Subscribe For My Weekly Two Cents
If you want to get every new article straight to your inbox, sign up for my Weekly Wisdom emails. 

Answering all those burning questions you didn’t know you had about home ownership.

How Long to Own Your Home Before You Sell

Picture of Jessica Dabkowski

Jessica Dabkowski

Helping you with all things homeownership!

I get this question from both new clients, who are about to buy their first home, as well as clients that have owned their home for a while: “How long should I plan to live in my home before I sell it?”

Whether you want to make a quick profit from the rising real estate prices in the metro-Detroit area or you face an impending move out of state, it is important to know how long you’ll need to commit to owning your home for all sorts of reasons.

Conventional “Wisdom”

The conventional rule of thumb has always been 5 years. This stat is so common, I am not even citing it to a source article because I’ve heard it thrown out there so often I just know that’s what “they” say. (When I say “they”, I am picturing the gray-haired men populating the board room in Mary Poppins where Mr. Banks is getting dressed down something fierce.)

For those of you who don’t know me that well, I really, REALLY, detest generalities, and I also don’t like “them” telling me the rules. Like urban legends (remember the guy on the roof of the car with the scraping hook?), there may be a kernel of truth buried in its history somewhere, but if I don’t have the time or the energy to dig around for it.

Buying a home is very neighborhood, and even house, specific. The numbers relating to your specific situation are the only ones that matter to you. Own that individuality!

So today, I’m talking about how to assess how long you should stay in your house from a financial perspective. I know the Mathematician will be so proud.

Break-Even Basics

Everyone would like to make a profit or at a minimum not lose money on their home when it comes time to sell. At its root, your home is a big financial investment, and it is important to consider the financial implications of the investment when buying or selling.

A true “break-even point” is not the amount you originally paid for a home. (Heck, that would be way too simple and “they” wouldn’t like that, now would they?)

This break even point needs to consider the costs associated with buying and owning, tax benefits you’ve taken advantage of during your ownership, and the cost associated with selling your home.

Without a doubt, you will want to factor in the equity you have gained in your home and also any appreciation in its value since your purchase date.

That being said, it really is beyond complex to calculate a true “break even”. There are so many extraneous costs to being a homeowner, you will never capture them all. This information all feeds back to “When do the numbers reflect a value that looks good to you AND at a time when you are READY to move?”

Let’s Break It Down

To determine how long you need to hold onto your home, you’ll need to calculate the break-even sales price by adding up your complete expenses for buying and selling a home and netting them against what you will walk away with when you sell.

For purposes of this exercise, we’re not considering the cost of your mortgage interest because we are going to assume that you would have been paying more than that cost in rent if you did not own a home.

We are also disregarding depreciation and any other of those precision topics the bean counters love so much. (Aww, you know I love you guys!) And we are definitely not getting into the opportunity cost of other investment opportunities you skipped in order to buy a home. (The Mathematician tried to throw that on the pile, and I shut him down REAL QUICK!).

We are really just looking at a quick and dirty method to get a sense of where you would land if you sold today or if you wanted to sell in the future.

The Many Costs of Home Ownership

  • Pull together closing costs from your home purchase. You can get this information from the closing statement provided to you by the title company when you purchased your home. (Search your email; it’s in there somewhere!)
  • Calculate the costs of owning your home — repairs, maintenance, insurance, property taxes and any upgrades. If you are not a meticulous record keeper, do a quick mental estimate of any major projects or repairs.
  • Calculate the cost of selling your home. Generally speaking, you will need to estimate about 7-8% of the selling price. This figure includes commissions for both agents, sales taxes, and fees. (If you are looking for help on this item, I know an AWESOME Realtor who can help you out.)

Add all three of these items together, and you have your version of cost basis.

On to the Benefits

  • Equity in your home (principal paid toward your mortgage).
  • Tax breaks you received while owning.
  • Any increase in appreciation to the value of the home (difference between the purchase price you paid and the purchase price someone else would pay for the home now).

Once you have the figures above, you can determine when it makes financial sense for you to sell your home.

Is your incoming money more than your cost basis? (I just know The Mathematician is going to tell me I’m not being precise enough here. He’ll probably want to write an article explaining this topic in a more mathematically precise way. Get ready, people!)

Once the income number exceeds the basis, you’ve broken even.

A Practical Example

You purchased your home for $300,000 in 2015. Your current mortgage balance is $205,000. Your closing costs for the home and mortgage were $7,000. You have taken advantage of about $10,000 in tax breaks since you lived there. Your insurance and taxes are $1,000 and $5,000 per year, respectively.

You put in new hardwood floors for $10,000 and had the landscaping updated for $5000. (Those boxwoods are a huge pain, aren’t they?!). You also figure you spend around $1000/year in basic maintenance (replacing a broken faucet, carpet cleaning, maybe some paint, etc.)

You consult a Realtor and she tells you your home is now valued at $350,000. The cost to sell would be about $24,500 (7 % of $350,000).

Your costs

$7,000 in closing costs + $35,000 in property taxes (7 yrs) + $15,000 in upgrades + $7000 maintenance (7 yrs) + $7,000 home insurance (7 yrs) = $77,000 in costs before you sell

Your potential proceeds

$350,000 sale price – $205,000 to pay off the mortgage – $24,500 in sale costs = $120,500.

Your cost/benefit analysis

$120,500 in net proceeds from the sale – $71,000 in costs = $49,500 to the good plus you received $10,000 in tax breaks over the years so you are closer to $59,500 to the good!

You can see with this example, the power of time is important. These numbers would look a lot different if you had been in the house for 2 years. For instance, your mortgage balance would not be so low, your home’s value would not have appreciated as much, etc. At 2 years, your costs would outweigh what you netted from the sale.

I know this a simplified example, but I think it bears illustrating that there are a lot of factors that go into determining your “break-even point.”

Now, if you paid attention, you noticed you are really only walking away with less than your initial down payment amount of $60,000 (20% of $300,000). That being said, those costs were spent over time, so when you get that big fat wire from the title company with your sale proceeds, you will see $120,000 hit your bank account in one awesome swoop.

And let’s be real! If you spent 7 years renting at $1,200/mo (yes, this is rent on a nice-ish apartment or small house in metro-Detroit), you would have spent $100,800 helping your landlord retire to The Villages.

Note: If you sell your home having lived in it for less than two years, you may owe capital gains tax on the proceeds and that is a whole ‘nother kettle of fish. Talk to a professional if you are in this scenario.

That’s enough brain power abused for this week! I hope I helped to shed some light on how long to own your home before you sell. Next week, we will take a look at the appreciation and equity pieces of this puzzle and explore how to maximize them.

As always, reach out if you have any questions or concerns! I’m here to help with all your home ownership questions.

This Post Has One Comment

Leave a Reply

More Wisdom from Dabs