A home is your haven, your comfort zone, the place you create memories, and almost certainly your most significant investment. And if you live in a hot real estate market where there are more buyers than sellers, your investment could pay off massive dividends. For proof, look no further than the current median list price for homes across America, which rose 25% in January compared with last year.
So if you bought a home two years ago for $400,000, in certain markets you could sell your home today for $500,000. Um, wow.
It’s no wonder some homeowners are choosing to sell their homes for a tidy profit. One catch: They still need a place to live. So in this tighter-than-tight real estate market, many are choosing to rent rather than buy a new home—and then buy again when the right opportunity comes along.
But can the sell-rent-buy strategy work for everyone? Yes and no.
Are you curious if cashing in on your home, raking in a profit, and waiting for better market conditions to buy again is right for you? Just be sure you know what could go wrong first.
One couple’s story
Jen and Ryan O’Connor of O’Fallon, MO, have kept an eye on home prices almost since they had their home built in 2011.
“We always thought of it as an investment,” says Jen. “The builder was offering amazing incentives at the time.”
The O’Connors landed a good deal, and over the years, the couple continued to improve their property. Ryan, who works in construction, is handy, and Jen has a good eye for design.
Still, the couple decided to put their home on the market when a neighbor in their development sold their home for an eye-popping price.
“We felt now was the time to get the largest return on investment, and we pulled the trigger,” says Jen. “We put the house on the market on a Thursday and accepted an offer Monday for over the asking price.”
Just how much did they make? About $150,000.
Now the couple and their two school-age daughters rent.
“We didn’t want to purchase at the height of the market,” says Jen.
Research rents
If you’re interested in following in the O’Connors’ footsteps, start by researching rent prices. If you own a home in a desirable area with high demand for housing and not enough supply, it’s likely those same market conditions apply to rentals.
“Before listing your home for sale, be sure to research how much a similar-sized rental home goes for in your neighborhood,” says Lisa Mark, real estate professional and co-founder of Oak & Co. in Ontario. “You may be shocked. And you may find yourself spending more than you anticipated.”
Also, consider your lifestyle when looking for a rental—you may have to downsize to a smaller house, townhouse, or apartment, or even move away from your current community.
And don’t forget your furry roommates.
“Many landlords won’t rent to you if you have pets,” adds Mark. “In particular, large dogs or having too many pets are red flags to landlords.”
Consider future mortgage rates
There’s a whole generation of homebuyers out there who have enjoyed low-interest rates. But with rising inflation and the Federal Reserve announcing it will increase interest rates over the next four years, jumping right back into homeownership isn’t a given. And sitting out the market could cost you down the line.
“Future homebuyers should take note of banking rates, trends, and projections,” says Tanya Vanterpool, a real estate professional in Miami. “Interest rates directly affect your purchasing power.”
Here’s how Vanterpool breaks that down: If you snagged a 2.5% fixed interest rate for a 30-year loan on a $500,000 home last year, you’re paying $1,976 in monthly mortgage. But if you end up with a 5% interest rate on the same loan down the line, you’ll be paying $2,684 per month.
And in a few years from now, a lender might not greenlight you for the same loan because approval all boils down to what you can afford to pay each month. If you can afford to pay $2,000 per month, a lender won’t process a loan that triggers payments over that amount.
“So the $500,000 house you could afford last year is now out of reach at a 5% interest rate,” adds Vanterpool.
Factor in additional costs
If you plan to cash out and then cash back in, first break down all those extra costs of buying and selling real estate. You’ll want to know if your net profit will be worth the inconvenience of selling, moving, renting, buying, and moving again.
“Real estate transactions have significant costs,” says Earl White, a real estate attorney focusing on residential and commercial sales and leasing. “Selling costs include agent commission, legal fees, transfer taxes, repairs if necessary, moving fees, and fees for municipal approvals and inspections.”
And when you’re ready to buy again, there will be a slew of outlays beyond closing costs. They could include the costs or fees for a home inspection, home appraisal, mortgage application, survey, title search, and insurance.
“Buying and selling may be less profitable than perceived once all costs are factored in,” adds White.
When sell-rent does work
The O’Connors took the opportunity of selling and renting to try something they’d always been interested in: country living.
“We stumbled across a rental property that sits on 130 acres of farmland,” says Jen. “Neither my husband nor I had experienced that and thought it would be a great way to test if we prefer living on land. We’ve been here about six months now, and we’ll never go back to a subdivision.”
But while the O’Connors are content to wait out the housing market during their two-year lease, they are mindful of the coming challenges.
“We’re watching the listings just to have a frame of reference,” says Jen. “We want to buy around the same area we currently live, which will be a challenge because the value of the land here is high and has been high for a while now.”
Meanwhile, there’s one bonus to renting Jen says she could grow used to: fewer home maintenance projects.
“We’re very happy to have a break from all the upkeep that comes with being a homeowner,” she says.
**Post from Realtor.com by Sally Jones 2/17/2022
