- Personal Finance
Reasons to consider selling your house and renting it back
Selling your house doesn't have to mean loosing your home.
What is the difference between a house and a home? This is, of course, one of those questions that will provoke a wide variety of equally legitimate answers from people. However, my purpose in asking it is not to elicit answers or provoke debate, but more to illustrate that, for the most part, people do agree there is a difference. This is important to keep in mind when considering property and housing issues.
An investor looking for a property is able to concentrate purely on the financial issues and desirabilty of the property as an asset. However house buyers looking for a home are invariably led by the heart to a degree because, while they will consider their home an asset they are not really treating it like one; they are primarily looking for something to turn into their home. This is where potential problems can arise as your best home choice may not necessarily be the best asset for you.
In many wealthy countries home ownership is the dream of many and often seen as a sure way to secure your financial future. For a great many people the equity they have in their home is a large part of their wealth and their home is often their families biggest asset. This is often the case without any conscious decision, other than wanting to own your home, having been made to invest in this way! Home ownership is a wonderful thing for many people but property prices, as we have seen, do go down as well as up. The purpose of this article is therefore to explore possible reasons for selling your property and renting it back so you keep your home. For anyone considering buying a property to create a home it might also provide food for thought as to whether that is your best course of action.
A rent back agreement needs to secure your home
Don't be a panic seller!
Sell and rent back schemes and companies often get a bad image because a lot of the people they deal with are under financial stress and go down this road as an option of last resort. If you are facing foreclosure on your home loan and eviction then even being offered 75% of your property's market value can seem a sweet deal if it means you get to stay in it by paying rent to the buyer who took it off you for a bargain! Whatever you do try and avoid getting to this point. Talk to your bank if you are struggling to make payments, they really would rather work with you through options like temporarily adjusting your payments rather than kick you out and be left with a property to sell. If you can see trouble on the horizon the sooner you consider selling the better, giving you time to achieve a fair price.
There are, however, many other reasons why home owners may consider selling their property before they are actually ready to move out and so wish to rent back so they can continue to enjoy their home. While reasons can vary greatly depending on circumstances, your time of life etc what is consistent is the attraction or need to get your hands on the wealth tied up in your home.There is always an opportunity cost to having your money tied up in your home; the myriad of alternative investments or spending you could be choosing is virtually without limit.
Property is an extremely illiquid asset, meaning it cannot be readily coverted into cash as and when you need. This inflexibility is a major downside to property as an asset, particularly as an asset used for a large proportion of an investment portfolio; which is effectively how many homeowners have their wealth invested! If, for whatever reason, you need or want to access some of your resources your paper wealth tied up in your home is not readily available. At best you'll need to remortgage to get a loan secured against your property. This illiquidity also makes it hard to react to events or market trends; it isn't always easy to sell a property when you want to, especially quickly when a lot of other people also want to sell.
So what are some reasons a homeowner who is not under financial pressure, i.e. is making any required monthly mortgage payments comfortably, may decide to consider selling their home and renting it back? Here are some examples;
- You may wish to get out of the property market for a period because of your feeling on its probable future direction.
- You may have identified potentially more profitable investment opportunities which you wish to persue.
- You may wish to release your cash for a project, to travel or to study.
- You may need to release your cash to start a business.
- You may wish reduce your commitment to the property in terms of maintenance, upkeep, insurance etc.
- Related to the above you may also want to start reducing emotional attachment before eventually actually vacating the property
The list is obviously not exhaustive but an indication of the types of motivations for considering a sale and rent back. Obviously in some cases a remortgage deal may be an appropriate alternative but these may not always be an option and can be expensive in the long term.
There are, of course, potential downsides to selling and renting back your home that should be considered. Obviously any rental agreement should afford you the security of tenure for a minimum period you are comfortable with. Also generally speaking houses are fairly safe assets when considered over periods of time that reflect typical ownerships outside of short term investing. Many other investments may involve a greater degree of risk and more volatilty over short time frames.
While I would argue returns should always be compared with what can be achieved with alternative uses there is no denying ownership of their home gives many people peace of mind and a sense of security that is obviously worth a great deal. This is not to be traded away too easily or for only a minor gain. However any property owner with equity that amounts to their personal wealth should from time to time consider if they could perhaps be putting that wealth to better use, whether that be a smarter investment or the fulfillment of a lifelong dream!
I am in no way a financial advisor and this article should not in any way be taken as advice but simply as food for thought.