Should You Rent Your House
Have you ever asked yourself - should I sell or rent my house? If so, you’ve come to the right place. The simple answer to the big question is that it depends.Our goal with this post is not to sway you one way or the other but to give you some helpful guidance to make the best decision for YOU!Of course, if you do decide to rent your house, we would love to help you get your home ready, find the best resident, and have great success as a landlord.But, if you’re on the fence and trying to figure everything out, then keep reading.
Should I Sell or Rent My House?
People consider renting their houses for a variety of reasons. Some of the most popular reasons include:
- Moving out of town for work and believing they’ll move back into their home after their assignment is finished.
- Having another house they want to buy but can’t sell the one they’re living in, so renting is an alternative they’re considering.
- Seeing it as a possible long-term investment strategy.
- Believing it can provide some additional income.
If one of these describes your thought process or situation, then this article is for you, and we have some insight that will help you make the best decision.So, should you rent your house? Let’s think through some items you need to consider.
Pros of Renting Out Your House
First, you should look at the pros of potentially renting out your house.
Positive Cash Flow and Income
Can you rent your house for enough to cover your mortgage, taxes, and the occasional maintenance repair?If you can rent your house for enough to cover the mortgage, taxes, and the occasional repair, it could make a lot of sense. We’ve seen owners use the rental income to build into their retirement through cash flow or the rental income’s equity built by paying down their mortgage.You likely won’t have to pay taxes on the income with deductions from the mortgage and any repairs through the year. And if you believe your house will increase in value over time, it’s going to be for rent. Then, when you end up selling your home, you will realize that appreciation in a lump sum. Not a bad idea, huh?
Build Equity
Do you need the profit on the sale of your house to put into a new home?Suppose you have a house that you want to go ahead and buy, but you can’t sell your home.If you don’t need all the cash from the sale of your home, then you might want to think about renting and taking an equity line of credit (HELOC) to fund the down payment on your new house. As long as your rent can cover your mortgage plus your equity line, it might make perfect sense. Over time you’ll be paying down that equity line with your resident’s money!
Use of Low-Cost Leverage
You can also financially benefit from renting out your home with the availability of low-cost leverage.Unlike other asset classes, real estate has straightforward access to debt financing. When you use a lower cost of capital financing, you enhance your equity returns while taking advantage of the historically low mortgage rates.You have another party pay the low-cost leverage for you while the principal amortization works overtime when you keep your house as a rental.
Option for Temporary Moves
Is your move permanent or temporary?Let’s suppose you are moving out of town for work but plan on coming back after a certain period and think you might want to move back into your house. This scenario happens more often than you imagine.If moving your family to a different city, we would strongly consider renting your current home for a few reasons.
- It’s the home where your kids grew up and would be perfect for you once you move back.
- You believe real estate in your new city may be overpriced and wouldn’t want to get stuck in a house you can’t sell if the market were to correct itself within 24 months.
- The commission you would pay to sell my house in your hometown and then buy another one in 12 to 24 months might make it more expensive to sell than to rent it out.
The reasons could go on, but you get the point.So, in this case, if you know you’re moving back into town, it makes perfect sense to rent your house for 12 to 24 months.
Cons of Renting Your Home
Alternatively, it’s equally important to look at the potential pitfalls of renting your home as well.
Time Consuming
Don’t forget that it can be incredibly time-consuming to deal with residents.You wouldn’t have to consider this if you used a good professional property manager. A solid property manager will act as your agent for the life of the agreement and handle all communication and any maintenance issues that arise, especially those that happen in the middle of the night.But if you decide to go it alone, this is a valid question to ask yourself.Here are some considerations for you to think about:
- Can I effectively screen out a potential problem resident and find the best one for my house?
- Do I have the time to answer the phone/email and show the house to anyone interested and who wants to take a look inside? As a Birmingham property management company, we average 15 showings to get five applications to find that ONE great resident…do you have the patience and discipline to stay the course?
