Making plans to travel for an extended period or indefinitely is exciting. As a home owner, before you set out on the road, a decision has to be made about what to do with your home? Broadly speaking the choices are to either sell it or rent it and the other less considered options are having someone house sit or leaving your home vacant.
For some the decision about what to do with you home is made easily and for others can it can feel impossible to decide. If you ask for advice or opinions from others (and sometimes even when you don’t ask) you will get varied responses as to what’s the ‘right’ thing to do. The opinions of others can often add to your confusion because often these opinions are not based on your personal circumstances or needs.
Lets be clear about one thing – there is no “right” or “wrong” decision here. As it often is, there is only what best suits your circumstances and you (and your partner or family). Whether you are someone who knows what you would do or you are someone feeling very unsure this article aims to provide some points to consider when making your decision about what to do with your house while you travel for an extended period.
Option 1: SELL IT
Selling your home is an option. Let’s consider this:
The Potential Benefits of Selling Up
Broadly the main benefit or reasons to consider selling your home is to make a profit or in other words turn your equity into cash so you can:
- Be Mortgage Free: no property means no mortgage to pay.
- Be Debt Free: after paying off the mortgage, the remaining profits could be used to pay off other debts, especially those that would financially hinder your traveling. These debts could include but not only car loans, credit card debt, money owed to utility companies and so on.
- Buy Your Rig or Set Up: very few of us are going to be gifted with the rig or things we want or need to travel. Some of you may already own your rig but there is very likely to be additions or other equipment that you will need. Whatever your needs, selling up is one way of getting the money to pay for it.
- Spending Money: while life on the road can be simpler and often cheaper than living at home, it still requires money. Profits from selling your house could go some or a long way to providing these funds.
- Real Freedom: not having a house to be concerned about or as safety net to return for some provides a real sense of freedom.
The Potential Risks of Selling Up
Selling your home for the purpose of ongoing travel is not without risk. Some of the risks to consider are i) Selling and Breaking Even OR Selling At A Loss and or ii) Loss of Home Ownership.
i) Selling and Breaking Even OR Selling At A Loss
Not all home sales result in a clear ‘profit’. The reality is sometimes there is not sufficient equity to make a profit. In some circumstances a property sale could result in the owner still having a debt to pay. This may not mean that you shouldn’t sell but I would very strongly encourage that you seek professional advice before making the decision to sell.
Selling to break even or at a loss in addition to the financial implications could also have an emotional or psychological impact. There could be those who even in these circumstances feel a sense of relief to no longer have a mortgage. For others it could raise negative feelings of regret and even anger of having worked hard to get ahead financially only to find they are right back where they started or worse.
ii) Loss of Home Ownership
I put loss of home ownership as a ‘risk’ with the risk being after an extended period of time traveling, possibly having had little or no income and having depleted your savings, when it comes time to purchase another property you could be faced with difficulties being able to afford to get back into the housing market. Not having enough money for a deposit to secure finance is one such risk. It is for you to decide how important it will be that you are able to purchase another property in the future. This will be essential to some and not for others.
What Could Determine if You Will Make a Profit or Not
Some factors to consider when making the decision to sell and whether or not selling will make you a profit are:
- Housing Market: Each housing market is different. Growth in values can vary greatly from area to area. It is important to have an understanding of the market in your area. Do your own research using real estate websites or obtain free non obligation evaluations from reputable real estate agents and in some cases your bank may be able to provide this information.
- Amount of Equity: Knowing how much equity you have (value – debt still outstanding) could go a long way to helping you make your decision.
Reenter the Housing Market in the Future
There are some options you could consider as a means to help increase your odds of reentering the housing market after you travel:
1. Funds for Future Purchase
The idea here (assuming the sale of your home makes a profit) is to put aside a proportion of the profits for a deposit to purchase another property in the future. How much you should put aside is something only you can decide. It may help to keep in mind factors such as:
- Your age and how many years you have to work in the future to pay off any future mortgage.
- Most lenders want a 20% deposit plus legal fees to approve a loan without other securities (such as equity in another property) and to avoid mortgage insurance.
- Consider how long it would take you to save a deposit to purchase a property.
2. Purchase a Smaller Property
The idea here is to sell your current house and purchase another which is cheaper, possibly in your desired area so that:
- You would still own a property and therefore still be in the housing market and, assuming you made a substantial profit from the sale of your current property, you could have money to fund your travels.
- Alternatively you would still own a property and be in the housing market but with a significantly smaller debt to manage.
- If the circumstances arose and you would have a home to return to.
These are all well and good however other things to consider are:
- The energy, time and stress of selling and buying properties.
- The costs associated with selling and buying properties including agent fees, bank fees, legal fees and so on. How much will these deplete your overall profit or impact on the amount you have for a deposit for the cheaper property?
- Note your new property will likely be an investment property to help pay the mortgage. You should have an understanding of what to consider when purchasing an investment property and what your role and responsibilities will be as a landlord.
