Should You Lease Your Home Rather Than Sell in a Softer Market?

More and more sellers are backing away from Toronto’s cooling housing market as property values continue to drop – while others worry they may have already missed their chance.

Home prices in Toronto have fallen 19 per cent since the market’s peak in April, according to the Toronto Real Estate Board’s most recent figures. The average selling price of all properties in the GTA in July was $746,218, down nearly $175,000 since the Ontario government introduced several measures aimed at improving home affordability. Toronto detached home prices slid 5.25 per cent to an average of $1000,336, while Toronto townhouses dropped 1.84 per cent to an average of $608,907.

Tired of watching tens of thousands of dollars evaporate from the value of their houses, homeowners with prior commitments may be willing to accept a little less than they were hoping for. Many more sellers, however, are moving to the sidelines, either taking their properties off the market altogether or putting them up for lease.

Worried Sellers Study Other Options

But before you hang up that ‘for rent’ sign, make sure you understand what you’re getting into. “Leasing can make sense for some disappointed sellers, particularly if they feel the long-trend is still positive. But it’s not for everybody,” warns Zoocasa Realty agent Carlos Moniz, who, rather than leave his own home on the market, recently rented it out and moved to another income property he also owns.

When talking with shell-shocked clients thinking of leasing, Moniz looks at several factors include the homeowners’ temperament, the type and condition of their property, and what the market is like for renting homes in their particular area.

He also needs to know how much is owed on the mortgage: “Most homeowners are highly leveraged, particularly in the GTA. Low interest rates, that’s been their normal. But that’s clearly changing.” The issue is no longer whether interest rates will continue to rise, but how quickly that might happen – and what the subsequent increase in costs will mean.

Related Read: The Hike is Here – Bank of Canada Raises Rate to 0.75%

Are You Ready to be a Landlord?

From the outset you have to start thinking in a different way, suggests Moniz: “If you’re thinking of making the shift from homeowner to landlord, you now have a business, so it’s important to see your home in that light.”

While most homeowners will likely account for insurance and taxes in their calculations, they may fail to put aside a sufficient amount for unexpected expenses and big-ticket items. How often will you do a physical inspection of the property? How do you plan to handle ongoing expenses such as regular repair and upkeep tasks? Do you have either the time or the talent to look after things yourself?

Of course, just because you suddenly own a rental property doesn’t mean you have to be the person dealing with the tenants. If you can find a great property manager, he or she can cut the stress of ongoing maintenance and handholding down to a minimum. The fee: roughly 8 per cent of gross income, Moniz estimates.

Time to Do Some Math

With these costs in mind, will your home produce positive cash flow? In other words, when it’s rented out, and you factor in all of the associated expenses, will the property produce a monthly profit or a loss? If it’s a loss, how long are you willing to hang on in hopes of a significant upturn in prices? Leases are typically for 12 months so you won’t likely be able to move things along in a hurry.

There are tax benefits to being a landlord, of course. Rental income is taxable, but there are deductions homeowners can take against that income. You can deduct mortgage interest, property taxes, insurance, and utilities not paid by the tenant. As well, you can write off prorated portions of the money spent to buy and improve the house as depreciation.

Another consideration is the potential exclusion from paying capital gains tax that’s allowed on the sale of your principal residence. Once you’re no longer living there, any future gains won’t be exempt.

Projecting the after-tax cash flow and net equity for the property over a few years is the only way to fairly evaluate your options, says Moniz: “This way, rather than simply looking at cash flow or speculating on future appreciation, you can come up with a better picture of your home as a longer-term investment.”