Converting to Investment Property

Sell or Rent HouseRenting Your Home vs. Selling Your Home

Many of the sales I handle are in urban neighborhoods where people consider keeping their condominium as an investment property instead of selling it. This is more common lately as many homeowners become painfully aware that they cannot sell their home for the price they want. They naturally consider holding and renting the property until the value of their home recovers. However, if a home’s value is much higher than what was paid for it, this strategy has serious tax implications.

Capital Gains Tax Rules  – The Basics

According to Federal and State (Massachusetts) tax rules, gains in value are tax free up to certain limits for people who lived in the home as a primary residence for two out of the last five years. A gain of up to $500,000 for a couple or $250,000 for an individual is tax free when you sell the home. Basically, if you rent your home instead of selling it right away, you have a three year window to sell and avoid paying capital gains tax. Gains on homes not sold in the three year window are taxed at 15% Federal and 5% State. Another option is to keep the property for life and pass it on to your heirs. A discussion of this option is complicated and beyond the scope of this post.

The Three Year Plan

If you hold onto a property and rent it, you will have to deal with one unpredictable variable – tenants. In my experience, the presence of tenants usually compromises your ability to get the highest possible price for the property. Tenants are not usually the best decorators and may not have the highest standards of cleanliness. Plus, it is extremely difficult to make improvements with tenants in the unit. To get the highest possible price, you may have to wait for the tenants to leave, make improvements, and then thoroughly stage the unit starting from scratch. With tenants in your unit, you could get anywhere from 3 to 5% off the highest possible price. The discount may be even greater if the home shows badly, or the tenants make showings difficult or are problematic. Being a landlord carries significant risk.

These costs and headaches must be considered against any expected future increase in the value of your condominium. If you decide to sell immediately, many of these costs can be avoided. There is no danger of a tenant causing wear and tear or making showings difficult. If your home is in good condition and well-decorated, you can probably prepare it for sale without making costly cosmetic improvements and can stage it using many of your own furnishings. Ultimately, you may decide to rent your condominium, but it’s important to be aware of what you’re getting into.

How Small Is Too Small?

After writing about enormous over-the-top penthouse condos in the city, I thought it might be nice to mention the other side of living in the city.

“Micro Condos”

I have sold some pretty small (but still nice) homes in my time.  My personal record is a 330 square foot studio apartment at 56 Commonwealth Ave. in the heart of the Back Bay that I sold 3 times as follows!

October, 2002         $229,000
July,  2004               $214,000
August, 2006           $245,000

A 340 square foot renovated studio on the third floor of 56 Comm. Ave. just sold for $281,000 in case you wondering how much it might cost you to own one of these babies today.

The most amazing micro-condo that I could find is in Hong Kong.  It is 344 square feet of hip environmentally friendly space that transforms through the use of sliding walls and slide-out furniture:

“Tiny Houses”

While I have never sold one of these, I recently learned that there is a new movement dedicated to living in exceptionally small houses.  These are not mobile homes but real houses that are typically between 100 and 130 square feet in size and are very often illegal because they are not even large enough to meet local building codes.  In Massachusetts, for example, a home that houses one person must have at least 150 square feet of habitable space.

For a fascinating and detailed discussion of tiny houses, check out this article from a recent New Yorker.

And if you still want more, go to Tinyhouseblog.com

{Please Comment Here}

More Real Estate Eye Candy

I fully intend to blog on some more serious subjects other than just real estate “eye candy,” but, I couldn’t help but comment on another ultra-high-end property that just hit the market today.  I am speaking, of course, about the Penthouse atop the Albert A. Pope building at 221 Columbus Ave.  This is the building developed by Paul Roiff in the late 1990s. The Penthouse built on the roof, which you have probably seen from the Mass. Pike, is his personal residence. similar sites It is now on the market for the first time (a mere $7.2M).  The restaurant Mistral is on the street level. Check it out:

{Please Comment Here}