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Real Estate Advisor:
Reinventing space - Building Smaller, Smarter Homes
Even as the average size of American homes continues to
climb, a movement favoring attention to detail and room design
over total space is gaining momentum. This architectural
counter-culture is based on the idea that bigger homes often do
not suit the lifestyles of their inhabitants.
In 2005, the average home size reached an all time high of
2,434 square (based on figures from National Association of Home
Builders and the Census Bureau). By comparison, the average home
size thirty years ago was only 1,645 square feet. At the same
time, family sizes are slowly decreasing. As of the 2000 Census,
the average persons per American household was 2.59, down from
2.63 persons per household in the 1990 Census. Many homeowners,
architects and builders feel strongly that the smaller,
well-organized homes are more practical and more enjoyable.
Techniques emphasized in scaled down design include
use of partial walls and glass for room separation, emphasis of
vertical space and small touches such as in-hall cabinetry. Proponents of smaller homes enjoy lower energy bills,
cleaning costs and property taxes. Building within a smaller
overall footprint also frees the owner or buyer to live in
neighborhoods where space is at a premium. The ability to design a
comfortable home in a condensed district with close access to
work, shopping and entertainment is an incredible advantage.
At the forefront of this movement is Susan Susanka, whose
"Not So Big House" books and lecture series place an emphasis on
smaller floor plans, spatial organization and high-quality
materials. Susanka's philosophy is that homeowners should build
homes that are 1/3 smaller than what they think they need, but
spend roughly the same budget over the smaller space. Spending
more per square foot enables the homeowner to add custom details
such as tiered arches or cozy window seats.
While the small-scale movement is growing in popularity and
the growth of home sizes may be gradually slowing (2005's average
was only 85 sq. feet larger than the same figure for 2004), there
is no doubt that the majority of Americans still follow the theory
that bigger is better. To most homeowners, two-car garages,
wide-open rooms and long hallways remain more appealing more than
cozy interiors with carefully crafted details. For some, however,
thinking smaller will be the key to a happy home.
Rapid Relocations: What to do with your old house?
Short-notice relocations are not uncommon, particularly in
the world of business. In addition to the weighty tasks of
organizing the move, making family arrangements, and settling into
a new community, homeowners have the added dilemma of what to do
with their current home? The question boils down to one of two
choices: put the home on the market for immediate sale, or keep
the property as rental/investment property.
Deciding whether or not to sell your home during relocation
is more of a puzzle than ever before. The appreciation of home
values, while not holding at the bristling pace of previous years,
is still alluring in most areas. Flexible lending options can
reduce the pressure also to sell.
Reasons for hesitation
For some homeowners caught up in a sudden relocation, the
prospect of a hurried home sale is unappealing. Many aren't
willing to add stress and complexity at a time when there are
already so many things to be taken care of. Others are reluctant
to sell right away in markets that show continued appreciation,
worried that they will be missing out on even bigger returns.
Should you stay or should you go?
Before you dwell on the possibility of renting your home
rather than selling, you must first determine if doing so is even
financially viable. Because you're considering holding on to the
house for its investment potential, you need to asses the quality
of that investment.
- What are the rental prospects for your home? - What are area landlords charging in rent for homes of comparable size and quality? Have rents fluctuated greatly over the last 2-3 years, or have they remained stable? Will any foreseeable local factors (such as nearby universities or large employers moving in/out) affect the supply of tenants? Getting an accurate read on the local renting market is essential.
- What are your anticipated expenses as a landlord? - If you are moving out of the area, you will likely need a property management company to handle the day to day aspects of the rental. Such companies usually charge 10 to 20% of the monthly rent for their services, although rates vary from market to market. Don't forget to account for the cost of basic maintenance and improvement to the property.
- What are your current home expenses? - How much are your mortgage payments, monthly property taxes and maintenance expenses?
- What are your new housing expenses? -Costs associated with your new home can affect your ability to be flexible with the old. If renting a new home, what is your monthly rent? If buying, what are your monthly mortgage payments, and how much financial flexibility do you have to meet a down payment and closing costs?
- What is the home's resale outlook? - How much value has your home gained in your time as its owner? Are home prices on a steady rise, or are prices leveling off, or even dropping? Form a realistic (in other words, conservative) estimate of your home's value in 2-3 years based on hard market data.
With answers to these five questions, you can start
to sort things out. If home appreciation in your area is leveling
off or showing signs of a downward turn, holding onto the property
as an investment probably doesn't make a lot of sense in the first
place.
In cases where favorable appreciation seems likely, next
examine the potential revenue vs. cost of the rental investment.
If the projected monthly revenue you will receive from rent will
generate a profit, the rental is likely a good investment. Even if
the rental profits are modest or just enough to cover expenses,
the appreciation of the home's overall value is reason to hold off
on an immediate sale.
In cases where the value of the home is appreciating rapidly,
keeping the home as a rental property may still make sense even if
it means operating at a loss. If the housing market appreciates at
a fast rate and you can sell the home at a significant profit, it
makes economic sense.
Tax Questions
The tax benefits of selling the home versus renting out the
property are not exactly cut and dry. When selling a primary
residence in which homeowners have lived for at least two of the
last five years, couples filing jointly can exclude up to $500,000
of the profit from capital-gains taxes (the figure is $250,000 for
individuals filing singly). This sizable tax advantage is
something most homeowners want to protect, and many who do decide
to rent will sell after a three year period to meet the minimum
requirements of the capital gains exclusion.
While the costs of improving and maintaining a rental
property are tax-deductible, the profits from the sale of a rental
property are generally taxed at the current long term capital gain
rate of 15%. This tax bill can be deferred, however, if you sell
the home and use the proceeds to purchase a similar investment
property (known as a like-kind exchange under Sec. 1031 of the tax
code).
Keeping it all Together
Aside from monetary concerns, the stresses of selling vs.
renting the home should be considered. Renting out a property from
afar can be a trying experience for some. So-called "absentee
landlords" may have to deal with problem tenants, emergency
repairs and changing rental markets. On the other hand, selling a
home on short notice can come with its own brand of anxiety.
