With local home prices rising 30-40% over the past year, many homeowners are thinking about selling their homes and “cashing out.”
Some want to take advantage of the current market conditions to pay off debts, while others want to use their equity for travel and leisure. Many simply want to lock in their equity gains.
There are a number of reasons for wanting to sell. And, given the demand for homes in our region, it seems like a logical move.
But, is it the right move?
As with any decision, there are pros and cons — short-term and long-term.
It’s critical to understand the implications of selling and the alternatives that may allow you to achieve your goals without giving up your investment.
To help, here are four things you should always consider before cashing out:
1. How Much Cash Do You Need?
If you need 300k right now, then cashing out may be the best option. But, if you only need 50k, 100k, or even 150k, you can either refinance or pull from your home equity line of credit (HELOC) to get the funds you need — without selling.
2. Closing Costs and Taxes
When selling, you’ll need to pay Realtor fees, legal fees, and other moving costs. And, if it’s an income property, you’ll likely need to pay capital gains tax on your profits. This can put a big dent in your take-home earnings.
3. Lost Appreciation
When you sell, you also lose out on future equity growth. Even at 5% year-over-year growth, you would gain 25k on a 500k property — in one year alone! It’s like having a $2,000+/month income stream that you’re banking for later use.
4. Lost Rental Income
If your property is or could be rented, by selling, you would be missing out on the core benefits of owning an income property: having someone else pay down your mortgage and, ultimately, earning passive income.
The More Options, The Better
Everyone’s situation and preferences are different. After assessing your needs and your options, you may determine that cashing out is the right option for you.
That said, we have always been big proponents of buying and holding real estate because it gives you multiple paths to achieve your goals.
For example, many homeowners — because they’ve bought and held — now have the following options:
- Draw from their HELOC
- Do nothing and let their home continue to appreciate in value
- Reinvest the equity gained in a rental property (which is essentially like buying another house with $0 of your own money).
Before you sell, take some time to make sure you are clear about your immediate needs, your long-term goals, and the options available to you — and move forward with confidence.
If you have questions about the market and the options available to you, contact us below. We’re here to help: