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 tenant, and have great success as a landlord.
But, if you’re on the fence and trying to figure everything out, then keep reading.
People consider renting their houses for a variety of reasons. Some of the most popular reasons include:
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.
First, you should look at the pros of potentially renting out your house.
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?
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 tenant’s money!
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.
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.
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.
Alternatively, it’s equally important to look at the potential pitfalls of renting your home as well.
Don’t forget that it can be incredibly time-consuming to deal with tenants.
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:
While being a landlord can be beneficial financially, it also comes with its own set of risks, including:
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 tenant 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.
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:
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.
On the flip side, you’ll also want to take a look at some of the pros of selling your home.
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.
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.
While there are some benefits to selling, it’s also essential to look at the potential downsides.
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.
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.
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.
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:
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.
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 tenants.
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.
Spencer is the VP of Marketing at Evernest. He wakes up with Google and Facebook on his mind. Having bought and sold over 150 homes in Birmingham, Spencer gets a kick out of helping new and seasoned investors navigate the mistakes he made as an investor. Spencer is also passionate about his love for Michael Jordan and does his best to explain to the Millennials (who never saw him play live) how much better he was than LeBron. He loves to hang out with his wife, kids, and the world’s best black lab, Jett.