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3 Reasons Why You Might Want to Break the 5-Year Rule
Some things get more valuable the longer you own them, and that is often true in real
estate. This is why you’ll often hear experts talk about the 5-year rule, which is the idea
that new homeowners should stay put for at least 5 years before selling a home or risk
losing money.
The way mortgages are structured, the vast majority of your monthly payment goes
toward interest charges for the first few years of the loan. You won't build much equity
during those early years, and building equity is one of the main reasons people choose
to buy instead of rent. There are also closing costs incurred whenever you buy a home,
which is another reason to avoid frequently moving.
However, there are some situations that may require you to break the 5-year rule. Here
are a few examples of when selling before that time may be the right thing to do.
Your property value goes way up
Sometimes the real estate market is so hot that it seems like property values shoot up
overnight. REALTOR® Jessica Hillyer, associate broker wi th Coldwell Banker Hubbell
BriarWood, says the current market has definitely made many homeowners rethink the
5-year rule.
“It typically costs a seller 8-10% of the home’s value when they sell,” she said. “In the
past, home appreciation was around 3-5% a year. So, it would take about 5 years
before you could sell, cover your closing costs, and recoup your investment. In the
current market, homes have appreciated 10-14% in just the last year. With that kind of
appreciation, you could sell your home and recoup your costs in only 2-3 years.”
But, in a hot seller’s market, realtor.com says that a lot depends on where you plan to
go next, explaining, “You might not be able to get into a nicer place, or end up paying
more money for a home much like the one you currently own.”
The neighborhood is declining
You can make changes to your house but, unfortunately, you can’t do much about your
neighborhood. Realtor.com says, “If you start to see a trend in the downhill spiral, get
out of there while you can because this could mean a loss of profitable sale in the
future.”
How do you know if your neighborhood is declining? Realtor.com says there are four
key areas to evaluate. First, take a look at the neighborhood home market. The website
says, “A neighborhood where homes linger on the market for years, where owners
constantly drop their selling prices or sell for much lower than they initially asked for,
might not serve as a great investment for a new home buyer.” Next, does the
neighborhood need some TLC? Realtor.com says, “If you spy dirty streets, poor local
services, few recreational facilities, or a shortage of restaurants and other amenities,
you may be witnessing signs of a neighborhood in decline.”
Third, evaluate the nearby conditions. Realtor.com says some things that might signal a
less desirable area include: lots of traffic and noise; roads and sidewalks in disrepair;
shabby, rundown or vacant buildings; near commercial or industrial areas; etc. Lastly,
are your neighbors keeping their houses in good condi tion? Realtor.com says, “Poor
yard maintenance, shoddy landscaping, discarded junk in driveways, gardens growing
weeds, and broken fences could mean owners lack pride in their homes, and possibly in
their community.”
You really don’t enjoy living there
While the 5-year rule exists to protect your investment, there are factors that may be
more important to you than money, including your happiness. If you really hate where
you are, and if it negatively affects your day-to-day life, you might need to break the
rule, no matter the cost.
Realtor.com does offer one alternative, saying “depending on your mortgage and home
insurance policy, you might even consider turning the house into an investment
property. The website says, “A lot of homeowners choose to rent out their homes when
the market is less than stellar but they want to stop living there.”
An important consideration
Hillyer says if you are thinking of breaking the 5-year rule, you’ll want to look into capital
gains tax and how that may affect your profit.
“With the recent rise in property values, some homeowners who bought even a year or
two ago are already considering a sale,” she said. “However, if you sell in less than two
years, you may owe capital gains tax on the profit if it exceeds IRS threshol ds.”
To be sure you are making a wise financial decision, it’s a good idea to consult a
REALTOR®, your lender, and possibly an accountant. For a list of local service
providers, visit the Greater Lansing Association of REALTORS® website at
www.lansing-realestate.com.