People relocate all the time for one reason or another; it’s part of everyday life. Any number of reasons can cause you to move. But to no surprise, about a third of people would move because of a better paying job. When considering accepting an offer, it is important to understand the cost of relocating so you could make an educated decision. Relocation cost should be factored into your salary assessment to understand if you are actually getting a raise.
Understanding relocation costs
Calculating the cost of moving is rather simple if you are a renter. But it gets deceivingly complex if you are a homeowner. If you are renting, it’s simply (1) the cost of lease termination and (2) the increase/decrease in new projected rent. However, if you are a homeowner there are a lot more associated costs. Some obvious costs include the standard selling/buying expenses such as (1) broker fees, (2) transfer taxes, (3) inspections, (4) assessment, etc. (5, 6, 7… you get it). These costs are generally about 10% of the value of the property you are selling. Note, we are assuming you are purchasing a similar property for similar value just in a different market. So for a $400,000 home, that’s a $40,000 haircut off your equity = LOSS. This is the simple part. What makes it complicated is the current market environment.
Impact of current financial environment
Record low interest rates of the pandemic era followed by the largest spike in the last 40 years is going to create some turmoil. Any re-finance now is a gut-wrenching punch to your wallet. Every 1% increase in interest rate will have an approximately $9,300 cost per $100,000 of loan in a five year period. Allow me to demonstrate. If you jumped on the record low rates during the pandemic and refinanced at 2.5%, you would be lucky to refinance at 6%. So on a $320,000 loan ($400k home with 20% down) it would cost you (6.0% – 2.5%) x 3.2 x $6,700 = $75,040Â over the course of 5 years, not including the $40,000 in selling/buying expenses. If your new job offer will offset the 5 year loss of $115k (or $23k a year), then by all means feel free to consider it. However, do you want to relocate for essentially the same equivalent pay? Allow me to offer an alternative solution.
Rent it out
If you are one of the many that refinanced during the pandemic, what you hold is a treasure. You have a 100-year event kind of an interest rate that could be compared to free money. Any refinancing now must have a solid reason to justify throwing away such a gift. But even if you must move, there are alternate options. The simplest option would be to rent the property, while you rent a place in your new city (if you don’t have enough for a down payment). There are many property management companies that will manage your property with little to know owner input. Even if your rent is higher, you will save on relocation costs by avoiding a 10% equity loss.
Owner-financing
A more exotic solution would be owner-financing the sale of the property. Essentially, you become the bank issuing the mortgage and in the case of payment default, the property becomes yours again. It is easier said than done, requiring you to find the right buyer who has sufficient credit and down payment. However, once arranged, the new buyer commits to today’s interest rate which will offset your future purchase. More importantly, the new buyer becomes responsible for everything to do with the property – zero maintenance cost to you. Again, this a more exotic solution as it takes time to find the right buyer and I wouldn’t recommend it if legal contracts make you queasy.
Conclusion
Everyone’s situation is different and you may be in a position where selling your home and buying a new one in this economic environment makes financial sense. However, before you make such a decision it is important you understand the full impact relocation costs will have on your financial goals.