Two of the best strategies for getting started with real estate are:
- Go the FHA route, and buy and move into a house for 3 or 3.5 percent down.
- Turn that property into a rental.
On an upcoming episode of the BiggerPockets Podcast, Brandon Turner sits down with real estate agent and investor Robert Jones to discuss whether people thinking of selling their home should rent it out instead. Below is a snippet of the interview, which will be released in its entirety June 27th.
Should You Sell Your House or Rent It Out?
Brandon: Buying property with an FHA loan alone doesn’t mean it’s going to be a good deal, right? But what you did, you bought a fixer-upper or something that needed to be a total remodel, and you did the work yourself—so sweat equity. You got in there. But then the second thing you did that was cool is that you turned that first property into a rental. That’s probably the number one way that I hear people get into real estate, “Yeah, I just turned my house into a rental property.”
Do you advise that for other people today? Because you, as an agent, you’d probably rather have them sell because you get money.
Robert: No, absolutely. Investment real estate is a big part of my business—for building millionaires, building investors. So if the property makes sense, which most of them do—especially younger clients of mine, they’re living in houses that would make good sense as a rental—that is my absolute first and foremost advice.
And even looking at tax strategies. You still have three years to make a decision, moving out of your primary, with capital gains rules. So yeah, I advise people to keep their existing home if they have the ability to.
And the laws related to qualification and income—even for new landlords—that’s eased up over the last couple years. So it makes that transition easier as far as qualifying for both mortgages. There’s much more leniency there now, too, compared to a few years ago.
Brandon: And if people are wondering what that means about the capital gains thing, I’ll explain that real quick. Correct me if I’m wrong here. Basically, the government says, “Hey, if you live in a property two of the last five years, you don’t have to pay capital gains when you sell. And again, we’re not CPAs, but the gist is you’re not paying cap gains if you live in the house two of the last five years.
It doesn’t mean the immediate two previous years, it just means two of the last five.
So I actually did the same thing recently. I lived in a house for several years, sold it—I think I made like $85,000 in profit. Well, I shouldn’t say I sold it, but there was two years in between when I stopped living there and when I sold it. I still got to claim that two-year thing, because I lived in there two of the last five. It just wasn’t the immediate recent two years. So that’s why you have a couple years to decide.
So a lot of people ask me that question: should I rent my house or should I sell it? And it’s a hard question. I mean I like to say, “Yeah, you should just rent it out, because it’ll get you into real estate.”
But if you’re going to lose a hundred grand in taxes, then maybe you should have just sold it and dumped it into something else. What do you usually tell people when they say, “Should I rent it or sell?”
Robert: Yeah, 95 percent of the answer is, “Keep it as a rental.”
If they have the fortitude or personality type that it’s going to work and if it’s a house that makes sense… which in our market, most houses will rent for what your mortgage is—especially if you got the mortgage a few years ago. And even if it’s running skinny, if you only own one, two, or three properties, you can take on a little bit tighter deals, as opposed to say owning 10, 20, 30. So I think you could be a little more risk tolerant in the beginning on deals that might be a little tighter.
Are you debating between renting and selling? Do you have any follow-up questions for us?
Leave them in the comment section below!