financially Stupid”.
So What’s The Conclusion?
The conclusion is the opposite to what I expected.
I should sell. I WILL SELL.
Not only is Selling cost neutral over the 3 years but I, also, get all of the added flexibility of liquid assets.
This is now part of My Plan.
October 2014 Update:
Well, one thing that is constant in this world is that things change…
Since I wrote this post in August:
- The NZ$ has fallen from US$0.87 to US$0.78
- This (with other indicators) has allowed the RBNZ to relax economic policy… the OCR will not be increasing as fast / as far as previously planned
- My new RV for My House has been published… it is lower than expected
These are all significant changes to my economic model… so, I have updated my model to check on the impacts…
It’s all good news. There is NO MATERIAL DIFFERENCE. My “sell” decision still holds.
October 2015 Update:
My house finally sold on 16th October 2015.
I stayed in NZ for another week so that I could settle my affairs and flew out to continue my around-the-world venture on 21st October 2015.
My venture re-starts in Saigon, Vietnam.