Updated: Feb 4, 2020
When a client is in the market to find her next home in Boston, she might often ask us at NextHome Titletown, “Is it better to sell my current home or keep it as a rental?” With a housing shortage throughout the Greater Boston real estate market, more people are willing to consider becoming landlords so they can earn long-term, monthly income while watching their property values continue to grow.
Cash Flow for Rentals?
Overall, in terms of renting versus selling, you need to look at the existing market conditions and if you would get positive cash flow from either a rental situation. Be sure to add the costs of your mortgage, homeowners' insurance, utilities, taxes and repairs compared with the going rate for rentals in your area. Also need to consider the implications of vacancy. If after calculating all of your costs you aren’t finding positive cash flow, then selling may be a better decision.
Will You Make Money on a Sale?
You also have to look at how much your home is worth in the current Boston market and take into account the cost of selling your home that will include fees, repairs, and closing costs, which tend to average around 10 percent, according to Forbes Magazine article.
Also, consider if the $250,000 tax deduction for a single person and the $500,000 tax deduction for a couple will keep you from paying the capital gains tax on the sale. The tax can be up to 20 percent, but the exact amount depends upon your tax bracket.
The Current Short-Term Rental Situation
If you are considering a short-term rental, Airbnb takes out, on average, 3 to 5 percent of the rental fee. If you live in an area where someone would need or prefer a short-term rental, like a vacation area or an area where business people need to fly in and have meetings, then it might make sense to go the route of short-term rentals because you will likely make more money from your home doing short-term rentals than you would with a long-term rental.
There are many portions of Eastern Massachusetts that have thriving Airbnb markets. If you decide to keep your property as a short-term rental, be sure to list with all of the top platforms, such as Airbnb, HomeAway, VRBO, TripAdvisor, and Vacasa.
Be aware of any short-term rental regulations within your community, and realize that you are responsible for knowing the rules of all municipalities involved (for example, the Commonwealth of Massachusetts has specific rules about the registration of all short-term rentals, the City of Boston has specific regulations that differ from, say, the City of Winthrop). In 2019, Boston imposed a 5.7 percent tax on nightly, short-term rentals. Also, owners need to register with both the city and the state. There is also a legal notification required to be sent to your neighbors that you will be allowing short-term renters in your home.
One big caveat for short-term rentals, though, is if the home is in a homeowners' association. Most homeowners' associations refuse to allow owners to use their homes for short-term rentals. The condo docs at our primary residence in Boston strictly prohibit rentals under six months, which is now fairly common for condo associations in the area.
The Current Long-Term Rental Market
If your home is in a city that has a stable population and less vacation or business appeal, you may likely find that a long-term rental relationship with tenants is preferable. Boston and most surrounding towns are great for landlords desiring long-term rentals because of the stable population and the dearth of long-term rental accommodations.