As with so many big decisions in life, there is no easy answer to this one. Renting out the home and selling the house each offer advantages, and potential drawbacks, that you must weigh carefully before making a decision.
You should consider each of the following points and evaluate how they fit into your short and long term financial goals. Additionally, how will the decision mesh with your personality and daily stressors in your life? These are important questions to answer prior to making your decision.
Points to Consider About Renting Your Home
1. Will renting my house be profitable? You need to know if renting out your home will generate positive cash flow, or if it will slowly (or quickly) suck you dry. The way you determine this is to add up all the expenses of renting out the home and subtract them from the income you will receive from being a landlord. Don’t forget any tax breaks you may receive.
Expenses when renting a home:
Insurance – this may increase for rental property as opposed to owner occupied property, so do your homework. Also, keep in mind this cost tends to increase.
Repairs and maintenance – this is reality and must be included.
Capital Expenditures – save some money monthly for that new roof, HVAC or driveway replacement.
Taxes – If your taxes go up annually, include an annual increase in your calculations.
HOA fees – this may or may not apply to your circumstances.
Management fees – if you hire somebody to oversee your property, plan on 10% of the rental income.
Vacancies – don’t expect to maintain full occupancy, I recommend that you calculate your annual rental income and multiply by 90%
Commission – are you going to be paying a real estate agent to market and facilitate a lease/rental agreement?
Advertising – if you are renting your property without using an agent don’t forget about advertising expenses.
Miscellaneous – include this line item for the anomalies you didn’t think of.
You will have to do some educated guesswork on what your rental income will be. You can look at rental sites and get a general idea of what rents are in your area. Consulting a local real estate agent who handles rentals would also be prudent. A good agent can assist you with market trends and advise you whether to increase or decrease your income projections for the next couple of years.
2. Are you okay with being a landlord?
Rental ownership is often stressful because you have so little control over what tenants do in your home. You may get great tenants who pay rent on time and respect the property. Or you may get tenants who never pay rent on time and destroy your home.
Even if you have the ideal tenant who respects your property as their own, you still will have to deal with repairs (some of which will be emergencies) and ongoing maintenance issues.
You can always hire a property manager, which, if you have a good one, makes your life easier. But as noted above, there is a cost (usually about 10% of your rental income).
Even if you have the ideal tenants, you should plan to do some painting, floor refinishing and maybe carpet replacement when tenants change.
3. Are you coming back?
If you are relocating, renting can provide some security because you know you can come back to your home. Selling a house and then buying another home incurs costs, so it may be cheaper to rent out your house and move back in when you return.
Quite often folks who are not quite sure where their life is taking them will hold onto their property. Renting allows them to do that while keeping the option open to selling in the future. Sometimes the choice to sell or rent a home isn’t just about finances but of life decisions.
4. Is the market going up in the future?
Some housing markets seem to be almost guaranteed to get stronger in the next few years. If you are in such a market, and you feel like there is a good chance your home will increase in value significantly, then renting will let you keep it, pay the mortgage down and realize a bigger payday down the line.
Maybe there are home improvements that you know you’ll need to make but you don’t have the money right now. If this sounds like the case, renting could be a good option. Renters are not like buyers in the sense they will be more accepting of specific improvements that need to be made.
5. Don’t forget about taxes.
If you are in the fortunate position to have excellent cash flow from your rental, don’t forget about the tax consequences! Like any other income-producing asset you will be taxed on any income you get from your rental, at your ordinary tax rate.
In addition to deducting regular expenses, you can also claim a deduction for depreciation on the property as well. Further, if you have a rental loss, it’s possible you can use the loss to offset some of your other income.
Always discuss your specific circumstances with your tax professional before making a final decision.
6. Did you ever want to have rental property?
Are you someone who always wanted to own a rental property? If this sounds like you, then renting your own home could be a great way to put your toe in the water. Maybe you will discover you love it. If so, you could have the confidence to acquire more properties in the future.
On the other hand, you may find out having rental property is something you despise. Finding out with a home you already own allows for trial and error.
Things to consider about selling your home.
1. You get to walk away after the sale.
There is something to be said for the freedom that comes from unloading a significant investment in your home. Every one of the burdens that come from renting your home is avoided by selling it instead. Selling is still stressful, and there will be work involved, but when it is all over you get a check for your home and get to move on.
If you are relocating to another state, selling can be even more beneficial. People do not realize the emotional burden of having two homes until they experience it. Having to deal with rental problems in the middle of the night while in another state is not pleasant.
2. You can escape a dropping market.
If you have a feeling that your real estate market is going to decline in the coming years, it makes sense to get out now. Selling your home at the top of a market allows you to maximize your net proceeds and gives you the ability to invest that money in something you feel more optimistic about.
3. You can take advantage of current tax laws.
Right now, selling your home allows you take advantage of current tax laws that exclude your sale from capital gains tax up to $250,000 on your own, or $500,000 if you are married. There are some limitations, but for most homeowners, the current law means they get to avoid a sizable tax on a huge capital gain.
4. You’ll have a down payment (and maybe much more) for your next home.
One of the biggest reasons people choose to sell instead of renting out their home is because it gives them a significant cash injection – enough to cover the down payment on their next house. Having a big down payment puts you in a much better financial position to purchase a home you want in an area in which you prefer to live.
5. You won’t have tenants.
Depending on your personality, having strangers in what is probably your most substantial investment – strangers who could destroy that investment – might be too much to deal with. If you cannot stop thinking about what might be happening, you are not going to be able to enjoy your life.
If you sell, you will not have to worry about any of these things. You will have gotten the money from your investment, and you simply move on.
When thinking about renting or selling a home, having to deal with tenants is always one of the most important considerations.
Reconsidering Renting or Selling a House
Sometimes when deciding between selling or renting a home, people make the wrong choice. More often than not, there will be a decision to rent the house that is later regretted. It is not unusual at all for the experience of renting not to be an enjoyable one. When this happens and you decide it’s time to move on you’ll need the best tips for selling a home with tenants. Trust me, this is no picnic!
One of the most challenging ways to sell a home is when tenants are occupying a property. Just think for a minute. A tenant is comfortably living in a home, and you want to disturb that. It is not out of the ordinary at all for a tenant to be uncooperative when it comes to showings and most likely will not maintain it in a condition ideal for showing and selling!
Deciding between renting and selling a house is not something that should be taken lightly. You are making a major life decision. Hasty decisions are made quite often without thinking through the pros and cons of renting vs. selling. Hopefully, the information presented here will help you make the best decision for your life circumstances.