Option 2: RENT IT
Another option is to maintain ownership of your home and lease it generating a regular rental income.
Renting on a Tenancy Lease
Leasing your property through a tenancy agreement for a set amount each week usually for a period of 6 or 12 months is often favoured by travellers.
Overall the idea and benefits of renting out your home are:
- regular income from the rent you receive to pay the mortgage and other expenses associated with owning a home (rates, insurances etc)
- rent received may, after mortgage and other costs, may provide some income for your traveling
Risks and Things to Consider:
Putting tenants in your home has potential risks which may include but not limited too:
- Tenants may not pay their rent or on time regularly but your lender and other services will demand you pay your financial obligations on time. So you may want to consider having adequate funds set aside to ensure you can meet your financial obligations if this issue arises.
- The rent you will receive may not cover all your property expenses and you will need to financially manage this shortfall.
- Rent received is income that has to be declared, tax is payable and it may impact on your overall financial circumstances such as in cases where you receive Centrelink benefits.
- As a landlord you have an obligation to maintain your property for your tenants. Consider how you would fund a new hot water service if needed, as an example?
- The options are to either rent using a real estate agent or on private lease (meaning there is a direct relationship between you and the tenant). Either way you need to ensure you and the agent or you and the tenant can regularly contact each other as needed. You have to be prepared to address whatever needs arise.
- As an owner of an investment property you have to be organised and keep good records for the purposes of ensuring all your bills are paid on time and for when it comes time to do your tax return (or provide your tax agent with the information to do it on your behalf).
Renting out your property even when all goes well, which can happen, is never completely a ‘set and forget’ scenario so you have to be financially and mentally prepared for this while you travel.
Holiday letting your home to guests at a nightly rate usually for short periods, is an option that can bring high returns, particularly in high tourist areas. Expenses are also very likely to be high. Things consider are:
- If holiday letting in your area is viable, what is the likely nightly rate and what are the occupancy rates?
- Are you prepared to ensure your house has adequate furnishings, bed configurations and everything guests will need to stay in your home?
- You will need to put in systems and supports to manage your bookings as well as tasks like cleaning, check in and check out, replacing broken or missing items and repairs to damaged or broken property.
- Are you prepared and disciplined enough to manage financially the inconsistencies in the rental income as occupancy rates change over time?
Higher returns of holiday letting can be very appealing and could be the better option in your circumstances but do your research first. Positive feedback on your holiday let in these days of internet is vitally important. Our experience is feedback often centres on communication, cleanliness and value for money and to achieve excellent feedback in these areas you have to be available to manage anything that arises as they arise which means being available immediately.
The Good News: Principal Residence Capital Gains Exception
Capital gains is a tax paid when an investment property is sold. This is something that often deters travellers from renting our their home, they do not want to pay capital gains for the years their home is rented. The good news is there is an exemption that allows you to keep your home, rent it out for six years and not pay capital gains. Overall the rules are:
- The house was your principal residence when purchased
- Your home remains your principal residence meaning you do not buy another property and live in it.
- Before the six year period expires you return to your home to live. If you do this for a few months, you can then rent out your house again for another six years also exempt from capital gains.
Option 3: HOUSE SITTERS
Having someone/s stay in your home for free in return for them caring for your property is another option. This may suit you if you have animals, feel there is more security in having someone in your home and financially you would not require to sell or rent your property to travel.
There are various websites providing a space to match you with house sitters. House sitters can have references and are often travellers too. That said of course it is not without its risks such as the house sitter canceling, being unreliable or causing damage.
Option 4: PROPERTY VACANT
Leaving your house vacant ie with no tenant or house sitter is an option you may consider. The obvious risks I see with this option is that a vacant property may be more prone to theft or damage. That said there is likely to be some basic things that can be done to mitigate this risk to some degree such as, hiring a gardener to mow your lawns and water your garden, installing a system that turns your lights on at night and so on.
WHAT WE DID & WHY
What did we decide to do with our family home?
Our home is rented to tenants.
A few reasons:
- The six year capital gains exemption
- The rental income we receive more than pays the mortgage and other expenses
- Being landlords is not new to us. We understand the rules and responsibilities to tenants, the risks and the rewards (income, tax implications etc) and are comfortable with these.
- We do not know where in Australia we may be likely to settle one day (way way way in the future) and by keeping our home, we keep our equity and our future options open.
- We are in our 40s and still very able to fund our traveling by working when we need to.
- Also being in our 40s we did not want to spend any equity we have in our home (if we were to sell it) and struggle to get a home loan in the future.
- Our home is in an area where growth is generally strong.
Note this is a basic summary as to why keeping our home and renting it was the decision we made for us. Whatever decision you make has to be what suits you and your circumstances. It is advisable to seek professional advice from a financial advisor when making significant financial decisions. And if anyone tells you their opinion was you should or shouldn’t just smile knowingly or tell them to pull their head in.
Happy travels and we hope to see you on the road