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Ask Adam: Tear Down or Rent Out?

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This regularly-scheduled sponsored Q&A column is written by Adam Gallegos of Arlington-based real estate firm Arbour Realty, voted one of Arlington Magazine’s Best Realtors of 2013 & 2014. Please submit your questions via email.

Q. Our house in 22207 would be considered a teardown. We may move in a year or so when my husband retires. Our question is: would it be better to do some remodeling and then rent it out for a few years to benefit from possible future appreciation, or better to take advantage of the current developer demand and sell? Of course it will depend on specific details of the house, the neighborhood, and other family considerations, but do you have a general suggestion?

A. Cash in or let it ride… This is the classic question of gamblers and investment owners. In this case I’m inclined to advise you to cash in. Here are three reasons why:

  1. Alhough I have confidence in the direction of our real estate market, there is no guarantee that the current level of demand for tear down properties will continue. In the current market, you may be able to orchestrate a bidding war that will outperform what your property will return during more conservative times. Many builders are buying with their own cash and they have been burned by past markets. I imagine that the slightest hint of slowdown in the luxury market will directly affect the demand for teardown properties.
  2. You have mentioned remodeling the home before renting it out. This is going to require investment in the home that is not going to provide any value to the person or developer looking for a tear down. Your investment will become a sunk cost that eats into the additional profit you hope to gain by holding onto the property longer.
  3. You’ll want to carefully explore the tax implications of holding the property. For example, renting the property out for too long can create substantial costs in the form of your capital gains tax.

If you were my client, I would provide you with an estimated sales price and strategy for the current market. I would also do my best to project the appreciation or depreciation you may experience by holding onto the property. This exercise would help you make a decision based on the unique value and estimated performance of your home. You can compare these numbers to the estimated costs of holding on to the property as a rental.

The views and opinions expressed in the column are those of the author and do not necessarily reflect the views of ARLnow.com.

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