It’s easy to get caught up in the “what ifs” of life. In fact, the what ifs of real estate are plenty and often circle around finances. One of the scariest what ifs homeowners face is “What if I had just continued renting?” When those types of thoughts pop into your head, it’s usually with good reason. If you’re financially strapped, could it be worth considering the sell to rent again plan? Since there’s no easy answer to this question, here we break it down for you in realistic terms to show you the what ifs of the sell to rent strategy.
The Strategy of Selling to Rent
Let’s first look at the strategy behind your selling your home to rent again. Basically the purpose of taking this step is that you have earned enough equity in your home to walk away with a nice chunk of change in your pocket, after paying your mortgage off in full. So you have to do the math to consider how much you still owe on your mortgage, what the realistic price is that you’ll get for your home, and then the difference between those two numbers to show your profits. And honestly, with the way the market is now, many homeowners will see a very respectable profit. From there it’s all clear sailing, right? You find a gorgeous place to rent, kiss those mortgage payments goodbye and settle in for a few years until you feel financially comfortable enough to look into owning again. Ahhhh, simplicity itself. But what if rent is just as high? After owning you’re going to want a decent home in a decent area, and this can cost you dearly. While the average rent for a two bedroom apartment in Toronto is about $2240, this can go as high as $4453. If you downsize to a one bedroom, you’re looking at an average of $1748 and up to $4500 which is oddly slightly more than a two bedroom on that higher end. So you have to consider just how much you’ll actually be saving.
In times like these where the market’s going crazy, there’s no crystal ball to tell you when prices will become affordable again. However, if there’s one thing we know about housing prices, it’s that they tend to go up, not down. While right now the prices are downright unsustainable for all accounts and purposes, it’s more realistic to know that while they might go down slightly, the truth of the matter is it won’t be to a level you can afford if you were struggling to pay a mortgage you signed a few years ago. What if you find yourself waiting, and waiting, and waiting, and waiting? Since there’s no way to know when the timing will be right, you might find yourself stuck renting far longer than you hoped and not necessarily reap the benefits you imagined financially in the longer term.
Your Buy and Sell Budget
What if the fees of selling eat into your profits? We’re talking about commission, land transfer taxes, legal fees, moving fees, storage fees if you have to downsize, and more. You then have to do it all over again if and when you find the right time to buy. Oops, and don’t forget mortgage penalties. Here’s a hitch most homeowners don’t get: You can sell your home and not get penalized but only if you buy another property at the same time. When you buy a new home when you sell, the lenders do what’s called “porting” your mortgage, so it’s in essence transferred to the new home. Otherwise the lender won’t be happy and considers you’re breaking the agreement. In this case, you have to pay the fees which add to the costs of selling. We’re talking thousands of dollars. So always speak to your lender to find out just how much you’re looking at in penalties.
Mortgage Stress Test
While you’re thinking you have a mortgage, so you’ll qualify again, this is not necessarily true. What if the mortgage stress test makes it harder than ever to qualify? If you’re struggling financially now, unless you get an amazing, new high paying job at the time you decide to start your house hunt, there’s a very real chance you won’t qualify for a mortgage.
Interest Rate Gamble
While interest rates are at record lows as we write this blog, depending on how long you wait, what if they rise to less than favourable rates? This not only costs you money on your mortgage, but it also takes you longer to pay it off. Back up to the point above, it will also make it harder to qualify for a new mortgage. In other words, if you do qualify, you’ll be far worse off financially then you were before you sold.
Savings or Losses?
While the plan seems solid you’ve got to consider the whole savings idea. Right now, you have one of the best investments you can hope to find: TO real estate. Real estate is one of the lowest risk, high return investments around. Sell that asset and you might more likely be looking at losses over time, instead of the savings you hope to make between the sale and your lower monthly budget. If you plan to invest, the question is in what and how much? What if your money will be held up and difficult to access and will also not likely see the type of growth you’d like to see compared to your home equity? Your home equity it also tax free, unlike most types of investments. So even if you ace your investment strategy, you’ll end up paying capital gains tax. Any way you look at it, your plan is more likely to end up with long term losses instead of short term savings.
When Selling Might Make Sense
When looking at your housing expenses, do they exceed 32% of your gross monthly household income? The reason we ask is it’s recommended you not exceed this number to live comfortably. If you are living well above this number, then you clearly can’t afford your current home. And remember, your housing expenses include your mortgage, utilities, and property taxes. You also want to consider your debt to income ratio. It’s more math, but it’s important. When you add up all your debt and divide it by your yearly income, you should not be over say 40 to 45%. In fact, lenders look for the ideal percentage as being more like in the mid to low 30s. What if you’re rising above 45% into the 50s or worse? You’re getting into dangerous territory. Do your math and consider your position financially to determine if you’re in over your head.
Two Options When Selling
So what can you do if you find yourself in this not so ideal financial situation? You have two options:
- Sell and rent in the hopes of finding a more affordable home to buy in a few years
- Sell and buy a more affordable home such as a condo now
While we’ve reviewed the dangers of the first option, we didn’t touch on the second. The second option can be a happy compromise if:
- You’ve got enough equity in your current home to pay for a condo down payment
- You’re not already living in a ridiculously small condo and can’t imagine downsizing any further
- You can afford the new mortgage AND the condo fees
The benefit of this strategy is:
- You gain from the equity from your sale
- You have the down payment for your new home
- You avoid mortgage penalties, so the buying and selling costs are more manageable
- You reduce your overall monthly payments so you can live with less stress
- You continue to build equity in your new condo, so you maintain all the benefits of still owning a money growing asset
- You have the bonus of a maintenance free life if you’re going from house to condo
The downsizing plan might make the most sense, all things considered.
The Bottom Line
While the idea of the sell to rent again plan seems good in theory, it tends to fall flat in practice from a financial point of view. If you can’t afford your current mortgage however, a good compromise is to consider downsizing, so you reap the rewards of your home equity, keep your foot on the real estate ladder and avoid costly mortgage penalties.
Do you want to work with the best real estate agents in Toronto? We have a kick ass team of experienced specialists ready to help you with all of your property needs. We can work with you to determine what makes the most sense for your situation. If you’re ready to sell your Toronto home, just give us a shout at 416-291-7372. We’d love to work with you!