- Do I have the ability to hire and manage quality maintenance personnel to take care of any calls that come in which require attention?
- Do I have the proper leases and documentation to ensure I follow the appropriate state laws when dealing with residents?
High-Risk
While being a landlord can be beneficial financially, it also comes with its own set of risks, including:
- The resident might leave your property in need of serious cleaning and repair once they leave.
- Dealing with evictions can be costly and stressful.
- Late rent and evictions can seriously reduce how much money the property brings in for you.
Countless unfortunate rental situations can leave a landlord financially ruined. Unfortunately, you cannot wholly escape these high risks of being a landlord, although you can do things to avoid and prevent this outcome. If your resident gets injured on your property, there are other high-risk factors to consider. Also, you can potentially be at risk for legal issues if you don’t comply with your state’s landlord-tenant laws.
Maintenance and Repairs
Even though you are no longer living in your home, all of its issues are still yours to deal with, especially when you rent it out.Normal wear and tear is normal, but several unexpected expenses can arise that can be pretty costly. Some examples include:
- The residents trash the property on their way out
- A burst pipe floods the property
- The roof needs repair or replacement sooner than you expected
- The HVAC system breaking in the middle of summer or dead of winter
You will want to set a portion of the income you make from the rentals aside each month to deal with this type of unexpected expense.
Pros of Selling a Home
On the flip side, you’ll also want to take a look at some of the pros of selling your home.
Frees Up Capital
You can free up a significant amount of capital when you sell your home. There’s a good chance that you have recognized some gains in your equity through both price appreciation and repayment of your mortgage. You are making that capital liquid again so that it can be invested in other ways when you sell your home.
Few Taxes
If you have lived in your home for two out of the previous five years, the sale of your house is excluded from capital gains tax up to $200,000. Since capital gains tax can eat into the profits from selling a home, this can be a huge financial boon.
Cons of Selling a Home
While there are some benefits to selling, it’s also essential to look at the potential downsides.
Update Home
It will most likely require some updating before you list your home for sale. In addition to these updates, the buyer who offers your house will likely also ask for some improvement for updates. You will probably have to reduce your expected sales price if you aren’t willing to do updates.
Sales Process
If you feel like renting is too risky of an option (you would not feel comfortable with a HELOC), you could continue selling your house or decide not to move at all.If you’re in a healthy market with good sales of comparable houses, but yours continues to sit, it possibly means you have either pricing or a product problem.Is your house outdated? Product problem.Is your house up to date with the comparable homes sold in your area? Pricing problem.In these cases, it’s best to listen to the market and either lower the price or improve the product. We have these same discussions with rental house owners who don’t see a lot of traffic or applications for their houses.
What’s Your ROI?
You will want to determine the return on investment to make a profit by selling. For example, you could make $200,000 in profit when you sell a property, but the same property would make $2000 a year in cash flow. According to these figures, you’re getting a 1% ROI. If this is the case, selling and reinvesting elsewhere might be the better financial option. Other types of investing can give you a higher return you might want to consider.
What Is the Future of the Market?
To get a good idea of the market’s future, you can look at the growth of your city to get a general sense. A couple of questions to look into are:
- Are businesses leaving the area or moving in?
- Are homes being left abandoned, or are they being fixed up?
It’s worth trying to make your best-educated guess about how your property will gain or lose value over time. Selling before prices drop might be a good idea if it seems like your neighborhood is heading downhill. Renting the property and holding it as prices increase makes more sense if your area has been improving.
Final Thoughts
When asking yourself - should I sell or rent my house - now you should be able to find the answer on your own.Looking back over everything we’ve discussed, you should rent your home if your move is temporary, you don’t need the profit on the sale of your home, you can cover your costs with rent, and you are sure you can handle the residents.If this is the case, you shouldn’t hesitate. Do it, and you’ll be glad you did. Should you need any help with the ‘how to’ involved in the management process, never hesitate to reach out to a property management company.