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Columns: Real Estate Adviser
Steve McLinden   Expert: Steve McLinden
Real Estate Adviser
When the military commands a housing move
Real Estate Adviser

Sell or rent in a slow market?

Dear Steve,
My husband is taking a four-year job in the military and we must move by this August. If we sell now, we may not break even in this housing environment. And if we rent the home out for those four years, we'd be losing over $400 a month to cover mortgage costs. What would you recommend -- rent or sell?
-- Leslie

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Dear Leslie,
From what you tell me, most signs point to "sell." It sounds as if you haven't been in the house too long and possibly bought at the end of the up-cycle. And if you're on a limited budget, you may need what equity you do have to buy a home in your new city, or at least to have enough cash flow to rent.

No doubt you realize that running a $400-plus monthly deficit would, on paper, put you close to $20,000 in the operating hole in your rental operation by the time you return. Even if the market turns for the better and you do enjoy the historic average value run-up of about 3 percent annually, that would amount to only $18,000 over four years for a house that is valued at $150,000, for example.

Of course, when the housing market was torrid from the late 1990s through 2005, you might have run the risk of being priced out of a market if you sold with the intent to return in four years. That's not the case now, as you probably know.

There are a few other solutions worthy of mention. You could advertise for a lease-option or lease-purchase tenant. In a lease option, the renter basically pays money above and beyond the monthly rent price to the owner for the right -- but not the obligation -- to buy the property later. A lease-purchase arrangement is similar but it obligates the renter to buy. In either case, the extra money would make leasing the place a little more feasible. See my previous columns on buying a lease-option home and rent to own.

Or, you could rent the place out with intent to return and sell it in two years and still be exempt from the 15 percent capital gains tax (for up to $500,000 in gains for married couples) on any profit from the sale. As long as you have lived in the house for at least two of the previous five years, you would remain eligible for that break. But the clock starts ticking once you leave the place. If your house's value increases in those two years -- a big "if" given the current market -- you might make out OK in this scenario.

Should you decide to become a landlord, you would get tax deductions on depreciation and expenses, including mortgage interest rates and property taxes, repairs, marketing, maintenance and other costs at year-end. However, trying to keep the place rented out as an absentee landlord is a tough game without the right tenants or caretaker. You may not have adequate cash reserves to pay two mortgages if something goes wrong and the place suddenly goes vacant. If you do pursue this path, make sure to read up on local fair-housing laws. And by the way, the services of a property manager for the house could set you back up to 10 percent of the monthly rent.

Better yet, perhaps, you might put the house on the market as soon as possible to at least gauge buyer interest. You might just hook the right buyer; such a move may at least give you better clarity on how to proceed.

Bankrate.com's corrections policy -- Posted: Feb. 3, 2008
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